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Like picking up the Good Book, a read of Berkshire Hathaway’s Annual Shareholder Letter yields
insight, wisdom, and encouragement for the long-duration common stock investor in a world of shortterm
thinking and 30-second sound bites.
“It [investing] is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority.” –John Maynard Keynes Dear Fellow Investors: To get a good feel for where the largest pools of money are
“There are three things that can happen when you pass the football and two of them are bad,” observed The Ohio State University’s legendary coach Woody Hayes. All the Seahawk fans, myself included, know exactly what he is talking about since the Seahawks chose to pass the ball at the one-yard line. You can complete a pass, you can throw it for an incompletion, or you can throw it to the other team (an interception).
As long-duration common stock owners, we are always interested and entertained when the media covers company earnings. To understand why, we think you need to know the facts behind the intrinsic value of a company, what it means to be a business owner and what differentiates a good business from a great one. Our contention is that there is little or no connection between short-term stock price movements at the time of earnings reports and long-term success in common stock investing.
Since this is the beginning of 2015, let me refresh you on today’s esoteric wizardry. Smart Beta, quant strategies, hedge funds, liquid alternatives, leveraged buyouts (LBOs)/private equity and go-anywhere bond strategies are all formulated to confuse Mr. Market in 2015.
It’s only after the animals are out of the barn that investors want to close the door. This means attempting to make most of the money from participating in common stocks, but somehow regularly going to cash in the worst declines. Consider the aftermath of the 2007-09 financial meltdown and bear market when asset allocator’s first looked to those active equity funds which weathered the 2008 storm the best. You want to make money in stocks, but “you want to be free.”
The “well known fact” with regards to oil over the last decade read like this: because of huge GDP growth in emerging markets like China, there were going to be 400 million new middle class citizens born of uninterrupted prosperity; they were going to want all the autos, consumer goods, $10,000 watches and food that Americans have. The demand for commodities was going to be endless because capitalism practiced under authoritarian control was going to be better than the “invisible hand” of the free market. No recessions or depressions required.
A great deal of confusion exists today about the merits of passive investing as compared to well-researched active management. An added layer of confusion arose in March when Warren Buffett explained that 90% of his widow’s money would be invested in a low-cost S&P 500 index fund. If this summer was a football game, 15-yard personal foul penalties would be thrown everywhere as experts piled on top of that announcement.
As school season kicks off, we at Smead Capital Management have been perplexed by the logic and reasoning over the student debt debate in America. There is a consensus in the investment markets today believing that student debt is a major credit problem rivaling other credit problems that were disastrous over the last 30 years. Much like Billy Madison had to prove to his father that he wasn’t completely helpless, today’s students have the daunting task of not only affording college and graduate education, but also finding ways to pay it off over the next 20 years. Billy had to hope to not pick a fight. We don’t have the same sentiment because as contrarians we have to find problems and contentious companies/industries. This seeks to explain the lies, damn lies and the statistics surrounding the student debt myth in the United States.
Since the stock market has done extremely well from its “abyss-like” low in March of 2009, many investors are worried about the risks associated with owning U.S. large-cap stocks. A cacophony of articles have been written which not only look for the stock market to correct, but also have an expectation of the kind of bear market decline which would set investors back for five years, like the declines in 2000-02 and 2007-09. Those declines each hit the S&P 500 Index for a loss of 40% or more.
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Smead Value FundSmead International Value Fund
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