Category: Quarterly Newsletters

Most of the studies we’ve seen argue that 90% of the benefit of diversification comes by the 20th common stock. In our discipline, based on our eight criteria for common stock selection, we own 25-30 names. Halfway through this year, you can see the benefit of our diverse group of common stocks and also see that our eight criteria for stock selection began to shine like our long-term record indicates it has in the past. […]

The world we wake up to today seems to have all the information we can dream of, but less discernment than is needed. The Iran conflict was misread with oil prices at $100 and investors are doing the same thing at $70 oil now. We write this letter from the Calgary Stampede, one of the genuinely great events hosted globally. While we’ve been here, we have talked with all of the issuers we own in the oil business. The problem we are stampeding towards is real and time is the only cure. […]

[…] For individuals, succeeding conventionally would be to invest in the passive S&P 500 Index because it is conventional and stocks only go up and to the right. For the institutional investors, being passive expects that others won’t do well in stock picking. Passive investing keeps your fees low and, all else equal, is the way to add value. These facts are all conventional. The inherent risk is that the passive S&P 500 Index causes most investors to fail together. Watching the conventional crowd believe that the market can’t ever go down longer-term because of factors like 401k flows, loss of active decisions, etc., is just as adorable as believing in 2005-2007 that house prices could never go down. […]

Now that the bloom has started coming off the growth/momentum rose, we would like our shareholders to consider the arguments of those who believe the S&P 500 Index is “just in a correction.” Their argument is that today’s S&P 500 Index has the ability to provide a permanently higher price-to-earnings (P/E) ratio to protect forward returns. […]

[…] The value investor is the person trying to understand how businesses are priced by different attributes like their capital structure, their returns on capital and the future growth and capital allocation. This is more coldly logical and analytical, but takes the same faith needed to say, “In the beginning, was the word.” We can’t know the future, but we know that Zeus didn’t do much to change the world. Plato did. We think the logos will conquer again.

Most of our work at Smead Capital Management is tied to stock selection. Therefore, our eight criteria for stock selection and our willingness to ride winning stocks to a fault have been our differentiators over the last 15 years. However, market extremes show up once every five to ten years. […]

It is not uncommon for investors to want to scale new businesses. We are currently seeing it in the AI story, where businesses are trying to find new customers and gain scale in what is believed to be a burgeoning industry. While there may be a winner, there tend to be many losers when it comes to scaling new industries. We like far more predictability in analyzing companies, which time and time again draws us to old industries. Banking is a roughly 600-year-old industry. The energy industry has been around since the first fire, but the oil business has been around since the 19th century. We will use this letter to explain to the investors of the strategy why these industries currently have so much in common. […]

We’ve been doing a great deal of reading about prior exciting and maniacal periods in the U.S. stock market. This is as much to remind us of why the tortoise won the race in Aesop’s fable. Once in Golconda and The Go-Go Years by John Brooks covered the 1920s and 1930s (Golconda), as well as the late 1960s (Go-Go). Eboys, the story of Benchmark Capital and eBay, covered 1998-2000. Most recently, we read a terrific article in The Wall Street Journal titled “Spending on AI Is at Epic Levels. Will It Ever Pay Off,” written by Eliot Brown and Robbie Whelan. […]

When you have a significant underperformance period, investors have a good reason for wondering if you’ve lost your investing mojo. Among respected value managers, there is nobody more respected than the Oracle of Omaha, Warren Buffett. Has he ever been doubted during his career? What were the circumstances associated with his most significant underperformance episode? Lastly, what was the outcome of his most miserable underperformance stretch? […]

[…] Rather than study dead poets, we study history’s successful investors. We seek to learn from their style, much like you study the prose of a writer or artist. You are learning to learn and seek opportunities because while we can’t predict the future, the outcomes of the past can help frame and ground us. […]