Dear fellow investors,
Yogi Berra was a beloved, successful baseball athlete, manager, and cultural celebrity. An entire book was written about his verbal amorphisms. One of my favorites was when he said, “It’s déjà vu all over again!” For us as investors, we can say that this is déjà vu all over again as we practice our stock picking discipline.
Yogi said a lot of things that seemed idiotic at the time until you flushed out his actual meaning. A couple of examples come to mind. He said, “Nobody goes to that restaurant anymore, it’s too crowded!” What he meant was that neither he nor the other major league players went there anymore because it was too crowded. He also said, “When you come to a fork in the road, take it!” He meant to give directions on a straight road until a fork angled left and created the need to take the fork to the left in the road.
For me, as a portfolio manager, this is the second time in my career (the first time for us at Smead Capital Management) that we find ourselves in the late stages of a major financial euphoria episode. The first one was called the Dot Com Bubble because it was connected to the legitimate development of the internet. At that time, investors were correct about the fact that the internet would change our lives. Unfortunately, for those who stayed with tech-heavy portfolios, it cost most investors 50% of their common stock portfolio over three years and caused a ten-year annualized return of -0.95% in the S&P 500 Index.
This time it is the legitimate development called artificial intelligence (AI). It will change our lives as much as the internet and has caused euphoria “all over again.” The centerpiece of artificial intelligence is NVidia, which makes the semiconductors required to make AI a reality. It has recently hit a $3.5 trillion market capitalization and is giving us a case of déjà vu.
The centerpiece of the Dot Com Bubble was Cisco Systems because the router that they made was at the center of using the internet. I was reminded of this recently because my father-in-law died on March 24, 2000, and Cisco’s stock peaked three days later when they reported earnings. They temporarily became a $600 billion-dollar market-cap company and were the largest-cap company in the S&P 500 Index. Their revenue in 2000 was $18.9 billion and their profits were $2.7 billion. In 2024, Cisco is estimated to have $56 billion in revenue and profits of around $14 billion. The market cap today is $238.5 billion. The stock price never returned to the $69 peak of early 2000.
What makes us believe that this will unwind in a problematic way “all over again?” First, equity ownership by households is the highest on record. Second, bullishness is as high as it ever gets for the most aggressive Nasdaq stocks. Third, financial professionals are telling us they will get fired for reducing equity exposure tied to technology stocks, growth stocks, or the tech/growth-heavy S&P 500 Index. Fourth, the most aggressive and speculative investments, like Bitcoin, are making new highs weekly. Lastly, many of the most respected investors of the last forty years are sounding alarms that are falling on deaf ears.
Charlie Munger said in 2021 that this was the biggest financial euphoria episode of his 73-year career. His partner, Warren Buffett, is piling up the largest cash hoard in the history of portfolio management at Berkshire Hathaway. He and Munger warned everyone back in 1999 about the Dot Com Bubble, but this time, we believe investors must do as Buffett does because he hasn’t confirmed his choice with verbal advice.
In conclusion, this is a déjà vu moment for investors in U.S. common stocks. Will they attempt to milk every bit of benefit from this extended euphoric episode? Or will they join us in owning stocks that are depressed because they aren’t anywhere near the center of the euphoric universe?
Fear stock market failure,
William Smead
The information contained in this missive represents Smead Capital Management’s opinions, and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, CIO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.
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