William Smead
Chief Executive Officer
Chief Investment Officer

Dear Fellow Investors:

The folks at Smead Capital Management (SCM) are admirers of the journalists who follow our industry. We’d like to expand on a piece written by Kelly Evans titled “‘Dumb Money’ Returns to Stocks”. The thesis put forward was that a recent tiny trickle of buying interest from US equity mutual fund investors and evident optimism in recent investment sentiment polls might be an indication that the dumb money is back, in the opinion of the Wall Street Journal headline editor. The conclusion was beware.

Our problem with the article is it lacks historical precedent. John Maynard Keynes was a very successful money manager in the 1920s until the late 1940s. He said investing “..is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority.” Therefore, Keynes would argue that in the long run the majority is dumb and the minority is smart.

For the last 19 months it has been “dumb” to be out of US stocks. The minority bought and the majority sold. Individual investors in the majority bought bonds and net liquidated stocks. How can the first positive flows after years of net liquidation qualify as a majority? The only enthusiasm for equity funds from US investors has come through net inflows into emerging market and commodity related funds. They are in the majority also.

We at SCM do not market time. If you are a long-term timer, you want to get out when individuals and institutional investors are falling all over each other to buy US equity mutual funds. This would mean multi-year, massive net inflows. We are a long way away from there. We believe the finest US companies are the minority investment and we have eight criteria for selecting them.

John Paulson was an unheralded hedge fund manager in 2007. He was in the minority thinking that the mortgage market would meltdown. Institutional and wealthy individual investors invested with him to hedge their long positions in mortgage-backed securities and over-exposed financial stocks. We believe that US large-cap recession-resistant quality is a good hedge for the majority of gun-shy individual investors who have chased bonds. They are also a good hedge for over-diversified institutions who think BRIC-trade related investments aren’t in the majority. Andy Grove, former Intel CEO, was asked in a Fortune magazine article what was the best business advice he’d ever received. He replied, “My professor at the City College of New York said, ‘When everybody knows that something is so, it means that nobody knows nothin’.” What people know is how strong the emerging market economies have been. What they don’t know is how much better the minority is going to do over the next five years as compared to the majority. We believe that over the long haul the minority will look smart.

Best Wishes,

William Smead

The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Some of the securities identified and described in this missive are a sample of issuers being currently recommended for suitable clients as of the date of this missive and do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.

We Advise Investors

Sign up to get our advice sent straight to your inbox.

Recent Missives

Recession Fear Investing

January 24, 2023

A recession is two consecutive quarters of economic contraction. Historically, highly inverted yield curves like we have now are predictive of recessions. The 10 Year Treasury Bond interest rate has dropped from 4.3%...

⟶ Keep Reading

4Q22 International Value Strategy Newsletter: The Law of Comparative Advantage

January 15, 2023

[...] The frustration of other investors and the strength of non-US dollar assets we believe will be our comparative advantage.

⟶ Keep Reading

4Q22 U.S. Value Strategy Newsletter: Shame on Me in 2023

January 15, 2023

[...] We at Smead Capital Management believe the stock market wants to cause stock market failure by being extremely difficult in 2023. Most investors were fooled in 2022 by expecting circumstances similar to...

⟶ Keep Reading

Not the Cool Kids

January 10, 2023

[...] In the stock-picking world of the last 40 years, we consider Warren Buffett, Charlie Munger, Peter Lynch, John Templeton and other long-duration value investors to be the “cool kids.” They took dramatically...

⟶ Keep Reading

Unreliable Contrarianism

December 20, 2022

It appears to us at Smead Capital Management that investors are behaving in a way that will damage their capital and cause them to suffer stock market failure. In 2022, as the favorite...

⟶ Keep Reading

Companies Still SOIL-ing Themselves

December 13, 2022

I was reminded in a recent read of Robert Hagstrom’s book, Warren Buffett: Inside the Ultimate Money Mind, how Warren Buffett and Charlie Munger define the economic earnings power of a business. They...

⟶ Keep Reading

We Advise Investors

Sign up to get our advice sent straight to your inbox.

US INVESTORS

Individual Investors

OR

Financial Advisors, Family Offices,
and Institutional Investors

OR

NON-US INVESTORS

Individual Investors

OR

Financial Advisors, Family Offices,
and Institutional Investors

OR

Scroll to Top