William Smead
Chief Executive Officer
Chief Investment Officer

Subscribe to the Missives Podcast

Dear Fellow Investors:

“Hoarders” is a popular TV show currently. It tells the story of people who buy and collect things and virtually never throw anything away. As we look out to the rest of 2010, some of the lessons from the show could help us as investors over the coming years.

Like most addictions or idolatrous behaviors in a person’s life, hoarding starts out with the best of intentioned purchases. None of the original items, be they knick knacks, clothing or even collectibles are in and of themselves harmful. Unfortunately, hoarders don’t stop there. They continue to buy new things and never throw anything out.

In the US investment markets there has been some major hoarding going on the last five years. First, between 2004 and 2008, US investors hoarded Oil, Basic Materials and Heavy Industrial company’s common stock and international mutual fund shares to participate in the popularity of the emerging stock markets like Brazil, Russia, India and China (the BRIC trade).

Second, US households and corporations hoarded Treasury Bills and Money Market Funds during the market meltdown between October of 2007 and March of 2009. In a recent Barron’s’ article, money manager William Priest points out that the ratio of cash to total assets surged to 35-year highs for both non-financial corporations and households. Since March of 2009, they have been hoarding bond Mutual Funds, despite the stock market marching upward. Various reports from Lipper and Morningstar have reported net inflows into bond funds at $350-400 billion, while US stock funds and ETFs saw net liquidations.

On the TV show, extreme problem hoarders end up with a great deal of useless trash in their house. The piles of junk collect dust and have no value to future buyers. It would be one thing to hoard works of art from Picasso or Chihuly, but the folks on the show buy and keep things that nobody else ends up wanting.

At Smead Capital Management, we watch what the crowd is hoarding and try to avoid those popular areas. Bond funds and most investments tied to the BRIC trade appear as over-crowded as the dust covered rooms in the TV show. Simultaneously, the lousy results of the last ten years have caused investors to avoid the kind of Hall of Fame companies we like. In our opinion, these works of art can make us wealthy by buying and hoarding their shares for ten years or longer until the building gets overcrowded. We have formed museums (portfolios) to collect what we believe are “works of art”. We do this under the assumption that the companies that meet our Eight Criteria will successfully execute their business purpose and plans. In so doing, they grow their earnings and free cash flow. Ultimately, the hoarders of cyclical businesses, commodities, emerging markets, money market funds, T-bills and bond funds may someday have to look at what they hoarded and reevaluate what creates long-term wealth. This could cause a transition away from formerly useful investments into the kinds of “Hall of Fame” companies we like.

If interest rates in the US rise for many years and/or China’s economic growth slows down, we believe you should watch for a giant yard sale in bond mutual funds and the BRIC trade. Hoard quality when it is out-of-favor and avoid holding Hall of Fame companies only when maniacal pricing threatens to turn future returns into junk.

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

The Great Conflagration

February 21, 2024

We consider Ben Bernanke to be the father of 21st-century central bank policy. His work in dealing with the credit crisis in 2008-2009 was just the right policy at that time. The problem...

⟶ Keep Reading

Drivers and Stock Pickers

February 13, 2024

In studies, 90% of drivers think they are above average. We believe that 100% of the people who pick stocks for a living think they will be above average. Is being above average...

⟶ Keep Reading

Business Insider: Cole Smead, CFA on the Potential Fed Policy Decision and Stock Market Failure

February 2, 2024

  The Fed risks making a big policy mistake this year that could spark a 30% drop in the stock market, portfolio manager says By Jennifer Sor For more information […]

⟶ Keep Reading

Chronological Snobbery

January 30, 2024

C.S. Lewis coined the term ‘chronological snobbery’. According to Lewis, the definition of chronological snobbery is “the uncritical acceptance of the intellectual climate of our own age and the assumption that whatever has...

⟶ Keep Reading

Stock Market-Interest Rate Rhymes

January 23, 2024

Warren Buffett regularly reminds his shareholders that interest rates are a gravitational pull to stock prices. History shows that the movement of stock prices and interest rates don’t necessarily happen simultaneously but play...

⟶ Keep Reading

4Q23 International Value Strategy Newsletter: Recognizing Change

January 15, 2024

As we end 2023, the world looks very different than it did a few years ago. The one thing inevitable in life is change. As investors, we are required to spend a lifetime...

⟶ 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