Dear fellow investors,
We love to be the optimist at the bottom in the stock market or in a major sector. When we started our strategy in 2007-2008, we were very lonely bulls. Even though the market bottomed in March of 2009, it took four or five years for investors to have any sustained confidence in stocks. By being optimistic we gained an edge over most stock-picking firms.
Today we are at the opposite end of the extreme. This financial euphoria episode has gone to a sustained high that makes the dotcom bubble look like small change.
Passive investment modalities have attempted to mask this crazy euphoria by moving tech stocks into other categories to disguise concentration. Facebook and Google have moved to communication services, while Amazon is in the discretionary column. As the chart below shows, we have the heaviest concentration of tech in the history of the index:
It’s as if RCA got moved to manufacturing in 1929 or Disney was moved from media into staples at the top in 1972’s Nifty Fifty bubble or AOL got moved into defense electronics in 1999. It wouldn’t have mattered back then because the U.S. stock market wasn’t owned by passive investors like Vanguard, Blackrock and State Street. These passive flows have sent billions into the largest cap stocks like an incoming tide.
Few things in this life are certain. However, after 43 years in this business, there is one thing we find empirically true throughout history. Manias die in vicious ways. RCA fell 90% in price in a year from 1929-1930. Disney lost 90% of its price-to-earnings ratio from 1972 to 1982. AOL got brushed into the dustbin of history and destroyed the Time Warner shareholders along with it.
John Sherman tried to prevent today’s circumstances through the Sherman Antitrust Act of 1890. He felt it was bad for the country for too much success to go to too few people. Nobody has the courage in government to surmount Sherman’s hill, so it is up to the next ten years of on-again, off-again bear markets to cure the stock market this time.
Therefore, for those who think we are just being stubborn, they can rest assured that one of the main things we try to do in our portfolio is avoid permanent damage which comes from being caught in financial euphoria. Hence the lack of representation in the sectors which we believe are most vulnerable to large multi-year price declines.
Fear stock market failure,
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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