Dear Fellow Investors:
We at Smead Capital Management have been discussing some of the follies common to human nature and what we see as some pervasive trends in the investing world. These conversations got us imagining what C.S. Lewis’s, The Screwtape Letters, might sound like if they were applied to today’s investment environment. The satirical letters are written by an advice-giving bureaucrat in Hell named Screwtape, to his nephew Wormwood, a young demon who is learning how to lead humans astray. Taking some liberty with Lewis’s work, we present what we believe Screwtape might say if he were trying to advise Wormwood on how to lead investors astray.
Letter One—Time the Market
Dear Wormwood:
It is your task to tell investors to go to great lengths to avoid intermittent declines at the cost of creating long-term wealth. We want to prevent investors from knowing that what comes before and after stock market declines is likely beneficial enough to make sitting through downdrafts well worth the effort. It is our job to withhold access to information which shows that in the next ten years there is the possibility of two full-blown bear market declines in the S&P 500 index exceeding 20% and in most of the years in between, a peak to trough decline of greater than 10%. Inhibit clear thinking on this topic among your target investors.
Convince investors to increase their costs significantly by using hedge funds, market timing, technical analysis and occasional large cash balances to avoid those declines. Help them trade cheaply and often. Even introduce them to ETFs as a quick movement vehicle. Take great lengths to shield them from the counsel of Jack Bogle (a proponent of passive investing) and Warren Buffett (a believer in high margin-of-safety and long-duration active management). Those men agree on riding through market declines, which is detrimental to our purpose.
Letter Two—Be Way Too Active
Dearest Wormwood:
If you can create an illusion for investors that it is the money changers who make the money, rather than the businesses themselves, you will have done well. To accomplish this, encourage investors look for a “go-anywhere” equity manager whose activity (portfolio turnover) exceeds 50% per year. I suggest connecting investors with someone who appears to make all the right tactical changes at all the right times by incurring high trading fees within their portfolio. Encourage investors to throw money away on trading costs in the hope that all temporary difficulties would be avoided; this will help us in our task.
Letter Three—Bet on all the Horses in the race to Win
Dear Nephew:
Over the years, my young Wormwood, I found a successful means of deception is to encourage investors to widely diversify and bet on numerous asset classes, sectors and pretend asset classes, like commodities. Getting a human to dilute their potential winnings by betting on every horse in the race is what will bring us success.
Once upon a time, we successfully trapped humans with the majority of their money in US large-cap growth/core stocks (the tech bubble) and helped them starve every other category for capital. We’re certain this is why Yale’s endowment appears so smart to everyone and deceives them into believing they need to emulate these massive foundation and institutional investors. If you can, block them from understanding what Warren Buffett always repeats, “what the wise man does at the beginning, fools do in the end” If you can create more fools, you will go far in our business.
Letter Four—Be more concerned with the Ride than with the Destination
Dearest Nephew:
It’s been my practice to always encourage investors to interrupt the long-duration process and lace their thoughts with doubt about what they own as soon as their beloved company underperforms for a while or suffers a meaningful decline in price.
I would advise creating an intense need on the part of investors to know what kind of ride they are going to get ahead of time. Avoid letting them have the idea that success in common stock investing comes because they don’t get to know the ride they’ll get and as a corollary, they won’t know how much of that time the stock market will disagree with their holdings.
In addition, you might consider helping them get access to massive amounts of relatively useless information above and beyond what they need and beyond what they own. Stop their ability to consider the long-term trading patterns of the shares of companies like Berkshire Hathaway and Starbuck’s, which have seen numerous declines of 40% in price over the decades and led investors who stayed put into massive wealth creation.
Letter Five—Shorten Duration and Seek to Eliminate Risk
Dear Wormwood:
I implore you to use all of your demonic powers to stop investors from knowing what we believe to be true: that the more time investors give themselves in their participation with quality investments, the more likely they are to succeed. Large investor conventions seem to be a particularly good place to deceive investors. Seek to pre-occupy them with reducing risk and convince them via willing speakers to construct portfolios which smooth returns, then you will have served our purpose well.
Overloading investors with information about macroeconomics, politics, executive pay, student loans and anything else which would scare them away from getting at the wealth creating ability of America’s largest public companies, will probably help them avoid long-term wealth creation.
I recommend convincing advisors that they should be more concerned with never offending any of their investors and providing a constant minimum return, rather than creating the most wealth for people over the next ten years.
Demonically Yours,
Uncle Screwtape
Or at least that’s how we at Smead Capital Management imagine the conversation would sound.
Warm Regards,
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. It should not be assumed that investing in any securities mentioned above will or will not be profitable. A list of all recommendations made by Smead Capital Management within the past twelve month period is available upon request.
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