Dear Clients and Prospective Clients:
Andy Grove was the CEO of Intel for many years and was asked what the best advice was that he’d ever been given in business. His answer was that a professor at the City College of New York taught him that “When everyone knows that something is so, nobody knows nothing”. It means that when the crowd of market participants reach more than 80% agreement on matters of business or investng, you have to disagree with them and do the opposite of what the crowd is doing.
A few examples for newer readers. When everyone thought in 1998-1999 that the profit to be made from tech investments was unlimited, you had to flee the area. A year ago when investors were rabid for international stocks (especially emerging markets), you had to assume the bubble would burst. Last summer when Oil hit $145 per barrel and commodities were flying high, we warned everyone who would listen to get clear and forget you’d ever heard of BHP Billiton, Transocean, Mosaic and Freeport McMoran.
At Smead Capital Management we crave the opportunities created by this phenomena we call a “Well-Known Fact”, which is a body of economic information which is known by all participants and has been acted on by the 80% majority. Unfortunately, for the last 10 years, most of the “Well-Known Facts” were things to avoid as opposed to sectors made attractive for new investments. Avoiding overvalued areas saves you money while pursuing undevalued sectors could make us wealthy.
I’m pleased to report the latest “Well-Known Fact”. The “new” fact is that the recession which started a year ago is going to be the longest and deepest since the 1930’s. Therefore, the crowd of investors assume that the most violent decline since the 1930’s in the U.S. stock market (from October of 2007 to November 20th of 2008) is not good enough to discount all the bad news which will come for however many months that the recession lasts. Individual investors are approaching having 2.5 times as much of their aggregate household assets in treasury bills, checking, savings and certificates of deposit as they own directly in common stock. It is almost the exact opposite of the top of the market at the end of 1999 when they owned $10 trillion of common stock directly and had $4 trillion in the safest and historically lowest paying instruments. Warren Buffett says, “Uncertainty is the friend of the buyer of long-term values” and “So if you wait for the robins, spring will be over”.
Here is our opinion based on the current “Well-Known Fact”:
Buy quality U.S. stocks with balance sheet strength and powerful brands.
Assume that Treasury interest rates will rise dramatically in the next two years.
Assume that recently hot sectors like commodities, oil, international/emerging market and gold will be dead money in the “Next Great U.S. Stock Market.”
Assume the largest self-help and psychological counseling group in the U.S. in 2010 will be made up of the folks who sat on low interest rate money market and “cash is king” investments at the end of 2008 and watched a once in a lifetime fire sale in America’s finest companies pass them by.
Lastly, if we don’t currently manage money for you and your portfolio doesn’t line up well with this advice, don’t waste time getting the dust off your feet before you call us.