Dear fellow investors,
We love the stock market, but there is one job in the industry we would never want to have. Most investment and mutual fund companies have a stock market strategist. This is the person who gathers statistics on the stock market, reviews the charts, tracks sentiment indicators, and attempts to guide investors on what might do well over the next six to twelve months.
What brought this to mind was the news that one of the most respected strategists, Mike Wilson of Morgan Stanley, admitted defeat as the staunchest bear on Wall Street. In his words, “we were wrong” and softened his stance.
Let me explain why we don’t make shorter-term market predictions. First, we don’t think we know any better than anyone else what the stock market will do over the next year! Second, we understand that these firms try to keep their investors updated in a way that keeps them in their chairs. Third, these strategists do put out fabulous charts and information that is useful to long-term investors like us. We love their information and don’t envy their position in the marketplace.
As contrarians, we view bullish strategists who give up at bottoms and bearish ones that give up the bear claws at tops are a necessary part of the natural stock market cycles. When strategists are uniformly bullish like now, we naturally are in less of a hurry to buy bargains because those bargains are hard to find. In 2009, the bearishness was so thick that it was hard to find a bullish strategist. We use a three-to-five-year time frame as we apply our eight criteria for stock selection and are surprised when we get rewarded quickly.
We stay pretty fully invested all the time because we believe investors come to us for strong large value representation in the asset allocation they choose. However, from a longer-term perspective, we agree with Mike Wilson’s view that returns will be retarded by higher interest rates, stubborn inflation and elevated prices left from the financial euphoria triggered by the free money of the last ten years.
We believe that real assets and commodities will outperform in the stubborn inflation period we foresee and expect our returns could be better on a relative basis than the last ten years. However, these returns should be significantly lower on a nominal basis than the history of our strategy.
Lastly, don’t be too tough on Mike Wilson. He may well be very right about the stock market over the next three years. If and when that happens, we could do quite well in a stock-picking environment.
Fear stock market failure,
William Smead
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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