The Price of Knowledge
The stock market has a history of torturing highly-valued knowledge. About every seven years a consensus forms around the fastest growing sector of the stock market, or the fastest growing country, or the fastest growing industry.
Patience and Free Cash Flow
Why is free cash flow so important in common stock selection? First, you must think like the owner of an entire business. As a sole owner, the cash flow leftover after all obligations are paid is all yours. The more of it you get, the richer you are!
The Risk Pendulum
A series of important factors in the U.S. stock market are in play which beg the question, “Are we at the beginning of a risk cycle or at an ending?” The answers will have a bearing on what to own and where to be positioned going forward. These thoughts won’t be exhaustive, but we hope to get you thinking on a few important subjects.
Did Vanguard Kill Wall Street’s Golden Goose?
Many are wondering why the market for Initial Public Offerings (IPOs) has performed so poorly, even though the flood of hot new ones came to market recently. It took three years to choke demand for money-losing dot-com IPO companies back in 1997, even though Federal Reserve Chairman Alan Greenspan called the mania for tech stocks in late 1996 an “irrational exuberance.” What has killed the goose which traditionally laid the golden eggs on Wall Street?
Berkshire Hathaway Annual Meeting 2019: Who is Judas Iscariot?
Charlie Munger set the tone for the 2019 Berkshire Hathaway Annual Meeting. He said that people involved in creating cryptocurrencies, “honored the life and work of Judas Iscariot.” On many major subjects, questions were fired at Warren Buffett and Charlie Munger related to short comings which self-proclaimed expert observers see at Berkshire
Stock Market Morality
The history of the stock market lays some reliable markers for long duration investors when it comes to these morals. First, in the long run, a basket of the cheapest of the stocks in the S&P 500 Index has outperformed the expensive ones by 3.6% per year...
Underperforming Like It’s 1999
The singer, Prince, wrote about “partying like it’s 1999.” We can tell you that 1999 was no party unless you owned the most popular tech stocks and the hottest initial public offerings of the latest dot-com company.
Antitrust “Internet Style”
We consider ourselves excellent spectators of competition and look forward to March Madness this month. We are reminded that these very competitive games can’t take place unless there are rules and referees to officiate. Our long-time readers are aware that we have warned of the danger surrounding the aggregation of power by the monopolistic tech behemoths.
Just Do the Math!
We remember looking at demographic charts back in the 1990s which compared the population of the peak borrowing age group (28-40) with the peak savings age group (49-62). At that time, 10-year Treasury bonds were still yielding 7.5-8% and investors wondered where interest rates were going.
Buffett’s Annual Letter: Forest for the Trees
There is an old expression, “You can’t see the forest for the trees.” After reading through Warren Buffett’s 2018 Annual Letter to Berkshire Hathaway shareholders twice, we fielded questions from the media folks who reviewed the annual letter by focusing on very small trees mentioned by Buffett.
Channeling Warren Buffett
The most popular missives we write are associated with Warren Buffett’s annual letter to shareholders and the annual shareholder meeting in Omaha. This year we thought it would be fun to channel Mr. Buffett and attempt to write his letter for him.
We See Dead Stocks
Financial euphoria episodes are a common occurrence in investment markets and the U.S. stock market. When a new one comes along, market participants accelerate their enthusiasm toward the end, which makes the shares of companies involved dead to us.
Dr. Jekyll Economy Meets Mr. Hyde Markets
In the famous book, Strange Case of Dr. Jekyll and Mr. Hyde, Dr. Jekyll and Mr. Hyde were one human being with a split personality. Dr. Jekyll healed people and Mr. Hyde murdered them. This economic environment and the U.S. stock market have the same kind of split personality.
C.I.a.P. Meets C.R.a.P.
Amazon recently announced that they are combing through the list of things they warehouse and sell to determine which items “can’t realize a profit” (C.R.a.P.).1 We found it very interesting how they are determining which items to pare from their website list.
Well Known Facts Can Hurt You
Our long-time readers are aware that we analyze the U.S. stock market through the prism of what we call “well-known facts.” A well-known fact is a body of economic information which is pretty much known to all market participants and has been acted on by almost everyone with available capital.
If I Fell, Again
Investors have called their five-year love affair with technology stocks into question over the last 35 days. For this reason, we at Smead Capital Management are calling in John Lennon and Paul McCartney’s beautiful ballad “If I Fell” to help answer the following questions.
Housing Consensus Dead Wrong
Most people tend to see what’s right in front of them, especially when it comes to housing affordability. Consider that most of the media organizations in the U.S. reside in the expensive coastal cities. These cities are suffering a decline in home values and contributing to a discussion on what higher home prices and higher interest rates could do to the number of new homes built nationwide.
Jerry Maguire Stock Market
The actor, Tom Cruise, is as enigmatic as the U.S. stock market. He has made many terrific movies over the years and today’s stock market reminds us of his classic sports movie, Jerry Maguire. Jerry was a top sports agent for a large agency and then suddenly, out of nowhere, was dumped out on the street with one client and a top college recruit to work with.
Framing the News
As contrarian investors and students of group-think crowd psychology, we look for investment opportunities in the way news is framed. There is an old Mark Twain saying, “Lies, damned lies and statistics.” We believe investors are getting mislead by statistics surrounding the U.S. economy and we will seek to dispel erroneous assumptions in search of long-term gains in the stock market.
Crowded Trade Exit
The recent action in the stock market seems to be governed by crowd psychology and reminds us of a theory we created in college called the “coat theory.” Back in the 1970s, the fraternities and sororities at my alma mater hosted several mixers so the students could get to know each other better.
Big Tech’s Three Identical Strangers
The U.S. government must determine how to deal with the negative consequences of some of the last decade’s most successful internet-based businesses. Alphabet, Facebook and Amazon grew up as strangers and have developed monopolies in search, social media and in e-commerce.
The Temperature of Market Leadership
At Smead Capital Management, we want to avoid excitement and expense in the marketplace. When a sector of the stock market gets white hot, there are usually a few stocks which dominate the market activity and see explosive price appreciation. We like to think that one of them becomes the thermometer of the market, in effect showing the temperature of the stock market.
Smoked in 1999 or Vaped in 2018 What You Pay Buying Shares Matters
It is no secret that the U.S. stock market has been completely addicted to discounting the future success of the most popular technology stocks. Momentum-based growth investing has had many bouts of success in the past, but this is the first episode in an era where indexed mutual funds and exchange traded funds (ETFs) were the largest aggregate owners of the largest capitalization companies.
Investment Humility and Economic Recovery
We make every effort to understand the way that investors go to extremes over what we call the “well-known fact” in the stock market. A “well-known fact” is a body of economic information which is known to virtually everyone in the marketplace and has been acted on by anyone with capital.
2018: The Math is Simple
We believe the math of common stock investing is pretty simple. When you buy a stock without leverage, you can only lose your original investment. Your gains can be unlimited over the longest term (long duration). Most of the benefit (90%) of diversification is reached by owning a twelve-to-eighteen stock portfolio...
Zero Cost of Capital
Massive investor popularity can produce some pretty strange circumstances in the U.S. stock market. Mark Twain said, “History doesn’t repeat itself, but it rhymes!” Today’s strange occurrence has been called a “zero cost of capital” and it rhymes with what happened in 1999-2000.
Imagining the Stock Market in Ten Years
What will the next ten years look like in the U.S. stock market? As we often do, we refer you to one of our favorite songs, “I Can Only Imagine,” and a book by George Friedman, The Next 100 Years. We believe the best performing securities of the next ten years will be very different from the securities and the sectors which currently capture the “popular imagination” of investors.
Berkshire Hathaway Annual Meeting 2018: A Mirage of Feelings
Much like the 1975 Billboard top ten hit song, Feelings, Warren Buffett and Charlie Munger laid out their feelings on a variety of issues in Omaha at the Berkshire Hathaway (BRKB) Annual Meeting. We believe even the greatest investors of all time are being influenced by a mirage.
Mr. Market Grasps the Esoteric
We are reminded of Ben Graham’s Mr. Market analogy. In his analogy, the stock market is like having a business partner (Mr. Market) who offers to either buy or sell his half of the business to you, based on how the business is doing.
The Good Shepherd Investor
David was the King of Israel and the writer of many of the Psalms. He spent his formative years as a shepherd and framed his life’s work around the key concepts from his profession. Herds were the primary form of wealth back then, while common stocks are a primary form today.
Buffett Whispers of Danger
In the 2017 Berkshire Hathaway Annual Letter, Warren Buffett told us what he is doing, and, in as quiet a voice as he could use, what he says to do. Our readers will not be surprised at our summation of Buffett’s letter, but here we go anyway.
In the movie, Minority Report, Tom Cruise plays a policeman in a world where crimes are predicted ahead of time. Cruise’s character gets accused of a future murder and he is forced to work incredibly hard to acquit himself of the anticipated crime.
Buffett’s, Bezos’ and Dimon's Tapeworm
Warren Buffett, Jeff Bezos and Jamie Dimon recently announced that their three companies will form a non-profit entity to attempt to drive down healthcare costs for them and possibly other companies. In the process of making the announcement, Buffett called the healthcare sector of the U.S. a “hungry tapeworm” in the economy.
Value Investing’s Dark Hour
Is the underperformance by most large-cap value investing strategies in this lengthy bull market the “darkest hour” for value investors? This is the longest underperformance stretch of four relatively poor stretches for value in the last 80 years.
Risk is Not High Math
Long term success in common stock ownership is much more about patience and discipline than it is about mathematics. There is no better arena for discussing this truism than in how investors measure risk. It is the opinion of our firm that measuring a portfolio’s variability to an index is ridiculous, because it is impossible to beat the index without variability.
As we enter 2018, numerous uncertainties are dominating the minds of American citizens and investors. We are happy to weigh in on what we consider to be both un-useful and useful uncertainties as they pertain to long duration ownership of common stocks.
Confusing Brains with a Bull Market
It is hard to think about 1981, my first full year in the investment business. Three-month Treasury bills were paying 18%, longer-term Treasury bonds yielded 15% to maturity and cheap stocks got 20% cheaper. In the summer of 1981, we saw a stock market decline from an already depressed market trading at eight-times after-tax profits down closer to six times.
Gold Rush to Tech Rush
Over the weekend I stopped to watch the last part of a James Stewart Western called, The Far Country. It was the story of two cattle drivers who took their cattle all the way to the Yukon to get a piece of the late 1890’s Klondike gold rush.
A massive amount of stock market capitalization is tied up in companies based on both their potential market share and hypothetical future profits. The popular arguments in their favor come from looking at a company’s total addressable market (TAM). Sky high price-to-earnings ratios and massive capitalizations are common in companies with a large TAM as we finish up 2017.
Investing Like the Mafia 2017
As famed market strategist Richard Bernstein has pointed out, investors should pattern common stock selection after the investment style of the Mafia. What causes the Mafia to get such good returns? How do they spot opportunities? Why should we as investors in publicly-traded common stocks emulate their behavior near the end of 2017?
Today’s Financial Euphoria
All major financial euphoria episodes hold aspects in common. Among our favorite books on investing is John Kenneth Galbraith’s A Short History of Financial Euphoria. More than any other economist, we admire his understanding of the connection between the securities markets and the economy.
Rise of the Rest
The first time I read Forbes magazine was in 1980 as a brokerage trainee in New York City. I was fascinated by the company stories and the way the top investment disciplines were analyzed. In the 100th Anniversary Issue—published in September 2017—over 100 successful business and investment people wrote a short essay.
Buying Value in a Good Ol’ Bull Market
Many well-regarded experts have weighed in on the length and the pricing of common stocks eight and one half years into this bull market. They range from the dire warnings of perma-bears like Marc Faber to more reserved warnings from Howard Marks and Robert Shiller.
Value’s Lazarus Moment
In the Bible, Jesus arrives to help his friend Lazarus a few days after he had already died. His friends Mary and Martha were very disappointed because they thought all hope was lost. As the story goes, Jesus raised Lazarus from the dead.