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.
Price for Clarity
The market hates ambiguity. That’s what we’re told, and on any short-term basis, we can see the market vote accordingly. In a world where investing has morphed towards algorithmic trading systems influencing daily volatility, many have come to accept this as a reasonable truth and participate by selling when things lose clarity or piling in when visibility is perceived.
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.
Academia vs. The Real World – Part 2
We are revisiting our discussion of what the real world is like versus what academics claim in papers and debates. A good way of putting this is “Academia has a tendency, when unchecked (from lack of skin in the game), to evolve into a ritualistic self-referential publishing game.”
Academia vs. The Real World – Part 1
In preparation for a talk, I began to review Sir John Templeton’s track record with the Templeton Growth Fund (TEPLX), which he managed from 1954 to 1991. At the age of 34, with a father that broke into the investment business in 1980, I was very aware of Templeton’s success in his career, but unaware of how the results came to his clients.
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.
South Sea Forecast: Stockjobbing Becomes Technology
In 1720, the South Sea Bubble arose from what seemed to be good intentions. The South Sea Company was given an exclusive monopoly on the Spanish Americas in exchange for assuming a large part of England’s debt. The debt holders received preferred shares in the South Sea Company that paid 6% interest.
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.
Road Not Taken
We have written profusely about the investment myopia of today which has focused on “growth at any price companies” without regard to profits or free cash-flow. We do this because we know success in investing requires a healthy degree of discomfort for it to be profitable, and we know how much comfort today’s investor has found by owning what has worked.
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.
Disciplined Opportunism: Templeton and Price Revisited
For Templeton and Price to execute a “new era” approach today, we believe they would likely advocate avoiding the S&P 500 Index, mutual funds and ETFs, emphasizing growth stock investing and they would be very careful with ownership of anything related to technology. Price recognized that growth eras don’t continue forever and Templeton went wherever he thought he could make great money buying companies at depressed prices with positive economics. We believe our eight criteria for common stock ownership will shepherd us through this “new era.”
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.
The Jim Carrey Parable
Today’s popular stocks have literally overwhelmed the stock market in the last four years and six months. To understand today’s financial euphoria, we will analyze three terrific movies made by the actor, Jim Carrey. In Liar Liar, The Truman Show and in Bruce Almighty, we learn morals which we believe should guide us in the long-duration investment process.
Global Dominance via Stocks, Not War
In the 1960’s, the slogan “Make Love, Not War” became a rally cry for anti-war protestors, but also typified their free love expression. They used the slogan to explain the harshness of the situation in Vietnam and to be countercultural to the capitalist and traditional way of life they saw in American society.
The stock market has put on quite a show over the last decade. Including dividends, domestic stocks have nearly quadrupled since the bottom in March 2009. Most of the crowd missed the best parts of the broader show, but that hasn’t stopped the excitement being built around the encore.
The Voting Machine vs. The Weighing Machine
The patriarch of value investing, Ben Graham, once said, “In the short run the market is a voting machine, but in the long run it is a weighing machine.” His statement is just as profound as the day it was first spoken. However, it is timelessly mystifying to most investors.
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.
Stretching for Gilded Poles
Elon Musk is possibly the most interesting man in the world, in our opinion. His nobility comes from his past as a founder of PayPal, but his popularity only grows in this era as he seeks to tackle big projects that include the car business, space, mass transit and other subjects.
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.
The Heart of the Matter
I came across a book titled The Matter of the Heart by Tom Morris that is a great history of the medical accomplishments and advances for the human heart. Mr. Morris details eleven operations and their evolutionary success over the course of the book.
Betting Against the Flows
Money flowed into passive investment vehicles at an ever-increasing rate in 2017. It was a record year for these products designed to replicate a stock market index and agnostically own a basket of securities without discretion.
The World is Not Enough
A few weeks ago, I caught myself pulled in by an old James Bond classic, The World is Not Enough, starring Pierce Brosnan. In the movie, an oil heiress, Elektra King, is kidnapped. While in captivity, she becomes a victim to Stockholm Syndrome and plots with her captor to destroy an oil pipeline running to the Bosphorus Sea. There is a scene in the movie that encapsulates where we are in today’s stock market environment.
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.