Bill Smead

When you have a significant underperformance period, investors have a good reason for wondering if you’ve lost your investing mojo.

Investors who have come to us in the last three to four years are probably wondering if we’ve been here before. By here, we mean a stretch of significant underperformance relative to our benchmarks. The answer is, yes. Let’s review those prior circumstances to see if we can learn something about where we might be headed.

Investors who have come to us in the last three to four years are probably wondering if we’ve been here before. By here, we mean a stretch of significant underperformance relative to our benchmarks. The answer is, yes. Let’s review those prior circumstances to see if we can learn something about where we might be headed.

How does the euphoria for stocks in the days after the 1980 election contrast with today’s Trump election euphoria?

[...] Our solution to these circumstances is running a concentrated portfolio of stocks that could be attractive to investors for reasons separate from the movement of the stock market itself. Oil and gas shares are offering an addictive legal drug and should do well in an inflationary environment where interest rates return equity risk premiums to normalized levels. Value has been relatively cheap for too long because there has been no reason to trust value for an extended period of time. Stocks like Target (TGT) and Merck (MRK) could do well from demographic sweet spots. U-Haul (UHAL) and home builders could benefit from the urge of 180 million people below 40 years of age to be “free to move about the country” to find affordable places to live. [...]

We’ve recently been making the case that the current circumstances in the stock market are most like the late 1960s and 1970s. Euphoric enthusiasm for the most aggressive stocks and an economic/national security spending explosion are held in common. However, the most interesting thing about 1968-1969 was the agreement about the stock market future between the greatest growth investor at that time, T. Rowe Price, and the greatest value investor of all time, Warren Buffett. [...]

During our quarterly webcast last week (October 21, 2021), someone asked us a great question. They asked, “Does the ten-year Treasury bond rate at 1.65% and an inflation rate of 5% teach us that inflation will be transitory?” It is an important question because the majority of economists and market strategists are betting that inflation is transitory.

We hear numerous market strategists talk about stocks which are going up because “there is no alternative” to owning them. In the Wall Street vernacular, this goes by the phrase TINA.

In the annual letter to Berkshire Hathaway shareholders in early 2000, Warren Buffett attempted to remind everyone why value investing works, despite the financial euphoria all around him at that time. We will revisit this valuable lesson and draw implications for reviving enthusiasm for value investing at a point eerily similar to early 2000.

One way of thinking about the share price of a common stock is the price range as a teeter-totter. When the psychology of investors is very negative, enthusiasm for the company hits the ground. On the other end, when everyone is in love with a company’s shares, their end of the board can’t seem to get any higher. Where is the board end hitting the ground currently and who is stuck up in the air on a psychological high?

We’ve heard Warren Buffett continue to repeat an important phrase, “what the wise man does in the beginning, the fool does in the end.” This begs the question, when does a foregone conclusion become what we call “a well-known fact”?

The current circumstance in the U.S. stock market reminds us of the mid-1960s. We thought it would be helpful to review what was going on back then and what took place in the following 16 years. It makes us believe that you want to own wonderful businesses and de-emphasize trust in the stock market’s ability to meet the financial goals of long-duration investors.

During our discussions with clients in October we were asked repeatedly what the outcome of the Presidential election would do to our investments.

At Smead Capital Management, we love to acknowledge financial journalists who really demonstrate an understanding of the underlying truths associated with high-quality and long-duration common stock investing.