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Smead Capital Management is a registered investment advisor headquartered in Seattle, WA; founded in 2007. The company was formed to allow investors to benefit from long-term ownership of common stocks meeting the firm’s eight proprietary investment criteria. The firm manages a US Large Cap... More
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  • Good Nutrition in the New Year!

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    Dear Fellow Investors:

    Heart disease has been prevalent in our family. About three months ago we started to develop better eating habits. We are trying to avoid many of my favorite foods (chocolates, hamburgers, fries, pizza, etc.) by replacing them with fruits and vegetables. We are bringing down our cholesterol in the process and a positive side affect is that I've lost some weight as well.

    As Frank the Tank said in the movie, Old School, "It tastes so good when it hits your lips". I miss the wonderful flavors of dark chocolate Mounds bars or the blending of the tastes in a Burgermaster cheeseburger with a big slice of Walla Walla sweet onions. They give me a big boost of energy, but years of eating these favorites can layer my arteries in plaque. This is the main cause of heart attacks and strokes.

    It is amazing how similar long duration investing is to long duration living. At any given time, there are tasty and exciting industries, sectors and countries which can give you short-term delight. Imagine the pleasure of folks who bought gold three years ago or commodities like copper or cotton or sugar. This burst of price appreciation has raised investor confidence the way my blood sugar level goes up right after Thanksgiving Day dinner! The benefits are in the short run and the problems come much farther down the road.

    Investors were excited about gold in 1980 when I started in the investment business. It peaked above $700 per ounce in 1981 as investors were sure that the double-digit inflation would be a fixture of the future. Today, investors are excited about it at $1400 per ounce as an alternative to paper currencies. These currencies have multiplied in the deep recession through the remedies governments are using to prevent deflation. Gold has doubled in price in 29 years. This means that despite all of the recent excitement you have received about a 2.5 percent average annual return during those years, even though it has been on fire for five to seven years. The Dow Jones Industrial Average rose from 800 to over 11,000 in that same time period. Those who used gold as a long duration investment had hardening of their financial arteries.

    How about commodities like copper, cotton and sugar? The most widely followed commodity indexes, like the Dow Jones-AIG Commodity Index, show that commodities have dropped in price on an inflation adjusted basis fairly significantly over the last 70 years (see chart below). Therefore, their only use is for the kind of short-term highs that I get from the fresh cooked chocolate chip cookies or the barbecued ribs lathered in sweet sauce. Better technology and human productivity are a curse to commodity investing! Compare that to all the wealth creation which long duration companies like Disney or McDonald's or Nordstrom or Merck produce from those same factors. As an investor, do you want better technology and human productivity to be your friend or your foe?
    The current investment landscape is loaded with sugar highs. All things China and BRIC trade are smoking hot including the commodities we've mentioned. The blood sugar level has taken heavy industrial stocks like Caterpillar, Joy Global and Cummins off the charts. The taste of mining basic materials in Australia and putting them on a boat to China is mouth watering. The GDP growth numbers in China are as exhilarating as drinking a couple of craft beers while washing down hot wings.

    Our bodies are subject to heart disease and those events usually come in shocking fashion. In the investment world there are business cycles with recessions and depressions mixed into history. When these negative events follow a boom, markets collapse and can lead to paralysis and permanent damage. Cyclical and commodity oriented common stocks trade at historical discounts for this very reason. Our current circumstance is that cyclical stocks and more economically sensitive small cap stocks trade at big premiums to recession resistant large cap non-cyclicals! History shows that investors in the cyclical stocks get crushed and profits many times turn to losses in the down cycles. Holding for the long-term is not an option which human investors have been able to handle.

    As disciplined long-term value investors, we at Smead Capital Management are patiently waiting for time to put things back into order. We believe long term financial health goes to those who defy short-term flavor gratification. Much like the fable of the Tortoise and the Hare, you only make the long-term success in investing if you avoid the busts that follow the adrenaline of today's excitement. We wish you all health and wealth in the upcoming New Year!

    Best Wishes,

    William Smead

    The information contained in this missive represents SCM's opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Some of the securities identified and described in this missive are a sample of issuers being currently recommended for suitable clients as of the date stated in this missive and do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.






    Disclosure: I am long DIS, MCD, JWN, MRK.
    Jan 04 11:50 AM | Link | Comment!
  • Dumb Money?

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    Dear Fellow Investors:

    The folks at Smead Capital Management (NYSE:SCM) are admirers of the journalists who follow our industry. We'd like to expand on a piece written by Kelly Evans titled “‘Dumb Money’ Returns to Stocks”. The thesis put forward was that a recent tiny trickle of buying interest from US equity mutual fund investors and evident optimism in recent investment sentiment poles might be an indication that the dumb money is back, in the opinion of the Wall Street Journal headline editor. The conclusion was beware.

    Our problem with the article is it lacks historical precedent. John Maynard Keynes was a very successful money manager in the 1920s until the late 1940s. He said investing “..is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority.” Therefore, Keynes would argue that in the long run the majority is dumb and the minority is smart.

    For the last 19 months it has been "dumb" to be out of US stocks. The minority bought and the majority sold. Individual investors in the majority bought bonds and net liquidated stocks. How can the first positive flows after years of net liquidation qualify as a majority? The only enthusiasm for equity funds from US investors has come through net inflows into emerging market and commodity related funds. They are in the majority also.

    We at SCM do not market time. If you are a long-term timer, you want to get out when individuals and institutional investors are falling all over each other to buy US equity mutual funds. This would mean multi-year, massive net inflows. We are a long way away from there. We believe the finest US companies are the minority investment and we have eight criteria for selecting them.

    John Paulson was an unheralded hedge fund manager in 2007. He was in the minority thinking that the mortgage market would meltdown. Institutional and wealthy individual investors invested with him to hedge their long positions in mortgage-backed securities and over-exposed financial stocks. We believe that US large-cap recession-resistant quality is a good hedge for the majority of gun-shy individual investors who have chased bonds. They are also a good hedge for over-diversified institutions who think BRIC-trade related investments aren't in the majority. Andy Grove, former Intel CEO, was asked in a Fortune magazine article what was the best business advice he'd ever received. He replied, "My professor at the City College of New York said, ‘When everybody knows that something is so, it means that nobody knows nothin’." What people know is how strong the emerging market economies have been. What they don't know is how much better the minority is going to do over the next five years as compared to the majority. We believe that over the long haul the minority will look smart.

    Best Wishes,

    William Smead

    The information contained in this missive represents SCM's opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Some of the securities identified and described in this missive are a sample of issuers being currently recommended for suitable clients as of the date stated in this missive and do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.





    Disclosure: No Positions
    Nov 09 5:16 PM | Link | Comment!
  • The Wizard of Oz

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    Dear Fellow Investors:

    Once upon a time there were institutional and individual investors named Dorothy. She was hit by two financial tornados and knocked unconscious. These tornados fell on the Wicked Witch of the East (Alan Greenspan) and Dorothy ended these crises wearing Alan’s ruby slippers (massive liquidity in the US financial system). All she wanted was to reach home (her financial goals).

    Fortunately for Dorothy, numerous good witches in the media told her that there is a place called the Emerald Country (China). At the heart of the Emerald Country is a Wizard (Centralized Government), who can not only successfully run a planned economy in a capitalistic way, but could help Dorothy reach her financial dreams. One of the good witches told her that to get to the Emerald Country she should follow the “Yellow Brick Road” (buy gold).

    Along her way to see the Wizard of Oz, Dorothy made three friends. First, she met a Scarecrow (Bill Gross). He told Dorothy to invest in the one thing that didn’t require a brain, his bond fund (Pimco Total Return). Then she ran into a Tin Man (Jimmy Rogers) who had no heart. He told her to invest in commodities so that she could take advantage of other people’s misery and be heartless like the Tin Man. Lastly, she made friends with a Cowardly Lion (David Rosenberg). He told her to invest in fear. The Cowardly Lion was precluded from participating in investment markets which require courage.

    Along the way to the Emerald Country (China) to see the Wizard, Dorothy ran into the Wicked Witch of the West (Meredith Whitney). The wicked witch told Dorothy she would be captured and her financial goals would be ruined because the US banking system would never repair itself. The wicked witch sent in flying monkeys (hedge funds and high frequency traders) to try and scare Dorothy away from going to see the Wizard. Other flying monkeys urged Dorothy to own the “reflation trade” and over-emphasize all sectors and companies which benefit directly from uninterrupted growth in the Emerald Country (China). All the flying monkeys kept one foot out the door at all times and turnover in investments hit record highs. She also ventured into Munchkin Land and had the leader of the Lollipop Guild (Peter Schiff) remind her to “follow the yellow brick road” (buy gold) and to own it outside the US to insure financial survival.

    All along the way, Dorothy had her dog, Toto (the media), coaching her. In the fall of 2010, Toto had a good witch (Becky Quick) take an entourage to the Emerald Country. In this entourage was the Oracle of Omaha (Warren Buffett) and the expectation was that this would be the coronation of the success of the Emerald Country and its leader the Wizard of Oz. As Dorothy approached the Wizard with her cowardly friends behind her, Toto had one of his own, (David Barboza from the New York Times) pull the curtain back to reveal that there was no Wizard. http://www.nytimes.com/2010/10/20/business/global/20ghost.html?_r=1&scp=1&sq=China%20Ghost%20towns&st=cse. A bunch of old Communists were behind the curtain funding the building of infrastructure that nobody wants or needs. They had artificially inflated the price of all commodities related to construction and created temporary demand for everything from Oil to Earth Movers. These old communists didn’t have any more chance of running a planned economy than their Soviet brethren did between 1950 and 1990. However, they knew if the truth came out and their construction-based economy was about to melt like Las Vegas and Phoenix did between 2006 and 2009, that massive social unrest would arise in the land.

    Dorothy was incredibly disappointed that wide asset allocation and Emerald Country related sectors like basic materials, heavy industrial, commodities, emerging markets and natural resource export countries couldn’t meet her financial needs. Fortunately, Smead Capital Management came by and told Dorothy that all she had to do was click her heals together, buy recession resistant large cap US common stocks and chant, “there’s no place like home, there’s no place like home”. We believe that Dorothy will wake up to find Auntie Em (Jeremy Grantham) telling her that if she stuck to large cap US quality the next seven years she will live happily ever after.

    Best Wishes,

    William Smead

    The information contained in this missive represents SCM's opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Some of the securities identified and described in this missive are a sample of issuers being currently recommended for suitable clients as of the date stated in this missive and do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.








    Disclosure: No Positions
    Oct 25 3:39 PM | Link | 1 Comment
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