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Defining Risk: Warren Buffetts Three Kinds of Investments
by Bill Smead of Smead Capital Management, 3/6/12
In his 2011 letter, Warren Buffett explained the purpose behind investing, the real definition of risk, and the three types of investments which congregate the marketplace. We believe Mr. Buffett struck at the core of the problem that most investors are having. They are defining risk primarily by what happens in the next twelve months, while the Oracle of Omaha is thinking in five to ten-year time frames, at a minimum. These short time frames are combined with eyes locked on the rearview mirror, inhibiting investors from participating in wealth creation as we look out into the future.

Is Popularity Ruining Indexing?
by Bill Smead of Smead Capital Management, 3/5/12
Scarcity creates value in economics. In our view, what is scarce today is an equity manager doing long-term/long duration equity analysis and institutions/individual investors willing to employ them. Since 33% of the stock market is indexed and most of the other 67% works in very short analytic time frames, we believe the market must be as inefficient as it has ever been. Time is the ally of the long-duration common stock investor and we believe more so now, because indexing is getting too popular and investing in short durations is at epidemic levels.

Not in My Lifetime
by Bill Smead of Smead Capital Management, 2/15/12
The weak dollar and international economic fears have sparked multi-year bull markets in gold, oil and most major commodities. This has forced asset allocators at the largest institutions, consulting firms, registered advisory firms and financial advisor networks to over-emphasize all aspects of the capital eaters and the longer-term Treasury bonds which compete for these dollars. In effect, the Federal Reserve Board caused the last of the unbelievers to give up in early February because it does not appear that rates will rise in our lifetime.

What is a Moat?
by Bill Smead of Smead Capital Management, 2/1/12
Our investment committee talks about the moat of a business a great deal. We believe that a wide moat is provided by the aspects of the company and their business which prevent competition from damaging highly sustainable profitability. Wide moat is one of our eight proprietary criteria for selecting common stocks. We have seen a number of organizations begin to include logic associated with moats into their equity research formats. Unfortunately, we believe many market participants confuse the by-products of a moat with the actual moat itself. We think this spells opportunity.

Mission Impossible: Why Chinas Soft Landing Will Look like the One We had in the US in 2007-2009
by Bill Smead of Smead Capital Management, 1/19/12
Last week the Federal Reserve Board released the minutes of its meetings in 2006. There were discussions of the current economy, numerous credit tightening moves and a consistent belief in the idea that the US and its policy makers could engineer a soft landing from our real estate bubble. The landing that we had from our real estate bubble was the hardest landing since the Great Depression. Now we believe all the pieces are in place for a hard landing in the China real estate markets.

Nero (Iran) Fiddles While Rome (China) Burns
by Bill Smead of Smead Capital Management, 1/12/12
What is required for a whopper of a secular bear market is for most market participants to believe the positive side of the story all the way down. We believe that all the pieces are in place for commodities to suffer a multi-year bear market which will wipe out up to 70% of peak prices on most major commodities. We want to make sure everyone sees the potential for a massive reversion to the mean. In our opinion, the recession coming in Chinas economy will break the back of oil prices for decades. Lower oil prices could strip the economic relevance of Iran, Saudi Arabia, Syria and Yemen.

Ebay and Amgen: Dividends Do Matter
by Bill Smead of Smead Capital Management, 1/4/12
We are owners of both EBay and Amgen. We believe the dividend policy and price action in the shares of these two companies can teach us about stock price performance over the next three to five years. History shows that for a few decades after terrible stock price performance investors demand more of their return from cash dividends. Historical payout ratio over the last 50 years is 52.6% and over the last 20 years it was 46%. We believe that the companies which raise their dividend payout ratio will enjoy the kind of outsized price gains that Amgen has seen in the second half of 2011.

The Great Scarcity: Stockpicking
by Bill Smead of Smead Capital Management, 12/16/11
Correlations among the S&P 500 Index companies was the highest on October 10th of 2011 as it has been for 25 years. In the opinion of Smead Capital Management, this means that more investors are participating in market directional strategies, macro-economic strategies and tactical portfolio strategies than at any time in US history. As large-cap value managers and stock pickers, we are very excited about the next three to five years as all the chips have moved to the other side of the table and stock picking has become a scarce resource.

Buying Cyclical Stocks: Wisdom or Inexperience?
by Bill Smead of Smead Capital Management, 12/8/11
Buying cyclical stocks and emerging markets under the assumption that secular forces in emerging markets will nullify the cyclical nature of sectors like energy; mining and heavy machinery exposes investors to a great deal of risk and shows a lack of understanding. It would be better to wait for 3-5 years of poor performance in these stocks and until earnings have declined quite a bit before you buy. It is just the first monetary easing move after a year of tightening in China. Besides, China could be starting its first real contraction as a quasi-capitalist country.

Grease (Greece) is the Word
by Bill Smead of Smead Capital Management, 9/29/11
You might think that the countries in Europe like Portugal, Ireland, Greece and Spain are the source of the current consternation in the US stock market. We believe that Europe is peripheral to the core issue. American investors have spent the last ten years falling in love with the BRIC trade and feeding an infatuation with the global synchronized economy and the emerging consensus surrounding global stocks/bonds. In our opinion, it is time to go back to conventionality and leave the BRIC trade before its time is gone and investors put their capital back in motion.

Darkest Before the Dawn
by Bill Smead of Smead Capital Management, 9/27/11
Even though we are not traders or short-term oriented, we would like to throw out a few opinions which cause us to be very positive about the stock market over the next one to two years. While market participants look to the US government and the Fed for answers, US Households are doing remarkable and historical work of getting their finances in order. Insiders have been as aggressive in their purchases of their own companys stock as they were in early in 2009.We believe many of our stocks have held up quite well in this environment, but some of them look especially attractive at this point.

Chinese Banks are Imitating Washington Mutual
by Bill Smead of Smead Capital Management, 9/15/11
Washington Mutual is only in existence in the world of litigation. For those of you out there who like to avoid these kinds of risks, we at Smead Capital Management recommend you avoid China, avoid the commodities which are used most heavily in construction, avoid the makers of construction and mining equipment, avoid the countries which have benefitted the most from Chinas uninterrupted growth, and avoid the vehicles used for financing all of this growth. The inevitable economic recession in China which we expect to follow will turn the asset allocation world upside down.

The Blessing of Hitting the Skids First
by Bill Smead of Smead Capital Management, 9/1/11
We believe that the first country to hit bottom, the first to confess its mistakes the way Frank Blake and Howard Schultz did for their companies, and the first to cleanse the banks, corporations and households will lead to lasting prosperity long before any other country in the world does. We also believe that the investment rewards of US non-cyclical large cap common stock investing has rarely looked more attractive because of the willingness of investors to underestimate the benefit of hitting the skids before everyone else does.

Money Manager Pride Goeth Before Destruction
by Bill Smead of Smead Capital Management, 8/16/11
All great money managers reach a point in their career where adulation and self confidence detracts from their better judgment. This interruption in judgment usually coincides with the discipline in use becoming the most popular discipline in the marketplace or the investing style being overdue for a three to five-year correction. Studies of the equity managers with the best long term records show that the best underperform the S&P 500 Index 35% of the time. The pride associated with multi-decade success and an army of folks enjoying your work is probably the most dangerous thing.

As Investors Panic: Calculating Intrinsic Value with a High Margin of Safety
by Bill Smead of Smead Capital Management, 8/12/11
When markets get super difficult it is great to be able to lean on valuation methods with a high margin of safety. Ben Graham had a simple and beautiful formula for computing intrinsic value. There are two simple ways to get a high margin of safety when using Grahams simple intrinsic value calculation. First, you can use a much lower ten-year growth expectation than other stock market participants. Second, you could use a much higher interest rate than the current ten-year AAA corporate bond. We would like to look at a few of our current holdings through the prism of intrinsic value.

Training Wreck Waiting to Happen
by Bill Smead of Smead Capital Management, 8/3/11
Someday soon, as the charade of uninterrupted GDP growth catches up with the Totalitarian Communist Government, we believe the entire Chinese banking system will have to be recapitalized to the tune of over $1.5 trillion. At that point, there wont be enough money to lend for new projects to even maintain existing GDP. In our opinion, there will be an economic contraction in China lasting three to four years. Whether China is to become a truly great economy will be determined by what they do in the aftermath of the coming economic train wreck.

From Asset Allocation Nirvana to Asset Allocation Nightmare
by Bill Smead of Smead Capital Management, 7/27/11
We believe the next 10 years will be about money moving back into non-cyclical US large cap stocks and domestic companies which enjoy lower commodity prices and the repatriation of money from highly risky asset classes with poor odds. Being widely asset allocated today prepares folks for an under-performance nightmare In our opinion, bonds are expensive, commodities are outlandish, small caps trade at a huge premium and as Chinas economic contraction occurs, the crowd will flee emerging markets.

Low P/E Quintile Courage
by Bill Smead of Smead Capital Management, 7/15/11
What most of the academic studies don?t tell people is that the companies which make it into the lowest PE quintiles have had some big problems or challenges which got them there in the first place. We use our eight proprietary criteria to find the ones which we think are the most likely to move their way back up through the quintiles and, possibly, be long-duration holdings for our discipline.

The Biggest Bear Market Rally of All?
by Bill Smead of Smead Capital Management, 6/30/11
Most stock market participants screamed ?bear market rally? in the summer of 2009 as the US market exploded to the upside from the March 2009 low. They were referring to the phenomena whereby a major rally follows a bear market, retraces some of the prior decline and attempts to suck most investors back into the market. These ?sucker? rallies are debilitating because they heap agony those who end up getting caught twice in the same secular decline. We believe the rally in oil to $115 is possibly the biggest ?bear market? rally ever and we advise folks to protect their capital.

Summer Bargains Galore
by Bill Smead of Smead Capital Management, 6/22/11
While China?s economy is hitting the wall and investors are beginning to deal with what we believe is a major bear market in commodities, it is time to stop and examine some of the bargains created by the recent correction. We have said many times that valuation matters. We believe one of the biggest bargains currently is Aflac (AFL). They are the largest seller of supplemental health insurance in Japan and the US. Japan and the US are probably the two countries which would benefit more from a decline in commodity prices than any others in the world.

The Exodus
by Bill Smead of Smead Capital Management, 6/17/11
Prices of residential real estate in Vancouver have skyrocketed. Over 70% of these purchases were from Chinese Nationals driving prices high. Compared to average household income, Vancouver is nearly twice as expensive as New York. Gordon Chang of Forbes wrote an article titled ?Chinese Entrepreneurs Are Leaving China?. Here is how Gordon began to explain the phenomena:?China?s rich, driven by a sense of insecurity, are taking money out of their country. Many are actually preparing to move elsewhere" There is an exodus of the best and brightest business people coming out of the country.

Cash Hoards
by Bill Smead of Smead Capital Management, 6/2/11
In Saturday?s WSJ, Jason Zweig asked the question, ?What will it take for companies to unlock their cash hoards?? Here we expound on his thoughts and examine our own portfolioin this light. First, companies with large cash balances are adding to them. Second, payouts are historically low. Third, the point has probably come where the best interests of corporate management and the shareholders are at odds. Zweig zeroed in on Ben Graham?s thoughts in regards to why big companies that generate high levels of free-cash flow are hesitant to return cash to shareholders.

Bull Case Nobody Makes
by Bill Smead of Smead Capital Management, 5/25/11
We feel compelled to make a US stock market bullish case which feels as good to this writer as avoiding tech stocks did in late 1999. It is so lonely that it is divine. Andy Grove, former Intel CEO, college prof John Maynard Keynes said, ?When everyone knows that something is so, it means that nobody knows nothin?.? We believe the majority has put their assets into investments that will provide defeat, insecurity and failure. Out of this comes a very optimistic bull case which is available to those who have courage to look foolish in the short run and avoid today?s popular asset allocation.

More People
by Bill Smead of Smead Capital Management, 5/20/11
As value managers, we are interested in secular trends. We seek company characteristics which lead us to non-cyclical businesses which are not capital or labor intensive. For this reason, we love businesses which need more people (as customers) to become more profitable. Unfortunately, from time to time, markets massively over-capitalize industries which they believe will benefit from having more people. Historical examples: The 1929 stock market peak was built around the idea that there would be more people to listen to radio, drive cars and fly on planes. The concept was over-capitalized.

Supreme Moment
by Bill Smead of Smead Capital Management, 5/11/11
Kairos- is an ancient Greek word meaning the right or opportune moment (the supreme moment). The world of value investing and portfolio management includes mean reversion and patience. Speculative episodes typically go on for much longer than expected. This fact forces us to take a stand by avoiding overvalued common stocks and owning undervalued shares. Everyone would love to make their adjustments at the ?Kairos?. We believe that the greatest existing misallocation of capital in the world today is based on over-confidence in the uninterrupted growth of emerging markets.

True Grit
by Bill Smead of Smead Capital Management, 2/11/11
We believe a whopper of a recession is coming in China. In our mind, it is only a question of when. Until then we will practice True Grit in our portfolio management and wait for history to repeat in the way we believe is inevitable.

Outlook 2011
by Bill Smead of Smead Capital Management, 2/10/11
The year 2010 took us on quite a ride and ultimately delivered acceptable returns in both the US stock and bond markets. Our returns were commensurate with the index, but did so without exposing our clients to what we consider the primary long term risks that exist today. Those two primary risks we see in 2011 involve bonds and China.
Results 251–277 of 277 found.