Frank Holmes-Fossil Fuels Are Under Siege. Is Misinformation to Blame?

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It's becoming more and more difficult to be in the fossil fuel business. On both sides of the Atlantic, lawmakers and unelected bureaucrats are turning up the heat, so to speak, on companies over the issue of climate change.

In the U.S. House of Representatives, Democrats have launched an inquiry into whether oil companies have participated in so-called “climate disinformation.” This week, letters were sent to top executives of Exxon Mobil, BP, Chevron and Royal Dutch Shell seeking records, and hearings are scheduled for next month.

Meanwhile, the Securities and Exchange Commission (SEC) is expected to propose a series of new disclosure requirements all publicly traded companies must make, possibly as soon as year-end, to inform investors about potential climate risks associated with their business.

Smead Capital Management- The Law of Fashion

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To us at Smead Capital Management, there are some divine laws that govern the stock market over long time periods.

Interest rates are like gravity to P/E ratios (Warren Buffett)

Euphoric episodes end badly (Galbraith)

Cheap stocks outperform expensive stocks over long time periods (Benjamin Graham)

Performance is enhanced by buying extreme pessimism (John Templeton)

Every stock which goes up 10-fold had to double and quadruple first (Smead)

Young people who buy stocks on borrowed money lose (Edwin Lefevre-Reminisces of a Stock Market Operator)

Most investors suffer stock market failure (Dalbar)

5 Reasons why I decided to invest in the Stock Market in Africa

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I recently decided to invest in the stock market in Africa. I worked and lived on the continent for 7 years, before becoming a full time investor, so I feel that I have a better-than-average understanding of the potential of investing on the continent.

I’ll start with five reasons why I decided to invest there, I’ll then mention some of the key risks, and will close off by mentioning how I invested in the stock market in Africa.

Smead Capital Management- The McNealy Problem

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Investors often ask our team at Smead Capital Management what we spend our time on. We believe reading is the best use of our time to learn and think about the way that we can profitably apply capital for our investors. We recently read Ben Inker’s letter from GMO. In the letter was a 2002 quote in Bloomberg from the former Sun Microsystems CEO Scott McNealy. McNealy was explaining ex-ante how irrational the financial euphoria of the late 1990’s was when he said:

2 years ago we were selling at 10 times revenues when we were at $64. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?

Stagflation to last next 6 months, markets in danger of sell-off – Tavi Costa

 

Several structural problems in the U.S. could cause a slowdown in economic growth soon, with stagflation hitting and lasting for the next six months, said Tavi Costa, portfolio manager of Crescat Capital.

“I am in the of sort of a more of a stagflationary environment in the next six months or so. It’s difficult to see stagflation over a long period of time…but it’s possible to have periods of that and I think we’re getting into one,” Costa told David Lin, anchor for Kitco News. 

Frank Holmes: When Will Social Security Run Dry? Sooner Than You Might Think

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I have some sobering news: Social Security is in worse shape than we thought. The program’s Old-Age and Survivors Insurance (OASI) Trust Fund is now expected to be insolvent by 2033, a year earlier than anticipated.

According to the annual report, its finances have been “significantly affected” by the pandemic and 2020 recession, not to mention “rapid population aging.”

Indeed, the ratio between contributors and beneficiaries has been shrinking for decades. In 1941, there were about 42 workers for every Social Security recipient. Today, that figure is around 2.5 workers per beneficiary.

A tipping point will occur in 2034: Americans age 65 and over will, for the first time ever, outnumber those 18 and under, according to Census Bureau estimates.

Berkshire: Pinch Hit Weschler

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We have argued for years that the biggest mistake being made by Berkshire Hathaway was not giving shareholders access to the thoughts and investment discipline of their two talented stock pickers, Ted Weschler and Todd Combs. After all, Buffett calls the shareholders “partners” and has not allowed his partners to understand anything about the strategies and results of upwards of $30 billion of shareholder capital.

Thanks to Allan Sloan from The Washington Post, we have learned more about Ted Weschler from the footnotes at ProPublica and Sloan’s phone call to Mr. Weschler than we have ever learned from the Berkshire annual reports or the Berkshire Hathaway annual meetings. Where has any of this been in the Berkshire Hathaway footnotes? Weschler has made himself a centi-millionaire just from his personal investments in his Roth IRA. These funds came from converting his traditional IRA and paying a whopping $26 million in taxes to have future gains grow tax free. Here is how Sloan explained these circumstances:

Chris Mayer: The First Rule of Compounding

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“The first rule of compounding: Never interrupt it unnecessarily.”

 - Charlie Munger

I love this Munger quote. (h/t to @LiviamCapital). I may have it pinned on my wall. (Right next to another Munger quote I have on  my wall: “The goal of investments is to find situations where it is safe not to diversify.”)

I thought about Charlie’s first rule of compounding the other day when a friend asked if I trimmed a position that has run quite a bit this year.

I haven’t touched it.

Why not? Shouldn’t I trim when something becomes “expensive”? Shouldn’t I put the money in something “less expensive”? Isn’t that what “active managers” do?

Warren Buffett's deputy explained how he snowballed his retirement account from $70,000 into $264 million, how he shrugs off losses, and how people can save a fortune

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Warren Buffett's deputy grew his retirement fund from $70,000 to $264 million in under 30 years. He detailed how he did it, shared the way he shrugged off investment losses, and offered tips on saving for retirement in a recent Washington Post interview.

Ted Weschler, who helps Buffett manage Berkshire Hathaway's investment portfolio, discussed his approach with Allan Sloan for the writer's latest column. ProPublica first disclosed the size of Weschler's nest egg in June, citing federal tax returns it obtained.

Jim Rogers: The Madness Of Investors

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In the book, Inside The House Of Money by Steven Drobny there’s a great interview with Jim Rogers on all things macro-investing before it was called macro-investing. During the interview Rogers recounted two stories that demonstrated to him the madness of investors. Here’s an excerpt from the interview:

I don’t know, there have been some nice ones. When you ask about favorites, that implies success. I usually prefer talking more about the things I have gotten wrong, because I learned from them.

The best one, the one I loved the most, was defense stocks in the 1970s. After the Vietnam War, defense went into the tanks—everybody hated defense, nobody was spending money on defense, so these were dollar stocks at best. I bought a lot of them.

Money World Interview with John Templeton

 

An old video but very good comments from Templeton.

Jean-Marie Eveillard: Investors Have To Have The Courage To Say No

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In Ronald Chan’s Book – The Value Investors, Jean-Marie Eveillard provides two examples of when he had the courage to say no. Here’s two excerpts from the book:

Because I became worried about the Japanese stock market in the late 1980s due to its gigantic credit boom, we sold all of our Japanese stocks in mid-1988. Some investors questioned us for pulling out from the second largest stock market in the world, but I said it’s better to take some money off the table than to participate in market mania.

Obviously, I was wrong and unhappy in the next 18 months because the market went up another 30 percent, but in 1990 when the market collapsed, we owned nothing in Japan and our decision was proved logical.

Meb Faber: Aaron Edelheit, Mindset Capital, “The Best Investors Are Those That View It As A Game”

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In today’s episode, we start with Aaron’s time as the CEO of The American Home, a company he grew to over 2,500 single-family rental homes and sold in 2015 to a REIT for over $250 million. He explains why that experience has led him to be bullish on Mexican homebuilders and why he thinks one specific homebuilder is the most undervalued company in North America. Then we turn to why Aaron thinks it’s helpful for investors to play video games and why he thinks Nintendo is undervalued.

As we wind down, we touch on the cannabis space and why Aaron is bullish on the sector.

  

Michael Mauboussin: The 3 Big Behavioral Investing Mistakes

 

In this interview with Outlook Business, Michael Mauboussin discusses the three big behavioral mistakes that investors make. Here’s an excerpt from the interview:

Mauboussin: Investors make a lot of behavioral mistakes but I’ll mention three I think are particularly prominent.

The first is this notion of being overconfident. People tend to be overconfident in understanding the future and the way that manifests for investors is they tend to project ranges of outcomes that are vastly too narrow. So investors really need to try to calibrate themselves to appropriate distributions of outcomes to offset that overconfidence.

The second really big one is called confirmation bias that basically says once you’ve made up your mind, made an investment, you can to seek information that confirms your point of view and dismiss or disavow information that doesn’t confirm it. One of the essential tasks of an investor is really to understand new information as it comes in and to revise your views appropriately.

The third big one is a failure to use base rates. So base rates are essentially a record of what’s happened in the past to companies in similar situations. An understanding of base rates in terms of sales growth rates or earnings growth rates or return on capital patterns can allow investors to have a much better understanding about how the future may unfold for a particular company or an industry.

GMO: When The Ducks Are Quacking Feed Them

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Stock issuance highest ever, as firms and Wall Street know when it’s time to sell to eager buyers.

Yes, we are witnessing new price records for the S&P 500, NASDAQ, and a host of other markets. That, in isolation, should not be worrisome. What should worry you, though, is that records are being set on the valuation front. By almost any measure – forward or backward-looking – we are staring at some of the most expensive valuations in history, especially in growth stocks. But we’ve talked about that inconvenient truth many times before. Here’s a new worry: Stock issuance in 2021 is also setting a new record, blowing away the last high set in the run-up to the Tech Bubble. This is a dubious item to celebrate if history is any guide.

Would You Have Found Berkshire Hathaway in 1975?

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Probably not, from the performance charts, writes Rekenthaler in this article from the archives.

My July 25, 2018, column suggested that time travelers purchase $1,000 worth of Berkshire Hathaway (BRK.A) stock in 1975. That position would be worth $7.5 million today. Which got me thinking: How did BRK’s equity appear at that time?

Warren Buffett gained control of BRK in May 1965. The chart below depicts the value of a $10,000 investment in BRK over the next five calendar years, from 1966 through 1970. For comparison’s sake, I included the S&P 500 and the price change of a barrel of crude oil. (The latter two investments are theoretical: There were no index funds, and oil barrels came with storage costs.) All figures are adjusted for inflation.

Josh Young: Delta variant and China’s economy are 'short-term concerns' for oil

 

Josh Young, CIO of Bison Interests, joins BNN Bloomberg for his outlook on the sell-off in oil. Young sees rising COVID-19 cases and weakness in the Chinese economy as "short-term concerns" and is buying more oil stocks on pullback from names like Baytex to SandRidge.

Old West Investment Management Q2 2021 Investor Letter

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Our firm recognized an extraordinary opportunity in the nuclear energy/ uranium mining industry several years ago. Old West partner and portfolio manager Brian Laks offers this update on our investments in this area:

It’s been two and a half years since we first wrote about uranium in our 2018 year-end letter. We launched our Opportunity Fund that year to focus on the idea as we saw industry fundamentals improving and felt that we were nearing a turn in the cycle. The timing turned out to be excellent as we were able to steadily raise and deploy capital building positions in a declining price environment as the stocks bottomed.

In April 2020 we wrote that we believed the inflection point had arrived. Since that time, our positions have multiplied in value and the patience of our investors has been greatly rewarded. In an interview we gave last quarter, we talked about the need to become more selective as general valuation levels improved. We think we are still in the early stages of a long overdue industry rebalancing, and we maintain core positions in what we believe are the best assets to capture improving economics in the industry. 

Sean Iddings: We All Need Some Perspective

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The bull market makes us all look like geniuses, but we’re not.

It’s time for a good dose of perspective and honesty.

Follow along…

In 2013, Brian Scalabrine, a recently retired 11-year NBA player, had enough.

Scalabrine was sick and tired of hearing average Joes say they could beat him one-on-one on the court. The armchair professionals insisted that Scalabrine, a 3 point per game player, a poor player by NBA standards, would be an easy challenge. 

Scalabrine wanted to shut them up. Scalabrine took on four of Boston’s best amateur ballers, dubbed it the “Scallenge” and recorded it for all to see. Some had Division - 1 college experience. All had supreme confidence they would win.

Here is how it went.

Smead Capital Management: Quail Pricing in Oil Assets

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On the insistence from a friend and a colleague, I watched the movie There Will Be Blood over the weekend. I’m a Daniel Day Lewis fan from his prior works like Gangs of New York, so was excited to watch this odd story. Lewis’s character Daniel Plainview is a silver speculator turned oilman who comes across an oil opportunity in Little Boston, CA. He takes his son (HW) to a property, owned by the Sunday family, that they are told contains oil. He tells the owner that they are going quail hunting, which wasn’t true. While hunting, HW stumbles upon an oil seepage confirming the oil is present on the land. They are both excited and the following scene ensues with his son:

HW (son): How much we gonna pay them?

Daniel (father): Who’s that?

HW (son): The Sunday Family

Daniel (father): We’re not going to give them oil prices. We’ll give them quail prices.

While we are not claiming to be getting our oil companies for birdfeed, it brings up the idea of distraction for the Sunday family in the movie and investors now. The Sundays had strangers show up looking to hunt quail, not knowing they were looking for oil. Outside of one family member believing there was a ruse, they were willing parties when the sale price was negotiated at what looked like low prices in the movie. These people had never seen oil drilled on their land, thus didn’t understand the opportunity that lied ahead.