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?