A Book with Legs: The Smead Book List - Fall 2024

Episode Overview

In the Fall 2024 episode of A Book with Legs, hosted by Smead Capital Management, Cole Smead and his father, Bill Smead, delve into their latest literary explorations that inform their value investing strategies. This quarterly book list episode intertwines discussions on diverse books with insights into market dynamics, personal anecdotes, and the enduring wisdom of investment legends like Charlie Munger. The conversation offers a rich tapestry of ideas for investors, business professionals, and curious minds seeking to blend worldly wisdom with financial acumen.

Exploring Technological Revolutions in Financial Capital

The episode opens with Bill Smead discussing Technological Revolutions in Financial Capital by Carlotta Perez. This seminal work, originally published around 20 years ago, examines the interplay between technological breakthroughs and financial markets, particularly highlighting the infamous technology bubble of 1999-2000.

Bill Smead [02:13]: "Carlotta Perez's thesis is effectively that you're going to end up with turds when technological revolution and financial capital meet."

Bill draws parallels between Perez’s analysis and Charlie Munger’s cautionary remarks from the Berkshire Hathaway annual meeting, where Munger compared financial euphoria to a "Ponzi scheme," ultimately leading to economic "turds" when hype overshadows genuine progress.

Cole Smead [00:58]: "We analyze their work through the lens of business markets and people."

The discussion underscores the cyclical nature of capitalism, emphasizing that economic downturns and inflation are natural mechanisms that cleanse and stabilize markets.

Books That Shape Investment Perspectives

Bonhoeffer by Eric Metaxas

Cole Smead introduces Bonhoeffer by Eric Metaxas, a biographical account of the theologian and anti-Nazi dissident Dietrich Bonhoeffer. The book illustrates Bonhoeffer’s profound second-level thinking and unwavering courage in the face of tyranny.

Cole Smead [18:11]: "Bonhoeffer had the poise to take his impending death in a purposeful way, showing unbelievable courage."

This narrative serves as a metaphor for strategic foresight and moral steadfastness, qualities essential for successful investing.

Living Life Backward by David Gibson

Another highlight is Living Life Backward by David Gibson, a contemplative work on Ecclesiastes that grapples with the inevitability of death and the importance of embracing life’s imperfections.

Bill Smead [16:27]: "Live your life, you're writing an obituary as you live it."

The Smeads reflect on how this philosophy influences their investment decisions, promoting a long-term perspective that values enduring wealth creation over short-term gains.

Move by Move by Maurice Ashley

Maurice Ashley’s Move by Move, a biography of the grand chess master, is also discussed. The book emphasizes strategy and logical thinking, aligning with the podcast’s focus on disciplined investment approaches.

Cole Smead [20:25]: "Think about logic and strategy when approaching investments, much like a grandmaster approaches chess."

How We Choose What We Do by Richard Robb

How We Choose What We Do by Richard Robb is recommended by listener Chase Emerson. The book explores the psychological drivers behind decision-making, suggesting that actions are often motivated by intrinsic desires rather than purely logical reasons.

Cole Smead [24:00]: "We do things for doing itself rather than logical reasons."

This insight is pivotal for understanding investor behavior and biases in market participation.

Bull by Maggie Mahar and The Professor, the Banker and the Suicide King by Michael Craig

Bill Smead mentions Bull by Maggie Mahar, anticipating its alignment with investing in common stocks. Additionally, Cole discusses Michael Craig’s The Professor, the Banker and the Suicide King, which delves into high-stakes poker during the post-9/11 economic landscape, drawing parallels to risk management and strategic investment.

Cole Smead [11:19]: "It's a fun book that explores risk-taking in a landscape fraught with uncertainty."

Additional Recommendations

Other notable books include Reminiscences of a Stock Operator by Edwin Lefèvre, a classic on trading psychology, and Fortune's Bazaar by Vaudin England, a recent publication on Hong Kong's economic history amidst geopolitical shifts.

Investment Insights and Market Reflections

Oil and Gas Sector Analysis

A significant portion of the discussion centers on the oil and gas industry. Bill Smead recounts past investment attempts during volatile periods, highlighting both successes and missteps. He emphasizes the cyclical nature of commodities and the importance of enduring strategies despite market corrections.

Bill Smead [35:24]: "Oil and gas is the tobacco business of the next 10 to 15 years. You get famously wealthy by owning the tobacco companies from 1970 to today."

Cole reinforces this by drawing parallels between past commodity bull markets and current opportunities, advocating for patience and strategic allocation to capture long-term gains.

China’s Market Evolution

The Smeads reflect on China's economic trajectory over the past 13 years, noting a shift from rapid growth to current market challenges. They discuss the implications of foreign ownership in U.S. equities and the diminishing edge investors once had in Chinese markets.

Bill Smead [25:39]: "Everything kind of moves on a pendulum."

This analogy illustrates the oscillating nature of market sentiments and the need for adaptive investment strategies.

Market Psychology and Margin Buyers

Cole shares anecdotes from his travels in Asia, observing how international investors lack a clear edge in volatile markets like Hong Kong. He critiques the herd mentality, emphasizing the importance of differentiation and unique investment insights.

Cole Smead [29:31]: "That's odd. Who's the buyer at the margin gonna be?"

This underscores the challenges of identifying authentic value in a globally interconnected and often irrational market environment.

Personal Anecdotes and Family Legacy

Bill and Cole weave personal stories into their investment narrative, such as their great-grandparents' nearly 70-year marriage and Bill’s grandfather's naval service in World War II. These narratives add depth to their investment philosophy, highlighting values like perseverance, courage, and long-term commitment.

Bill Smead [17:30]: "Our goal is to get to 93 years old, to complete what they almost did in their marriage."

These reflections serve as metaphors for sustaining wealth and maintaining disciplined investment practices over extended periods.

Notable Quotes with Timestamps

• Cole Smead [00:58]: "We analyze their work through the lens of business markets and people."

• Bill Smead [02:13]: "Carlotta Perez's thesis is effectively that you're going to end up with turds when technological revolution and financial capital meet."

• Cole Smead [11:19]: "It's a fun book that explores risk-taking in a landscape fraught with uncertainty."

• Bill Smead [16:27]: "Live your life, you're writing an obituary as you live it."

• Cole Smead [24:00]: "We do things for doing itself rather than logical reasons."

• Bill Smead [25:39]: "Everything kind of moves on a pendulum."

• Cole Smead [29:31]: "That's odd. Who's the buyer at the margin gonna be?"

• Bill Smead [35:24]: "Oil and gas is the tobacco business of the next 10 to 15 years."

Conclusion: Integrating Wisdom into Value Investing

The Fall 2024 episode of A Book with Legs showcases how Cole and Bill Smead integrate diverse literary insights into their value investing framework. By examining historical economic cycles, investor psychology, strategic risk-taking, and personal values, they demonstrate a holistic approach to navigating complex financial landscapes. This episode not only highlights the importance of continual learning through reading but also reinforces the timeless principles of patience, discipline, and informed decision-making that underpin successful investing.

For listeners seeking to enhance their investment strategies with depth and clarity, the Smeads' discussions offer valuable perspectives grounded in both scholarly analysis and real-world experience.

Key Takeaways:

• Cyclical Nature of Markets: Understanding economic cycles helps in anticipating and navigating downturns.

• Strategic Patience: Letting winners run and avoiding unnecessary trades can lead to superior long-term returns.

• Global Market Dynamics: Shifts in global economic power, especially regarding China, require adaptive investment strategies.

• Integrating Wisdom: Drawing lessons from diverse fields enriches investment decision-making processes.

Join the Conversation

The Smeads invite listeners to share their book recommendations and engage with the community through email at podcastmeadcap.com or via their social media handle @smeadcap on X. Your insights could feature in the next quarterly book list, fostering a collaborative space for enriching investment discussions.