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- [00:03]
Podcast Host
You're listening to A Book With Legs, a podcast presented by Smead Capital Management. At Smead Capital Management, we advise investors who fear stock market failure. You can learn more@smeadcap.com or by calling your financial advisor.
- [00:21]
Cole Smead
Welcome to A Book with Legs podcast. I'm Cole Smead, CEO and Portfolio Manager here at Smead Capital Management. At our firm, we are readers and we believe in the power of books to help shaped informed investors. In this podcast we speak to great authors about their writings the late, great Charlie Munger prescribed using multiple mental models and analysis, we analyze their work through the lens of business markets and people. Today's date is September 30, 2024. This is our quarterly book list where we talk about books, books and more books. Hosting this with me is our Chief Investment Officer, my dad, Bill Smead. Thad, thanks for joining me.
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Bill Smead
Great to be here.
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Cole Smead
So let's start out talking about what we've recently read. You want to kick it off?
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Bill Smead
Sure. As if I didn't need to inundate myself. More. I was recommended Technological Revolutions in Financial Capital by Carlotta Perez, which is about a 20 year old book that was written in response to the technology bubble of 99 2000. And what's so interesting, since this podcast is named after Charlie Munger, I went to the Berkshire Hathaway annual meeting in May and they started with a bunch of vignettes honoring Charlie because he passed this last year. And the first vignette they started with was Charlie back in 99 at the annual meeting saying, you know, if you have a financial euphoria episode, it's like a chain letter or a Ponzi scheme. And if you throw a legitimate development into it, it's like mixing raisins with turds. And what you end up is turds. Well, Carlotta Perez's thesis is effectively that you're going to end up with turds. When the technological revolution and the financial capital meet together, it ultimately turns into some kind of mania and you end up in that situation.
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Cole Smead
But it's a very normal part of capitalism. And there's the cycles of capitalism.
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Bill Smead
It is. That's why people doubting it should feel kind of foolish about doubting it, because it's just as healthy a part. I mean, you have to have a recession once in a while to clean out bad economic behavior. You have to have inflation clump along every once in a while so people can understand how damaging it is. But if you're the federal government and you've borrowed $12 trillion and monetized it. Inflation can be your friend by helping you pay stuff back cheaper. So it just. It's actually a terrific book. But she's a very technical, wonky economics writer. Right. She would have taken the math oriented economics classes at our college, but it was.
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Cole Smead
You didn't take those classes?
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Bill Smead
I tried to avoid some of them, yeah. Econometrics. I took Econometrics. I got six weeks into it, I got so bored.
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Cole Smead
So you're not. Yeah, I was gonna say at the age of 66. You're not atoning at all.
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Bill Smead
Well, no, but I'm glad there's people that like that stuff and do that work. That's the kind of information we like access to. And she does a great job. You wouldn't know that. She didn't write this a year ago.
- [03:35]
Cole Smead
Let's see. You just brought something to mind. I was in Southeast Asia recently visiting with some of our investors out there. And one of our investors, unbeknownst to them, while I was in Thailand, gave me a small thing of what would be like a Thai peanut brittle. And it's got. Had a lot less sugar. And, you know, I immediately thought of the Breaking Bad Charlie Munger scene where I turned. I actually turned to our investor and mentioned to him the scene. So I had Munger echoing through my mind when I got that gift. From now on, brittle will never just be brittle to me. It will be, you know, as he said in the Breaking Bad scene, he says, brittle bitches.
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Bill Smead
Yeah.
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Cole Smead
Pardon my French for all our listeners.
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Bill Smead
Yeah. And the funny thing about this, the video, that was the other snippet besides the raisins and turds thing.
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Cole Smead
Yeah.
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Bill Smead
And it caused me to come back from that annual meeting. It's the 14th in person annual meeting in the last 16 years that I've gone to. It caused me to and your mother to watch the Breaking Bad series from the beginning. And so as soon as you get to about the third episode, you realize that these drug dealer guys are calling each other bitches all the time. And that's what the humor of it was. Charlie ate peanut brittle. All meeting long for six hours. So he was obviously addicted to that drug.
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Cole Smead
Yeah. Let's see the book. I just recently got done reading. I have a couple here, Ben and me. We had done this book with Eric Weiner. I find it so interesting because again, you go to Charlie Munger. Charlie considered Ben Franklin to be one of the greatest people in the history of the world. He was a patriot, he was an inventor, he was a pragmatist in Every sense of it. I was reminded of the fact that the matching scheme that we now see in a lot of charitable endeavors and whatnot was created by Ben Franklin. He used a matching scheme to do funding back at hand time. So again, back to the incentives. Incentives cause humans to do crazy things, as Munger would say. I thought a lot about Munger in that. But here's what was interesting is like, while you can look at all these very interesting relationships to what he had towards also education. He created University of Pennsylvania, which was really a classical education from the beginning, which we're big fans of, especially with us being this liberal arts podcast, if you will. But while that's going on, it's interesting because Franklin's son was a loyalist to England. So here's Ben Franklin, one of the modern fathers of America, and his son is a British loyalist. And watching the strain of that relationship of his son being this British loyalist who ends up getting captured, held as a prisoner. His son ends up getting extradited back to England, and Franklin later is in England, and Franklin's grandson lived with him in the United States as an attache with his parents back in England. And it was just an incomplete human mess in the end. So again, you're watching this person that has just these incredible ideas and capacities, and yet the ability to be human and forgive isn't present.
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Bill Smead
A penny saved is a penny earned.
- [07:00]
Cole Smead
Yep. So again, it's like you're finding all these incredible curiosities tied to Ben Franklin, and yet you can't get over the fact that he's a fallible human. And he was very pragmatic. But if you look at his relationship with his estranged son, in the end, it wasn't very pragmatic. And so it's like the idea I was taken away from it. It's like, gosh, you could do incredible things and you're still just an imperfect human with sin, and you're gonna have all these incomplete messiness. Another book that hit that same theme that we recently did was the Incorruptibles by Dan Slater. Really, the history of Russian Jews leaving the Pale Settlement from what's modern day Ukraine in the late 19th century and ending up in late 19th, early 20th century in New York. And we often think about. I mean, you hear these stories where if you've been robbed, it's usually someone in your family. In other words, proximity causes problems. And I thought a lot about that in Dan's book, because Dan talked about, in the Pale of Settlement, Russians were not only the prostitutes, Jews were not Only the prostitutes, but they were also the pimps. So the legacy of bad, I'll call it family thinking in the context of the Russian Jews, the family having these issues. They completely ported right over to New York. So guess who's dominating the prostitution. And effectively all the pimps were also Russian Jews. And so it's kind of like his book was a great study of saying, in your community, if you have problems, you shouldn't be looking outward, you should be looking inward, because that's where the problems are. So I've thought a lot about this. You know, we live in here in Phoenix now, so I think about this in context of our own family. I also think it's context of our own community. In other words, what goes on in your community, the things you don't like are actually things you're involved in.
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Bill Smead
The history of the tobacco industry was that prior to inventing the machines that rolled the cigarettes, there was a huge community of Jewish men that were rolling those cigarettes for years. I saw there's some kind of historical TV show where they kind of recreate what's going on. I can't remember what the name of it was, but they told that story because one of the brilliance of how profitable the tobacco industry has been is those machines haven't changed much in the last 70 years. All you gotta do is put some grease in them once in a while. And so it's incredibly inexpensive to take tobacco and put it in the form of cigarettes.
- [09:43]
Cole Smead
Yeah. When in Dan's book, to kind of clean up those, I'll call it familial messes. You have to deal with it in the family. And it's the people that are going to rectify the situation. Were people inside that community. And you might not do that in the most legal bounds, but it might be right. Is one of the things that took away another book that I've got done, actually. Our colleague Will Keenan had recommended this book. Book to me is called the professor, the Banker and the Suicide King. It's written by Michael Craig. Oddly enough, Michael Craig actually is located here in Mesa, Arizona. He wrote the book. He's been a. He's played poker for years and been highly involved with poker. And he talks a lot about the, you know, mid-2000s Chris Moneymaker craze that took poker to a new height and, you know, put the World Series of Poker on tv and. And so what his book is about is a guy named Andy Beal who has a bank in Texas, and he shows up in 01 and starts playing big Money poker out of nowhere. And this is right after the 911 attacks. And so here, you know, here's the economy slowed, Vegas is dead, and he starts showing up to play these big poker games. And, I mean, he's playing for some really large money, and he ends up running. And I won't give it too much away because I think there might be a chance that we end up having Michael come on to talk about the podcast. But he ends up playing, playing poker against what is called the corporation. And the corporation was a pack of the best poker players in the world, and they called themselves a corporation because they were pooling their money together because Beal was playing for such big money that they could go bankrupt.
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Bill Smead
Yeah.
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Cole Smead
And so you think about, like, risk pooling in an insurance, you know, like Lloyds of London risk pooling. You think of who has an edge, what's their edge? And so it just. Very fun book, very fun read. I thought a lot about risk taking in it. I also thought about, you know, the old saying is you can't play on scared money. It's funny to watch the pros, the.
- [11:38]
Bill Smead
Best players in the world, be the scared money. Correct. And what it makes me think of is the way the hedge fund algorithm guys moved closest to the electricity, you know, the closer they were.
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Cole Smead
Well, yeah. For latency.
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Bill Smead
Yeah. The more benefit they would get by something had nothing to do with trading skill or understanding of the stock market.
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Cole Smead
Yeah. So let's pivot to what we're currently reading. What do you have?
- [12:07]
Bill Smead
Well, Hetty's Folly is kind of fun because my mom was a big old time movie person. And so Hetty was from Austria, was married in Austria, and turned out was a very bright lady, although undereducated, because she was really a child and young teen actress. She was a spectacularly beautiful woman and started acting in plays. And then the movie makers eventually caught up with her. But she was also a very, very smart woman and in the process began to tinker around with inventing electronic ways to solve one of the key problems of the era, which was radio guided torpedoes, how to stop them and how to cause them to be unseen to do the good work that you want done. And so it's a very, very good book. Great subject. You just mentioned, for example, her first appearance, she sold $5 million worth of war bonds, which $5 million was just its equivalent of just like 50 or $100 million today. And it was just astounding. And so it's. They called her the most beautiful woman in the world, but she was a super smart lady. And it's very entertaining because that was my parent. Your grandfather served in the Navy during World War II and helped keep the peace in Tokyo afterwards. I've always been fascinated by that time period. And this book just takes me right back in there and. And, you know, so it's got. It's got multiple. Great history, great logic, great writing. This guy's a Pulitzer Prize winner. This Richard Rose.
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Cole Smead
Gotcha. Well, on the. On the. On the Japanese or Tokyo side, I actually went on this trip out to Asia. I got to go there. And I landed and the DNA Bay Stars were playing the Yamuri Giants, which would be the Tokyo Giants, and. And I was too late to go, probably scalp tickets, so I just sat there watching the baseball game in my room. And then I was getting ready for our meetings. The next morning I woke up because obviously the Dodgers are playing their Sunday day game. And so I'm watching Shohei. I think he hit number 46 while I was watching. And I thought, any country in the world that wants to give me baseball Sunday and Monday morning, I like those people.
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Bill Smead
That's a good place to go.
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Cole Smead
It's a good place to go. Let's see. So my books. So I was given this. I actually want to give a shout out to a group by the name of Highmount Capital. Highmount is a venture capital firm that we got introduced to through a friend. And Highmount sent me a book called Living Life Backward by David Gibson. And it's really a book on Ecclesiastes and talking about, you know, it talks about life as though it's missed. Okay. And so he talks all about, really, death. Okay. And he talks about death because most people try to just avoid the idea of it altogether and because of that are just not very realistic about life. In other words, like, if you avoid death, you kind of like, take out the. Well, what does life usually bring? Right? There's good seasons of life, there's bad seasons of life. And so he's really trying to shape this idea of what do you have to deal with no matter what? And all the imperfections of life are actually the things that, you know will come and should not be avoided, but really just taken as part of that whole experience. And so I'm not about two thirds of the way done. There's a lot of wisdom in it to where you're just like, getting drowned in wisdom. And you're like, all right, I gotta, like, process each chapter.
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Bill Smead
So I was told a long time ago. And I think this Is brilliant thought. Live your life, you are writing an obituary. As you live your life, you're writing an obituary. How many people think about, gee, when I die and they put my obituary in the paper, what's it gonna say?
- [16:27]
Cole Smead
Well, correct. But even contextually so, I mean, here we are on a podcast. I like to think this is a great podcast. I have fun doing this with you, by the way. In 100 years, this doesn't matter. And again, it doesn't mean what we're doing in civilization is an important. You know, it doesn't mean that what we're doing in our lives isn't important. But after one generation comes another, and after another generation comes another.
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Bill Smead
Yeah.
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Cole Smead
And the idea. I think the real danger is, like, you know, to your discussion earlier, look, what's going on right now, Bill, is so much more important in the history world than anything. And then the next generation says that. And the next generation says that.
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Bill Smead
Yeah.
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Cole Smead
And then. And having a perspective of the process that you're going through and being realistic about that process, which is. Which is funny to think about. So, you know, just giving you a lot of picture from a. All right, if you're God looking down, you know, what do you think?
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Bill Smead
Well, so living life backward, your mother and I have a strange goal. Our goal is that my great grandfather and grandmother were married 69 years, 11 months and 10 days, and they died within two hours of each other on that day. And they didn't make their 70th anniversary. Well, one of the reasons that I'm so into this is that I've seen many of the notices in the Portland Oregonian newspaper. Every year, the family reunion was celebrating the anniversary of Pap and Melvina. Shmied.
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Cole Smead
So giving you a little genealogy here, too.
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Bill Smead
Yeah. So it was a big deal. I mean, the relatives came from all around, even from Kansas, each year for that reunion. And it was a big deal. It was the reunion, et cetera. And so we just passed our 43rd. So we've set that as a goal. Right. So the goal is to get to. She and I have to get to 27 years. We gotta get to 93 years old. We're born the same year. And to make 70 years being married to complete what they came really close to competing. And I don't know about dying on the same day, but that's a whole separate subject.
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Cole Smead
Yeah. See, the other book that I have here, this has been a book that we've both been in for a while now, is Bonhoeffer by Eric Metaxas. I Think I brought this up last quarter, too. I mean, it's such an interesting book where, you know, I'll use Munger. Munger talked a lot about second level thinking. Okay, so you're in this book. Everyone's kind of watching the events unfold and the wisdom that Bonhoeffer is exhibiting relative to the people around him. It is very much second level thinking all the way to where we're now at the point in the book where Bonhoeffer knows that he has to go back to Germany and it's like he's going to die.
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Bill Smead
He knows he's going to die.
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Cole Smead
He knows he's going to die for what he's doing in Germany and because of why he disagrees with the Nazism. But Nazism from the perspective of a biblical perspective and a godly perspective, I would argue. So it's just interesting to think as we're doing Bonhoeffer and you're reading living life backward, you're like, okay, I'm going to die. And I'm at least Bonhoeffer had the poise to take that in a way that he was purposeful in death.
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Bill Smead
And courage.
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Cole Smead
Correct.
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Bill Smead
Unbelievable courage.
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Cole Smead
Unbelievable.
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Bill Smead
The guy had unbelievable courage.
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Cole Smead
Yeah. So the other book that I just cracked, I'm like a chapter into this. It's like a short history of the history of Hong Kong. It's Fortune's Bazaar by Vaudin England. It was kind of fun because I was cracking it as I was, you know, in Asia at the time. And I just thought, you know, it's a newer book, it's just been released. But what more fun than, as we're watching the whole, you know, what's going on with Xi Jinping and, you know, is China Bottom then is David Tepper's Buy Everything China, you know, have validity, you know, to kind of be in a short history like that. So let's pivot onto the ones that we've had recommended to us. Maybe you want to kick it off on that side, too.
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Bill Smead
Well, I just literally got recommended this book, Bull, by Maggie Mahar. And I don't know very much about it yet, but I just downloaded it and I'm sure it has something to do with the investing in Common Stocks, which is a favorite. And then a book I read a long time ago that had a huge impact on my life. I've decided to go back and reread because it was recently given to me as a gift by a charitable organization up in Seattle that we supported, Faith by Mike Martin. One of the great stories of conversion and really a missionary in a local place. Right? He didn't go halfway around the world to be a missionary. He went to the middle of just north of Seattle and created a huge school. It started out being a school for wayward kids. And it's Cole. That's a school Cole grew up going to. And there were some wayward kids there when he was there too. But not the same way. But anyway, just be reminded. It's an incredible story of what God can do if he gets a hold of somebody.
- [22:03]
Podcast Producer
Hey, I want to give a big shout out to everyone who's been working so hard on the show. You know, we recently hit the top 10 investing podcasts on Apple Podcasts and even number one in the business category in several countries. As you may know, this show is brought to you by Smead Capital Management. Smead Capital Management understands how frustrating and illogical the stock market can be. If you are searching for funds with a proven track record, give the Smead funds a look. Or better yet, reach out@smeadcap.com and don't forget to mention that you're a fan of the podcast. Past performance is not indicative of future results. Investing involves risks, including loss of principal.
- [22:40]
Cole Smead
Please refer to the prospectus for important.
- [22:42]
Podcast Producer
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- [22:55]
Cole Smead
Not affiliated so the other book I had recommended to me, and actually I got a copy of it, was and I'll give a shout out to our partner that we've worked with on our software suite, which is Ridgeline. If you haven't checked out Ridgeline, Google them, check them out. I'm sure people would love to talk to you there, but it's called Turn the Shipped around by L. David Marquette. David is a retired Navy officer and it's a book about leadership and dealing with, you know, many people. And I haven't cracked that yet, but that's he had spoken at their base Camp conference. And so let's see here, I have a couple others. So as usual, knowing what season we were in, about to come to the book list, superfan Steve did email me and he says the book he recommended was Move by Move by Maurice Ashley and it's a story of a grand chess master. Okay. And so again, think about logic. Strategy is what I was thinking about when he sent that in. Let's see, another, another. Oh, and by the way, if you want to find super fan Steve out there on X at Denver, Labrador is his handle. So if you guys want to kind of self identify with superfan Steve, I see another friend of ours, Chase Emerson, who's also on X, he's a Z Land investor, is his handle. I had asked him as a friend, you know, do you have any good books you recommend? He. How we choose what We Do. Yeah, he says How we choose what we do by Richard Robb. And he said that Richard Robb is a. He's a University of Chicago guy. He runs a hedge fund. And Rob argues through the book. Chase was telling me that ultimately we do things for doing or doing things for itself rather than logical reasons. Okay. And it made me think, like, oh, is it like a yolo, right? You only live once, so might as well do a few dumb things. But again, it's a book that Chase recommended and, you know, that you could check out. So a couple question, A couple of questions that I want to throw out to us because I know we're getting these anyway and I know there's something you and I've been talking about. Can you, can you give a sense to our listeners, Bill, how far away we are from where we were 13 years ago on China? Cause it's like I always tell people, listen. Markets are adaptive, complex systems. They adapt over time, but not overnight. And so kind of explain the last 13 years.
- [25:40]
Bill Smead
Well, everything kind of moves on a pendulum. And you start out unknown, unloved, unthought of. And then what happens is momentum takes you clear the other side of the pendulum. And so 13 years ago, China was the bomb. They were the most highly thought of major economic power in the world because of how fast they were growing, how much stress they were putting on inputs, how positively they were affecting neighboring countries and economies like Australia and the countries that produce natural resources and commodities. Brazil, Brazil, Russia, India, China, the BRIC trade. And literally that was the top of the world. I'm writing about that for our quarterly letter for our fund. And then as of two weeks ago, and I mentioned it to Cole. Now, Cole and I both have a lot of hesitation about whether a command communist system is really investable. I mean, if you own stock there, do you really own anything? Can't the government just say you don't own that? So we have a lot of reservations about that.
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Cole Smead
How or how you can allocate capital.
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Bill Smead
Based on that regime, how you could allocate capital. Yeah, but. And that's a very fair point, but from a pendulum standpoint, people about a week ago were the least likely to think that that was a good idea, because anything outside the United States is considered a bad idea from international investors as well as U.S. investors.
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Cole Smead
Yeah. They all in unison agree.
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Bill Smead
They all in unison agree. They all just want this S&P 500 drug, which is loaded with the most glamorous and successful companies, mostly tech and a bunch of what we call kind of high quality, wide moat growth companies, the Costcos and that kind of people. And that's like the only drug that anybody wants. Whereas we've got a chart that shows in 2010 that the list of largest cap stocks in the world was dominated by people directly connected to the BRIC trade. Including. Including in Brazil it was Petrobras, China Construction bank, icbc.
- [28:13]
Cole Smead
Petrobras would go down as another company that can the government get out of their way and let them do what they want to do. So it's funny, and I don't know if I got to tell you this, the last two times I've been to Hong Kong, which would really be from a capital markets perspective, historically been the gateway to China, I sit down at lunches or meetings and here I am like, you know, your classic suburban kid, you know, from west coast America, living in Phoenix now. And I sit down in meetings and they look at me and they say, so when are the Hong Kong stocks gonna bottom? Now that's how far the psychology is. They're asking people from far flung places in the world to understand what's going on there. When the reality is what's our edge? You know, outside of what insiders teach us or what kind of businesses fall into our lap, we have no edge in there. But I say it because that's where the psychologists when they're looking everywhere else. And now I'll add one more thing. And I shared this with our team coming back. So, you know, like we've talked about in the last, you know, letters, missives, quarterly booklets, household ownership of common stocks here in the United States is higher than it's ever been. It's a death knell.
- [29:21]
Bill Smead
It's a terrible thing by a mile.
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Cole Smead
But we'd recently seen some charts that foreign ownership of US equities is at the highest point in US history. So you see that and you're kind of like, that's odd.
- [29:32]
Bill Smead
Who's the buyer at the margin gonna be?
- [29:34]
Cole Smead
Correct. So then I'm on this trip and I'm sitting in Bangkok at the time, and one of our partners there was taking us around to see institutions and I'm asking them to kind of. Our colleague Richard was asking to teach us about what do they own and whatnot. And they pretty much ended up owning what would be looked at as kind of like a misky world index where 70% of their equities are U.S. s and P500, like equities. Okay. And I'm just sitting there thinking, if you're halfway around the world and they're acting like anyone else in the United States, the game's over. Because what's the edge? There's no differentiation who is going to.
- [30:12]
Bill Smead
Be the buyer at the margin. So here's what I think about that. Cole, which is great that you bring that up. So Cole was going through the CFA process in 2010, 2011, and had to interact with the head of. Mr. Robinson was the head of the educational division, Tom Robinson. Tom Robinson. And so Tom.
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Cole Smead
Shout out to Tom, by the way.
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Bill Smead
Yeah, great guy. So Tom said, hey, you folks, you like to write and you like to speak about the fundamentals of common stock investing. We badly need people like you to go to the Far East. We have more new candidates for CFA charters in the Far east as any place in the world back in 2010, 2011. So they said, we will fly you and pay for your hotel if you'll go to do that. Well, at that point in time, we had virtually no one to sell to, so it was really a great opportunity. So we started in Singapore. Well, my gosh, Singapore is just a fantastic place. Yeah, right. It's just this pristine city, very orderly and very attractive, et cetera and so forth. And then we went to Saigon and Hanoi and we went to Hong Kong and Shenzhen on the first trip. And then the next year in 2011, we went to. I went to Beijing and Shanghai and Korea and Seoul and Tokyo and I think Hong Kong again and so forth. And it was so interesting for us because we got to see the economic miracles as they were, but yet we could also see that it was a mania.
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Cole Smead
Yeah.
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Bill Smead
And that got put together with a video from the Australian version of 60 Minutes, SBS, Dateline.
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Cole Smead
Yeah.
- [32:18]
Bill Smead
Sydney Broadcasting that was pointing out that the incredible growth statistics in China were a function of the connection between the federal government or the top level of Chinese government, passing down to the regional and the local governments dictates. You're going to. You're going to. You're going to cause this economy to grow. You're going to go to the government. 80% or 70% own banks, and you're going to tell them to loan money to build these buildings, these condo buildings, these shopping centers, these ghost cities. We're going to grow because you're going to spend that money and call it gdp. And so by going there, it helped us see the phenomena and understand. And the irony is, here we are today and they're at rock bottom because nothing they've been able to do has been able to get their economy going again. Because that's what happened in the United States. We did stupid borrowing between 03 and 07 and then the thing collapsed and we had a really hard time reinvigorating our economy in 2009, 10, 11, 12. People try to rewrite history. We were very bullish about stocks back then, but in 2012, we'd go see people when we finally did get on platforms and they weren't very interested in owning common stocks in the United States, even though we were already three years into the process of coming out of that deep recession. So this is like the first volley in China. But again, that's all against the backdrop that when you own a Chinese stock, what do you really own?
- [33:56]
Cole Smead
Yeah. And I think, I mean, my discussion with people was around, think of where China was 13 years ago. That's where the United States is right now, in capital markets, top of the world. And so think of how low the opinion and the sentiment has been tied to China. And we're going to go there.
- [34:13]
Bill Smead
There will be a time in 10 to 15 years that we will be there. I came into the business at that time, 1981, 80 81. We were that we were at the low point. People wanted gold and oil and commodities and to own inflation protected investments. They wanted nothing to do with good quality common stock. Nothing to do with them.
- [34:34]
Cole Smead
Yeah. And someone had said to me, they were looking at our portfolio and they said, well, we understand what Apple does. And they were looking at the US Fund or US Portfolio and they said, oh, we might know what Occidental does, but not all of our institution would understand what Occidental or Oxy does. And I thought to myself, oh, I forgot that this is a game where everything should be readily identifiable to everyone around the world. Which shows you how foolish the psychology is backwards in this global mania, unequivocally. So let's pivot a little bit. I think I have a sense of what you'll say on this. But if you were going to say, where do the investors of Smead Capital Management think we are at on the oil and gas business? What are your thoughts on that?
- [35:25]
Bill Smead
Well, Cole knows the story because first, from being in my household as a kid and then working with us for the last 15, 16 years, that I tried to make a major foray into the oil and gas business in 1999 and I had success. Right off the bat I bought Arco and it got bought out a year later. But then in 2002, due to the Enron WorldCom debacle, utility companies that had got caught up in the energy trading scandal.
- [36:01]
Cole Smead
Yeah. By 03 when Enron was going, were.
- [36:03]
Bill Smead
Being forced to sell assets to repair their balance sheets to stay in business. Kind of the antithesis of people bidding up Constellation Energy because they're going to start a nuclear plant again. So I jumped in. I tried to buy a couple of gas pipeline companies, transmission companies, Williams and El Paso. Williams and El paso. I paid 11 down, way down from where they had been, but they immediately went to seven. I sold them for tax purposes and then they bottomed at the bottom of the bear market in 03 they bottomed at 7.8of a point on Williams and $3 on El Paso. And then later on I never got back in.
- [36:48]
Cole Smead
Yeah.
- [36:49]
Bill Smead
And I never took advantage. The only, the only way from late 99 to the middle of 08 to make any money was things related to the developing of the brick trade.
- [37:01]
Cole Smead
Yeah. As an example we've talked a lot about during the decade of the 2000, stocks lost money.
- [37:06]
Bill Smead
Yeah.
- [37:07]
Cole Smead
The S and P lost money. Dividends reinvested and energy made double digit returns. It was the only game in town.
- [37:12]
Bill Smead
So my mistake was not putting up with being abused. Because from the point in May 1st of 2020 when commodities were the cheapest relative to stocks anytime in 200 year history of the United States, we had a great move off that in 2021. We made a pile of money from it. And now we're in the first mega correction of that probably 10 to 17 to 20 year commodity super cycle. And today on Kelly Evans show on cnbc, I'm trying to explain that if you want to make a lot of money out of a 15 year bull market, I mean think of in the 80s, stocks were hellaciously cheap in 81, the market took off in 82. But you had to sit through a 43% 78 day decline in 1987 to stay in your chair. And we're in a correction. These oil and gas stocks, that's not quite that bad, but it stinks. But that's okay. You reestablish a massive sentiment. Bottom is what you have to do each leg along the way.
- [38:23]
Cole Smead
Yeah. And I always think to myself, how come we don't hear these stories about these people who made crazy Incredible wealth in some of these parts of the market. And the answer is, we never read those stories because people get shaken off the bus early and often in a long, you know, so it's like, you know, you tell your old story. Actually, in fact, tell. Tell your old story of Telex, because I think it's a good way of thinking about this.
- [38:46]
Bill Smead
Yeah. Again, Cole knows all the stories because I moan and groan about all.
- [38:51]
Cole Smead
You know, and by the way, for the millennials out there or the Gen Zers or Gen Alpha or whatever you want to call yourself, telex would be like the headphones communication system.
- [38:59]
Bill Smead
They're still around on the coaches at the NCAA football games.
- [39:03]
Cole Smead
Yeah, it's a communication system, but it.
- [39:06]
Bill Smead
Was a computer company, tech company. And I bought a bunch of the stock in 1982 at 11, and it went up to 17. I sold it, and then they reported earnings that were really good, and I bought it back at 18, and I sold it at 31, and then it went to 55. Okay, so what Cole's getting at is letting your winners run. Buffett talks about it all the time. Everybody wants to learn what's the worst stock you ever bought? Well, he says, I never lost more than 2% of my portfolio in a single stock, but he says the worst ones were ones that I owned and then I let go of, and Telex was the first one. And we've done a pretty darn good job of writing our winners to a fault. That's one thing we've done well as a portfolio management team is write our winners to a fault. And, boy, when you get way ahead on an Oxy or you get way ahead on a Conoco, you get way ahead on some of these, and then you give a sizable chunk of it back, maybe 25% of that gain back over a year time period. Most people are not willing to reinvest unrealized gains in future gains, and that is one of our competitive advantages.
- [40:25]
Cole Smead
I don't even think it's not the gosh, what do I think about the business. You get the feeling of, gosh, this sucks, that I gotta look so stupid, at least in the interim. But again, you're playing a game of how do. I'm thinking about from the picture of you're the investors of Smead Capital Management at large, and your goal is to get from point A to point B. And someone says, do you care how you get from point A to point B? The answer is no. You just care that you get to point B and point B. In my mind, Is how do you produce the most after tax wealth as you possibly can? There was what is your. You against you. Yeah. You against you having the most success in common stock investing you can.
- [41:10]
Bill Smead
Yeah.
- [41:10]
Cole Smead
And it's actually not you versus them.
- [41:13]
Bill Smead
No.
- [41:14]
Cole Smead
Right. Because the you versus them becomes the well, why do I sell this and buy it back at a higher price? Because I didn't feel like I want to sit through that. And the reality is the compounded wealth from owning a business for a long time that was had a poor opportunity cost relative to it is the way that people get superior returns like Buffett and Munger and other people have like, you know, Phil Fisher and other great investors like that over time. The human proclivity is to look and say, gosh, I'm not as cool or mentally capable in the last six months as I would be otherwise. The reality is that might tell you very little other than what the market's doing now.
- [41:53]
Bill Smead
In the book Reminiscences of a Stock Operator by Edwin Le Fay, they asked Bernard Baruch, the great investor, what the single activity caused him to make the most money in his investing. And his answer was, sitting on my hands.
- [42:08]
Cole Smead
Yeah. And now the only other thing I think is like our edge is we're just dumb enough to do that. Yeah, that's one of our edges.
- [42:16]
Bill Smead
We don't mind looking very stupid from time to time.
- [42:19]
Cole Smead
Well, and deposited against our China question prior, we, you know, I tell people there's two ways you make alpha. You can buy something that goes up. That's one way to make alpha. And the other way is you don't own something that goes down. Okay. And in a prior year, we didn't own these businesses because we felt that they were the latter. They were things that we're going to do really poorly versus now we own them because we think they're the former. But a lot of things we don't own today is because we think we'll capture alpha on a relative basis for the investors to meet Capital management. Because we don't own a lot of the things that we think could do really.
- [42:57]
Bill Smead
Oil and gas is the tobacco business of the next 10 to 15 years. You got famously wealthy by owning the tobacco companies from 1970 to today, even though they have been despised, divested for moral reasons, et cetera. Now, we didn't own those because I don't want to be in that business, but I don't mind at all. By the way, 40% of electricity in the United States is made with natural gas. That might, if we're not commodity traders. We don't get involved in the commodities directly. But if I was going to choose right now whether to be long oil contracts or be long natural gas contracts, I think I'd want to. There's more torque in natural gas right now because it's been so depressed for so long. And it is going to be the solution to more electricity for data centers and others.
- [43:48]
Cole Smead
Yeah. And a paradigm that I was talking about when I just coming off my last business trip. I pointed out that the prior, if you go back 200 years, our primary energy source was wood, or what I'll refer to as carbohydrates, which it technically is. And then we transitioned to coal, which was led by the United Kingdom in the Industrial Revolution. But we didn't use less wood.
- [44:10]
Bill Smead
In the next years, we used more.
- [44:11]
Cole Smead
Wood because the economic growth and the needs drove more total wood usage. So then to Bill's point, we transitioned to natural gas. And the question is, did it cause us to use less coal? And the answer is, in 2024, we're using more coal than at any point in the history of the world today. So the idea that we're going to transition to something less and is going to cause less use of the old form of energy is just foolishness. I mean, utter foolishness. Now, will the market shares change? Yes, the market shares change because natural gas could be bigger. The other thing you made me think of, and I'll probably close on this, is when Buffett made his investment in Oxy, originally on the Anodarko deal, he said on cnbc, he said, the oil business is not a business you get wealthy in. It's a business you stay wealthy in. And in this era with the risks we see, we think that's an excellent paradigm for thinking about what we're doing in the oil and gas business or what the investors of Smead Capital Management are doing. The oil and gas business. Dad, thanks for joining me. Thank you to do this with our podcast listeners on the Smead book list. For our listeners, if you have a great book that you'd like to recommend, you can email us@podcastmeadcap.com that's podcast meadcap.com you can also reach out to us on X. Our handle is at smeadcap. We'll give you a shout out the next quarterly book list like we have for superfan Steve, our friend Chase. We look forward to the next episode. Thank you for joining us for A Book with Legs podcast.
- [45:38]
Podcast Host
Thank you for listening to A Book with Legs, a podcast brought to you by Smead Capital Management. The material provided in this podcast is for informational use only and should not be construed as investment advice. You can learn more about Smead Capital Management and its products@smeadcap.com or by calling your financial advisor.