Loading summary
Transcript162 lines
- [00:00]
Bill Smead
Foreign.
- [00:03]
Cole Smead
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@smeedcap.com or by calling your financial advisor.
- [00:22]
Welcome to A Book of 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 shape 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 March 31, 2025. This is our quarterly book list where we talk about books, books and more books. Hosting this with me is our chief investment officer and founder, my dad, Bill Smead.
- [00:59]
Bill Smead
Great to be here, Willie.
- [01:00]
Cole Smead
Thanks for joining me. So, as many of you know, this is our quarterly thing. We like to have a little bit of fun. So we'll talk, you know what, what we're going over and kind of some titles and whatnot. So as we usually kick it off, we'll start out with what we recently read. Bill, I'll kick it to you first. And you know, what books do you just get done with?
- [01:18]
Bill Smead
Yeah, I actually the most recent one, I reread A short history of Financial Euphoria by John Kenneth Galbraith just to be reminded, refreshed on the behaviors that have contributed to the senselessness of inflating relatively useless items or excitement about economics. And then of course, along with that, the book that I just really was super impressed with was called Bubble in the sun by Christopher Knowlton, telling the story of the land grab in Florida in the mid-1920s. And it was a much smaller population of people in the United States. So a lot of the most famous industrialists and business people and celebrities got caught up in that. 12% of the United States population participated in the the land grab itself. And he does a pretty good job in this book of arguing that that was as big a contributor to the Depression as the stock market crash, which was only participated in by about 1% of the population.
- [02:27]
Cole Smead
And then really quick on that because you know this, I was just actually I was with our colleague Connor and our other colleague Bobby for an event and meetings in Palm Beach. And to your point, just as you're saying this is kind of hit me, we were sitting in the room where they host the breakfast buffet there. And I don't know what the name of the room is, but it's got an incredible fresco to it. And at the time, I think this is foolish. My thought, because I think it's wrong. I thought, well, maybe they just greatly underpaid labor and therefore, like, maybe there was like a labor arb. And you'd have to pay these artisans very much. And as you were saying that, I was like, no, that's not it. Because we know at tops, people tend to way over capitalize things. And so I was. Connor and I were having this discussion over you could never recreate something like this again. And the reality is you can't unless you're at the major points of euphorias where people believe that the amount of capital expenditure is so great. And there was a lot. Then, you know, using your numbers you mentioned in the average person's participation, that is the only way you get that large amount of capital put together for something that the rental income will obviously be very low for many years, but it tells you that the value capitalized day one and the belief in the future rental income tends to be far greater.
- [03:54]
Bill Smead
Yeah, if you go to Florida and you go to Palm beach and you go to Miami and you go take a boat ride around Fisher island, named after Fisher, who's the guy that did the development there in Miami. And you look at these Meisner built architected buildings like the Breakers Hotel, et cetera. I mean, their fingerprints are still all over that place from what happened in 1924 and 1925. And it's a great reminder that you just. You have to resist the urge to get caught up in momentum. That's really the moral of the story. There was so much momentum in the price of, you know, they'd take a bunch of raw land and they'd plot it out in lots and they'd start selling the lots. Then those lots were changing hands every month or two by different buyers who are bidding up the price of the lots. It's just crazy.
- [04:54]
Cole Smead
Well, and to your point, there's a rational argument in the euphoria. For example, as I'm visiting, and mind you, I. I can't remember if I'd ever been to Palm beach before. Is it pleasant in Palm beach in early March each winter? And the answer is, it's incredibly pleasant.
- [05:12]
Bill Smead
It was. Cole, you're hitting right at the center of what? To be able to enjoy a nice summer day in the middle of the winter was incredible for especially people from the Northeast.
- [05:27]
Cole Smead
But they take the train down back.
- [05:28]
Bill Smead
Then bring the train down and the upper Midwest. Right. So people from Chicago and New York and Boston and places were just flocking down there to take advantage of this. There's a segment in that book where they talk about they destroyed some part of the Everglades building a road.
- [05:47]
Cole Smead
Yeah. They killed the swamp.
- [05:48]
Bill Smead
Yeah. And just obviously one of the ladies was a great environmentalist that ended up jumping on that subject. But it's just again, it's a very unusual place and a very unusual circumstances as we sit here in Phoenix, Arizona, as it gets to be 80 or 90 degrees this week in late March.
- [06:11]
Cole Smead
Because the other book that I've read before that touches on that, and it was a big proprietor of Palm beach for many years even after that happened, was Joe Kennedy. Obviously Joe Kennedy spent a lot of time there. He had a few dalliances there, I'm pretty sure too.
- [06:23]
Bill Smead
Oh yeah, that's all covered in the book.
- [06:25]
Cole Smead
So what else did you have on your list?
- [06:27]
Bill Smead
We read Bonhoeffer's book, which is just by Metaxas. And I mean, it's just so intense. It's almost like you need to go to someplace secluded and heel for a while after you realized what a great man this was, what a courageous man this was, and then how ugly and bizarre the Third Reich and the whole Hitler phenomena was.
- [06:54]
Cole Smead
Yeah. Reading that book, I think of how purposeful Dietrich was, which is very, you know, strange. Now again, was it logical? It was highly logical. But we're humans, we like to be logical where we think it benefits us at least in the interim. But, you know, I mean, he was on a path, a multi year path where he knew that it was life was going to be uncomfortable and ultimately, you know, even when I think of the question some of our colleagues had off it was why didn't he escape and why didn't he, you know, try to get out of this? Because ultimately he knew that was his calling in life.
- [07:30]
Bill Smead
Some of the bravest and best of men have blinked at some point.
- [07:34]
Cole Smead
Yeah, agree. And you know, and men and women. Yep.
- [07:37]
Bill Smead
Yeah. So, you know, we know about what's happened to people in concentration camps. Like we're here in Phoenix and John McCain was a prisoner of war and what he did or might have not done. Well, gosh, you can't know what you'd do in that situation until you were held prisoner by somebody that was wished evil on you.
- [07:59]
Cole Smead
Sure. Yeah. Because I think I mentioned you. I just saw the Academy Award winning movie A Real Pain, which isn't about Bonhoeffer, but the Bonhoeffer movie's out. My one criticism of the Bonhoeffer movie is watching Dietrich, like, sit in his bed in the fetal position, crying and being highly emotional. That did not remind me of the book. There's no point in the book that explains that. I think that was the dramatic part to it. But I say it because I watch a real pain, which is a story of these two Polish Jewish cousins who live in New York. It's played by the actor who played Zuckerberg in the Social Network, which he does look like Zuckerberg. But anyway, it's with him and McCulkin. I'm trying to.
- [08:43]
Bill Smead
Kieran.
- [08:44]
Cole Smead
Kieran McCulkin. And they go off to do a tour of Poland, and it's kind of a Jewish tour to look at the history of the Holocaust. And they're ultimately going to visit their Jewish grandmother's home in Poland. And to your point, it's interesting to think about that because it's like, okay, if you're Jewish, there's just no question whether that's affected your life greatly and your legacy and et cetera. And it's very important. However, Dietrich took that upon himself as a Christian, either because he had friends who were Jewish, or he knew it was inherently evil, which I think that's the real interesting thing. In other words, it wasn't about him. It wasn't about what he was or what his legacy was. It was about the inherent good or evil, and the truth, I would argue. And thus, if it's truthful, it doesn't matter who it affects. Yeah.
- [09:47]
Bill Smead
And he, in his case, as a brilliant man, he never appeared to think in terms of the cost benefit analysis of him.
- [10:01]
Cole Smead
Correct.
- [10:01]
Bill Smead
Doing what he'd need to do to go on with his ministry for another 30 years versus take the punishment that everybody else was taking.
- [10:12]
Cole Smead
Agree. Totally agree. It's a great book. Let's see some books that, you know, I just finished. We podcasted, I think, all three of these, but in fact, I know we did Chain Reactions by Lucy Jean Santos. History Uranium. The main thing I drew out of the book, because it's like, you know, uranium. And she goes all the way back to what they call pitchblende, which is like the kind of the origins of uranium that the Germans were finding in. In these mining towns where, like, you find gold in this pitch blend. And so what'd they do? They just took the gold out. And if you got too much pitch blend, you knew the gold was gone. And so you go from that it's original formation of, like, how we got these materials, and I'll call these base materials, if you Will to. It's like, all right, when you figure out that you can use radium, the hucksters and the marketers all show up. And it's like when you're reading her book, you can hear like AI ringing in your ears. Because, you know, like the old joke is there might be some truth to that rumor. There might be also a lot of lies. And I think you have to be very careful. It's like you go and look at a corporate issuers, you know, IR deck and if you didn't have a I in your, your, your corporate information or in your risk disclosures, it means you probably didn't have a pulse. And it just shows you whether it's real or not isn't dependent on the occurrence of it. Whether it's real or not is only depended by time.
- [11:40]
Bill Smead
Everyone wants their boat to float on the AI river is what you're getting at.
- [11:45]
Cole Smead
So the other, the other one that we read and I just, I think we brought this up in our discussion. Connor joined me for it was the Caesar's palace coup by Sajit and Max. We are watching right now what is going on with Melrose and Lennar, okay. And why it was such a fun book to read is because it actually reminds me also of another book. And I got to meet. I think I got to meet or I got to ask a question. Joel Greenblatt, maybe he wouldn't say he met me. That's probably giving me too much credit. But I got to meet Joel. And the other book that comes to mind is how to be a Stock Market Genius. Okay. And in that book he talks about when the hotels separated the Propco and the OPCO out. And so I think it was in college at the time I read that. So you're just always kinda like, huh, that's interesting. But at the time you're like, that was profitable from a stock perspective. But as an analyst, you're thinking like what actually made that so profitable? Okay? And what it was is that it caused the investors to look at the same business separately, differently, which was this? A business that is capital intensive, that produces lower returns by nature will get lower multiples. There's just nothing shocking about that. That's a matter of fact statement. Just like if I said a business that needs less capital, that produces higher returns, gets a higher multiple. And the weird part to humans is even though those can sit in the same corporate structure, we actually have trouble understanding them together because ultimately our concern is that the capital intensive part will affect the less capital intensive part. Okay? So that's what I think that the idea is. But then you go to the Caesar's palace school. Well, not only is that rolled out in the hotel world, but the most natural place is, you know, businesses that have a lot of hotel rooms, casinos. Right. And, but any real estate asset we've talked a lot about, say U Haul who has real estate assets but sits in a C corp versus all their peers sit in a REIT structure. All real estate, which is ultimately asset backed lending is now sitting in a Propco REIT structure is how we think about it. So it was such a refreshing book to think about. Okay, let's just do a case study on the past history of businesses that broke out the Propco and opco. And what always happened is the cost of capital for the property company went down. Okay. Which means obviously the cost of finance it went down, which marginally helps returns there and also would help multiples. But more importantly there's just very little capital needed in the operating company there forward. And that's why like in the hotel business it's become more of a royalty model because you're collecting a royalty for your brand. And it was so refreshing because as we know as we watch Melrose kick out right now, it's like, like if I call up the Wall street sell side analyst and say hey, you covered the housing stocks, what are you going to do with this Melrose? They're like I don't have a clue.
- [14:58]
Bill Smead
It's a REIT and it's tiny.
- [15:00]
Cole Smead
Well, well, relative to those market caps. But the question like I would think is like well, how tiny is it relative to the book and what are the returns of the business and things like that. And so I, I find it funny that people can study an industry as integrally as that and then when it comes to understanding the disaggregation and the capital intensivity inside the industry, they're like I'm punting to the REIT analyst. And it's like, well the question is do you really understand the business if you're punting the REIT analyst?
- [15:27]
Bill Smead
Well, which just reminds me of something I've been talking a lot about lately. Because the stocks have been punished primarily because of their success, our large home builders are unfragmenting a fragmented industry. So the more people focus on the temporary problems in the industry, those temporary problems work in favor of the unfragmenting. Yeah, I agree, it works in the favor of the wide moat, strong balance sheet.
- [16:00]
Cole Smead
But it's your point. Never let a good crisis go to waste.
- [16:04]
Bill Smead
Yeah, it's exactly what you'd want to have happen if by end of 10 years from now you've had three or four companies completely conquer the entire.
- [16:13]
Cole Smead
Let's use it like in, in. If I ask you in hotels, how many brands are there? How many, you know, mega brands are there?
- [16:21]
Bill Smead
Maybe four or five.
- [16:23]
Cole Smead
Four or five. That's what I'd say. And then if I say, hey, casinos, how many mega brands are there?
- [16:27]
Bill Smead
There's probably 20.
- [16:28]
Cole Smead
I. I say there's. I say there's like six or six online mega brands.
- [16:32]
Bill Smead
Yeah, yeah, yeah, yeah.
- [16:33]
Cole Smead
So because you have like Caesars, you have mgm, you know, but there's not a lot to your point. And then it's like, okay, if that's the guidebook and by how many of those groups sit private. Okay, so it's like we're all going to go to lit markets in that industry and. Which means we're going to take private players, disaggregate them, bring them forward. And again, I think that's what. Because as, as, as Caesar's palace is getting rolled up, they continue to swallow more assets. That's. That's the nature of the beast. The other book is Fortune's Bazaar, which we did a podcast on with Vadi in England. I would just say this. It was interesting to think back to the history of Hong Kong. And then like we've talked a lot about sentimentally, it's very obvious that China is on the outs. You know, it's just a. It's a swear word in some respects, very different than the. Oh, the nine Politburo members in 2011 are going to figure out this world better than we were it. You know, the brick trade, things don't change overnight, but they do change over time. You know, but, but really the history of Hong Kong is the families that are in business. And so we, as we watch the, you know, the Li Ka Shing entities of the world sell a port in Panama to BlackRock and have them get chastised by the politburo and the Communist Party while we watch, you know, the tycoons of Hong Kong really get hung out to dry by the government. It's just a very interesting time. I think it says something that the strength of those families in Hong Kong are really the core of Hong Kong. And if they are not in strength, neither will Hong Kong ultimately. Let's pivot. What are you currently reading, Bill?
- [18:15]
Bill Smead
Well, I'm reading a very fascinating book called Inside Money, which is the story of Alex Brown and Sons and Obviously, as you can see from this podcast, we already have a multi generational business ourselves in the investment business. And so this is one of the great multi generational investment businesses. So that part of it automatically makes it interesting from our side. But it's also an incredible history lesson because, for example, they funded the Baltimore and Ohio Railroad, which is really the first significant railroad in the United States.
- [18:56]
Cole Smead
It's the same one that's in Monopoly.
- [18:58]
Bill Smead
Yeah, same one that's in Monopoly. And then triggered, and I just love this kind of thing, it triggered the movement of the United States government to decide it was a really good idea to push the railroad system west, which. So in 1836, a general by the name of Winfield Scott. Yes, that's Winfield Scottsdale, if anybody's wondering. General Winfield Scott appointed a guy by the name of Isaac Stevens to head the U.S. army Corps of Engineers. Now, when you grew up on the Columbia river near the dams that are governed by the U.S. army Corps of Engineers, you're very familiar with them. But his first job was to survey the western railroads, which was triggered in the 1830s by Alex Brown and Sons funding the building of the B and O. So this all kicked in motion and so he and his team were hired to survey the western railroads. That means out to San Francisco, out to Portland and out to Los Angeles. It was later that Sam Hill sent the railroad, the Great Northern from Minnesota to Seattle. But that was way later. We're talking 50 years later.
- [20:19]
Cole Smead
They also make me think of the old saying, what in the Sam Hill.
- [20:22]
Bill Smead
Yeah. So I am partway through the book. It's very enjoyable, enlightening.
- [20:32]
Cole Smead
It's very much a transatlantic history, but also an American history in a lot of respects.
- [20:36]
Bill Smead
Yeah. And of course, I know part of the ending is that that when Microsoft went public, they went public through Alex Brown and Sons out of Baltimore.
- [20:46]
Cole Smead
Yeah, but I don't think the book covers that because it only goes in 1960.
- [20:48]
Bill Smead
No, no, that's right.
- [20:49]
Cole Smead
They wouldn't need another 21 years.
- [20:51]
Bill Smead
But I mean, just think about that. That was ultimately, in that particular era, the most glamorous IPO ever. And of course, Alex Brown and Sons no longer exists.
- [21:04]
Cole Smead
Well, it's part of Raymond James, but Alex Brown and Sons was a. That was considered a white shoed firm at one time.
- [21:08]
Bill Smead
Yeah, over the years.
- [21:09]
Cole Smead
So there was a prestige to have Microsoft go public to them, but of.
- [21:12]
Bill Smead
Course they had the stain of not being involved directly, but making an awful lot of money trading cotton that was made with slave labor. So that's so you got that part of the book and then I haven't got to the rest of it, but it should be fascinating.
- [21:27]
Cole Smead
Hi, I'm Cole Smead, CEO and Portfolio Manager here at Smead Capital Management and host of this podcast. If you enjoy this podcast, I'd like to invite you to check out smeedcap.com at our firm, we are stock market investors. We advise investors who fear stock market failure with a discipline that has proven success over long periods of time. Learn more about our funds@smeedcap.com past performance is not indicative of future results. Investing involves risks, including loss of principal. Please refer to the prospectus for important information about the investment company, including objectives, risks, charges and expenses. Read and consider it carefully before investing Speed Funds Distributed by UMB Distribution Services, llc. Not affiliated My wife and I are.
- [22:12]
Bill Smead
Doing the Audiobook of Love does by Bob Goff and Bob Goff is an incredibly inspirational speaker and writer. He's got maybe the most positive attitude about life that a human being could just about ever have. And therefore, whether you're a religious person or not, it's a great book. And so he's telling the story today as we took our walk this morning. He said that he played baseball and he was a big kid and so he was constantly getting hit by the pitch. So the coach liked the fact that he was on base a lot, but he couldn't bring himself to keep his eyes open when he swung. So they got toward the end of the year and he actually swung with his eyes closed and he thumped a home run over the fence. And after the season was over, the coach sent him a note and said how proud of him he was for hitting that home run and encouraged him. And his point was it doesn't take very much encouragement from another human being to go a long way with a person. And so that's what his this book is said. You know, the love you give to the human beings you interact with, regardless of what their background is, regardless of what their beliefs are, have a powerful force. And that's pretty cool.
- [23:35]
Cole Smead
Yeah, I agree, by the way, on the Inside Money. The one other thing I forgot to mention, I'll leave a breadcrumb out there for our listeners. The Other Connection so whenever I read fiction, I typically read Hemingway. And I love the Hemingway connection with Inside Money. Cause I'm pretty sure it happens in Sun Valley, so I'll throw that out there. Let's see the two books I'm currently reading. I just started a book shout out to my friend Chase Emerson. He's On X as AZ land investor is where you can find him out there. He gave me a book called Uncertainty and Enterprise by Amar Bide. And what this does is this comes out of the Chicago School of thinking. Frank Knight, who was Milton Friedman's, you know, that's who he did his doctoral dissertation under. And what the book is around is on Knightian uncertainty. And so I just. I just cracked the book. And what he starts out is he's starting from Knight's work in 1921. And he said. He effectively says it's like he's leaving from a 1921 port. He's just not taking a 1921 ship. So I'm very interested in that. Amar's written a lot, and Chase was teaching me a lot about his background, his writing, and so I'm very much looking forward to that. The other book that I know that you're reading as well, Bill, that you haven't mentioned is the life of St. Patrick. We just cracked this by J.B. burry. We have quite a few Irishmen that we work with, either in name or in lineage or in plausibly, since we just got through St. Patrick's Day spirit. And so I thought it was just an interesting time to ask, who is St. Patrick? What did he do? When early in the book, where we're at, it's talking a lot about the culture of the Roman Empire, and Ireland was never part of the Roman Empire per se. And the interesting paradigm that J.B. burry throws out is that ultimately the lands outside of Rome were more interested in what Rome was doing. And so I know you just got back from being abroad. I'm about to go abroad. And it's like, you go abroad and you hear a song that's new in America, and you think, well, I mean, I get it. It's English language. It's most spoken language in the world, and we send out culture. But it's just like the idea where people might not be interested in what America's doing or our politics or things of that nature, but they're sure interested in our culture and what's going on in that. And so you can just see touches that even in our current day, where you go halfway around the world and you're gonna run into American culture whether you like it or not.
- [26:21]
Bill Smead
Yeah, I was on a sales call yesterday with the gentleman that represents us in Europe, Richard O'Connell, and Seamus Sullivan was with me. And I jokingly mentioned to the people on the call, I said, yeah, I've got my small Irish army Here, ready to go at it. And of course, this would be your great great grandmother. And my great grandmother was Melvina Ferguson, who came to the United States from Ireland as an indentured slave through Philadelphia and ended up marrying Charles Schmied in Lawrenceburg, Indiana, right on the Ohio River.
- [27:02]
Cole Smead
In full disclosure, we don't only hire Irish people. That's just the randomness of the life.
- [27:06]
Bill Smead
That's just what happened.
- [27:08]
Cole Smead
Let's see. Let's jump ahead to books you've had recommended to you or ones that you've bought and haven't cracked into yet. What do you got?
- [27:15]
Bill Smead
I've got Grit and Grace by Eric Speer and again, much more like Love does with Bob Goff. That's more designed to inspire. And then I wanted to read this book. I just haven't got to it yet, but. James J. Hill by Michael P. Malone. I lived in Seattle for 40 years and the imprint of the Hill family was all over Seattle. Yeah, right. That was a dominant family in the creation of that town.
- [27:45]
Cole Smead
Let's see. So what I got, I got this actually off the Wall Street Journal. The first book I got that I bought but haven't cracked into is Rot by Podrick Scanlon. And it's a history of the potato famine in Ireland. Since we're In Life of St. Patrick, I was like, might as well go at another one. And I just kind of reading high level about the book, there was only one single potato strain in all of Ireland, so there wasn't like a diversity of potatoes. And I was like, what kind of paradigms am I gonna dig out for today's stock market where there's like, there's one strain of winner. It's an American big cap tech company. You know what I mean? That made me think of that already. The other book, and I think I'd mentioned this one to you earlier, Bill, is Meltdown by Duncan Maven. It is. It is kind of the fallout of Credit Suisse. I'm not interested in grave dancing. I'm just interested in kind of what was the inside baseball. That and so something I'll crack into. It's a brand new book that just came out and saw floating out there too. So I want to turn to our questions. I think there's two I kind of want to focus on. I'm sure we'll go a few ways with this, but what would you say, how do you look at what's going on with Trump? I know we were talking about some of the dynamics of this earlier today, but just kind of like as you sit here this morning, what are things that come to mind for you?
- [29:14]
Bill Smead
Well, part of it is I was always astounded by my three economics professors at Whitman College because I was studying between 1976 and 1980 and inflation was a rampant problem in the 1970s. Therefore we spent a lot of time and David Ricardo's theory on three countries and three products just was forever indelibly etched in my mind. And because I couldn't believe it, I couldn't believe the theory because what he said was, if there's three countries and three products, the country that makes one of those three products better than the other two countries and also makes the other two products better than the other two countries should only make the product they make better than the other two and leave all the production of the other two products to the other two countries. Therefore, more total good would be created by this division of who was producing it, even though the one country was going to be better than at all three.
- [30:28]
Cole Smead
And it's a follow on of like Adam Smith's idea of specialization. It's just country to country rather than, you know, person to person.
- [30:35]
Bill Smead
Yeah. So, so that if you think about it, you know, this idea of, of, of, of trying to bring back. I think there's something like a relatively low number of people that are actually employed in machine based businesses with skilled labor. I mean, you're bringing some of these businesses back into the United States. It doesn't look to have the kind of upside you'd want to have from doing so. This is what I'm talking about is not political in the slightest. It's just thinking of it from a purely economic standpoint. We should be thrilled that there's countries that are close to us, that are friendly trade partners that will gladly do something that's less productive for us to do.
- [31:28]
Cole Smead
Agree. We got to listen to Larry Summers a few weeks or a week ago, I want to say now, and I got to ask him the question, but obviously we were just all listeners in the room to him and he was pointing out the numbers tied to like steel. So I think he said there's like 10,000 workers in the world.
- [31:44]
Bill Smead
That was what it was. Yeah.
- [31:45]
Cole Smead
That, you know, directly make steel. And then if you go out from there and say, how many jobs are there tied to people that use steel as an input? And I think he said something like it was what, a million people? Something like that. If that it was a hundredfold. And so he pointed out, so if the companies that use steel are such a larger component to the economy. Why would you explicitly want to raise the price of that when the benefit goes to such a smaller group? And I think it was helpful because you think about, you think about the numbers that are affected. What's likely to cause a bigger economic effect? The one that does a small number of labor or a bigger number of labor. Okay. And, and so it's like, what does that mean? Well, that means you're probably not very good at, in David Ricardo's theory, a small amount of labor. You're not very good at creating steel. You're better at leveraging steel in your production.
- [32:45]
Bill Smead
And it made me think of Wilbur Ross's book, which we podcast. And Wilbur Ross made a mitt out of using better balance sheet analysis and better financiering to make a lot of money from these industries that other people didn't want to be involved in. And then I played golf Sunday with a guy that, that, that sold his, his steel business to LTV or somebody. And it just reminded me, I think that the Wilbur Rosses and the guy I played golf with that made some money from being involved in that, but then passed it along, are, are going to be the ones that are better off.
- [33:24]
Cole Smead
Well, I agree. And I, I think there's, I think there's, you know, again, I've been talking about this idea a lot with people is how differently people act in business. And when they enter politics, things have to change. The question's how. And I mean, like, we've talked a lot about this on the tariff side. This is not the first time we've seen tariffs to deal with in our portfolios. We own West Fraser. They had to deal with the softwood lumber dispute in 1617, which was enacted by Wilbur Ross as Commerce Secretary. Countervailing duties and anti dumping duties. And the rationale was the crown lands or the government lands they get the trees off of was too low. Canada argued that the labor costs were high, so therefore they weren't subsidizing anything. But ultimately, if you look and said, well, who's backing the North American producers that are pushing this agenda at the government? The answer is the North American producers are represented really by one company, Weyerhaeuser. So again, trying to make it like a real cut and dry, simple measure. It's messy on either side, I would say, and I'm not criticizing Wilbur for that. In fairness, like Wilbur did, we made pretty darn good money stepping into the uncertainty at that time. And I don't, I think in many cases it's nothing dissimilar now, now, what.
- [34:48]
Bill Smead
Company that goes back for me 40 years. What single company has been the most unproductive user of the capital of common stock owners? In my career, it's been Weyerhaer, it's been Weyerhaeuser. The business is organized to feed dividend payments to multi generations. And not only are they. Not only are they not a good cause, not only is it bad that this incredibly set of productive assets hasn't been used as wisely from an investment standpoint as possible, but on top of that, Frederick Weyerhaeuser's endowment to. You're in my alma mater for the spiritual support of the students, sits there and isn't being used on what it. It's just one thing after another. We find out is not being used the way the assets ought to be used?
- [35:45]
Cole Smead
Yeah. Cause I remember we had a discussion, and again, this is how they choose to run their business. We get to choose whether we want to be investors or not. So take with that what you want. But I remember we had a conversation with the warehouser folks. This is, you know, maybe, I don't know, seven years ago.
- [36:00]
Bill Smead
Oh, maybe 10, eight years ago.
- [36:01]
Cole Smead
Anyway, our question was effectively, hey, why don't you make hay while the sun shines? And the answer was, well, because we don't want to be too cyclical. And, you know, it's like we make too much then, you know, and it was just one of those things where, like, you just make money when you can. It's a cyclical business. It's a, in some cases, not that good a business. And, you know, ultimately Weyerhaeuser, back to our REIT discussion, sits in a reit, and it ultimately is a very capital intensive business with low returns.
- [36:30]
Bill Smead
So they're running the business, defying what we now know about the forests. The forests from Northern California to southeast Alaska is the greatest farming expedition in the world.
- [36:48]
Cole Smead
But I'd say the southern US Is the greatest farming because it's actually farmed.
- [36:52]
Bill Smead
Yeah, but that renewable resource. Yes, you cut the trees down. So my favorite story that comes out of this is about 10 years after Mount St. Helens blew up, Cole's mom and I drove down through Mount Rainier into the backside of the Mount St. Helens National Recreational Area. And we're driving through the forest, and all of a sudden we get to where the eruption had completely cleaned off all the trees. So you're driving through a thick forest and you pop out into no trees whatsoever. And you drive forward and you notice as you're driving into the National Scenic Area, that surrounds Mount St. Helens. Now that on the left hand side, it looks like the moon. And this is 10 years after the mountain blew up. And the right hand side has got vegetation and it's thriving on the right hand side. So we go down to the ranger station and they said, hey, what's the deal? The left side looks like the moon and the right side looks like it's restoring itself. And he says, oh, that's simple. We allowed the wood products companies to come in and salvage whatever salvageable wood there was on the left hand side of the road. And we decided to leave the other side completely untouched and allow nature. And what was being proven out is nature was doing a great job of restoring what nature caused, which was the mountain blew up, that was a natural thing, whereas man mucked it up. And so in effect, Weyerhaeuser has defied those facts by not cutting down and selling more wood when the prices are high and then blessing their shareholders with some of the results of that, instead of just wanting to annuitize the business for the benefit of the future generations.
- [38:53]
Cole Smead
When to come back to the tariff idea, the other thing that had been hit in my mind and again in an earlier discussion about bubble in the sun is again, you think about the fresco that you can look at there at the breakers is, okay, would anyone do this again if it wasn't in a euphoria? And the answer is no, Just explicitly, it's no. Okay, so we were having this discussion the other day on, you know, obviously in this tariff discussion is the Canadian oil and gas companies. And just so everyone knows the only thing that's really made in Canada's tar sands assets, that's, that's what makes everything in Canada. From an oil perspective, there's a very little portion that is non tar sands. But let's just talk about tar sands, heavy crude. So it's like, okay, would someone come in today and build these tar sands assets from scratch? And the answer is no. The cost of replacement is way too high to do that from scratch. But like the fresco and the breakers Hotel, luckily someone already did that. And now that you know that the cost to replace that is way too high, the question is, are you interested in walking in that day to be an investor and pay the maintenance costs to ultimately make the returns on capital going forward? And I think that's what I think a lot about is like someone said, well, yeah, this costs a lot of money. Well, no, no, it costs someone else a lot of money.
- [40:12]
Bill Smead
I like to say they had better dinosaurs up in Canada.
- [40:16]
Cole Smead
We hope you're enjoying the podcast. You know, we work hard putting together this show, but we work even harder for our investors at SMEAD Capital Management. At smead, we believe in disciplined investing, which is why the SMEAD funds have a proven track record of long term outperformance. If you're an investor who fears stock market failure like I do and want to invest in wonderful companies to build wealth, we invite you to visit smeedcap.com Past performance is not indicative of future results. Investing involves risks, including loss of principal. Please refer to the prospectus for important information about the investment company, including objectives, risks, charges and expenses. Read and consider it carefully before investing. SMEAD funds distributed by UMB Distribution Services llc Not affiliated the other thing off off Trump and I want to get your your kind of take on this is we I was thinking about this is like, I mean I don't know about you, but it's like you're just like drowned in ideas and hyperbole in the last what, 60 days?
- [41:16]
Bill Smead
Yeah.
- [41:17]
Cole Smead
And I kind of think of it from a someone said what, what does analogously make you think of it makes you think you're playing quarterback and there's nine guys in the box and you just don't know who's actually going to blitz. Yeah, that's what it kind of seems like. Which if you think about it from a political perspective, let's say, you know, you're the Republican Party, you're the party in power right now. Is that a great tactic? I mean it seems to be working because the question is like what do you really need to go out and defend from. You just don't kind of know if you're on the other side of politics.
- [41:50]
Bill Smead
My, my main thing in this is I know what the sentiment was immediately following the election, number one. Number two, there are an enormous number of forces at work right now that spell that inflation is going to be a persistent problem at higher levels.
- [42:11]
Cole Smead
Sure.
- [42:12]
Bill Smead
We know that labor unions are getting 8.5% wage increases regularly. We know that people that weren't unionized are going unionized. We know that the United States Postal Service is going to charge 60% more for last mile deliveries and UPS has cut their Amazon deliveries in half. There's just a tremendous number of signs. Every fast food place, every restaurant business you interact with, you're looking and you're seeing you're paying way more for your food than you used to be. And that's all inflation. So this idea that you're going to jawbone the oil companies to get lower inflation numbers to make people think you're defeating this problem. I just, it, it's too much of a stretch.
- [42:58]
Cole Smead
I agree, and I'll use. And I think you saw this because I shared it out with our group. But so in the US Oil and gas space, the person that I think I admire, I think you do as well, the most in the space, because he's the greatest capital allocator in the history of the oil and gas industry is Harold Ham. Plain and simple, his Canadian counterparts, in my opinion. I know there's some debate on this, but it's Adam Watrous who I think the world of, and I think he's doing something incredible. That's my theory, because no one can prove me wrong to a certain extent. But so it's like, all right, you got Harold Ham. He wrote a book called Game Changer, which was really what politics could do through the oil and gas business. And a lot of stories of what he thought was right. I think we are on page 215 of the book if you want to, you know, jump our interest in the book. But I say it because, you know, he has been a longtime Trump supporter and I would say, like, if someone could bend his ear in the oil and gas base, it'd be Harold Ham. And it just so happens last week we see out that there's a press release that Harold Ham is in Turkey looking to do some exploration. Okay. Now, if this is such a dang good place to go drill right now at these prices, why is a red blooded Harold Ham starting exploration in Turkey?
- [44:28]
Bill Smead
Big Trump supporter.
- [44:29]
Cole Smead
Okay.
- [44:30]
Bill Smead
Yeah. So it's funny, not only Ham, but Scott Sheffield, who sold his business to Exxon Pioneer. To Exxon Pioneer. To Exxon. About three or four of the most respected people that we would think would be the right people to listen to are all saying the same thing, which is the idea that you can go poke holes in the ground on land that is controlled by the United States federal government and create the kind of gusher that the Permian Basin through fracking developed between 2012 and 2022 is a pipe dream. It's not out there. It doesn't exist. Therefore, the economics of the oil and gas business is gonna be governed by scarcity in the same way that tobacco companies made a lot of money because of the scarcity, creating dramatically higher prices for the addictive legal drug. Tobacco. Well, energy is an addictive legal drug in our opinion.
- [45:40]
Cole Smead
Yeah, and, and, and we've talked about this. So I, you know, I think of two dates like Very focal in my mind as investors in the energy space. Those two dates are Saudi Sunday, which was the day the Saudis chopped the legs off the market during the pandemic, which was bizarre and crazy.
- [46:00]
Bill Smead
But you had to pay to get rid of your oil for one day.
- [46:03]
Cole Smead
Part of the game. Okay. And then the other day that I'm very focal in my mind, I will refer to this the rest of my life. But it's Ash Wednesday 2, you know, as of this podcast release date, like three weeks ago. Okay. And I say that because this is, in our opinion, the second best buying opportunity in the energy business of the last 20 years.
- [46:24]
Bill Smead
Yeah.
- [46:24]
Cole Smead
Now the first one off of you know, what was going on time you had to stare into the abyss, not know whether oil prices were going to cover if and or when. And you had you believe, have the faith, let's call it, to perceive that the balance sheets will improve because the industry would change from what it done in the past.
- [46:43]
Bill Smead
Yeah. Because oil was the cheapest relative to common stocks in 220 years.
- [46:47]
Cole Smead
And that was a seminal event and what I would argue was a generational opportunity in the oil and gas business. Fast forward to today. Balance sheets almost debt free, very unlevered, nothing like the past.
- [47:00]
Bill Smead
It's not a risky industry anymore.
- [47:01]
Cole Smead
You're making returns. The question just what's level of returns? Because there's so much free cash flow. And to your point, drilling is not in vogue. The energy vigilantes scream bloody murder anytime you raise your capex. And so it's different because of how the businesses and industries change from a capital allocation, balance sheet perspective and ultimately where the oil price sits. But as we've talked about, people looked over the edge, okay, they looked over the edge and said, I've lost a lot of money in this industry before and I don't know if I want to go there again.
- [47:34]
Bill Smead
Yeah, no, literally, what is left of the stock picking world in hedge funds and mutual funds and ETFs or the.
- [47:44]
Cole Smead
Hedge fund pods like we talked about earlier.
- [47:46]
Bill Smead
What's left? The they got to two weeks ago and just like I was sitting here and I commented to our team, I said, is this the hill we want to die on? And many professional investors decided two weeks ago that they did not want to die on that hill. And boy, if you can buy regional banks when they don't want to die on that hill in 2023, if you can buy oil companies in April and May and June and July of 2020 and when you can buy when most of the Professionals are afraid to die on that hill. You're in pretty good shape when I agree.
- [48:31]
Cole Smead
And the rhetoric coming from the president was confounding people. So to your point, the best day was the best. You know, Trump coming to power. Right. The market's been following ever since Trump came to power. And it's interesting that markets are highly elastic. Oh, hey, Trump wins. Great. We're going to bid this sucker up. Okay. But, but it's like a buy the rumor, sell the news. We're seeing that constantly right now. It's like, oh, you know, Trump's in power. Great. Markets run up. He's in power, Markets are coming down.
- [49:01]
Bill Smead
Yeah.
- [49:01]
Cole Smead
And so it's like this highly elastic reaction with the repercussions 60 or 90 days later not being nearly as good as the excitement to begin with. And the rhetoric on oil did the inverse. It's producing the low. So it's like here we've been the last couple days, it's just the oddest thing. This is middle, you know, we're like the, you know, middle of March right now. And it's like oil's like up a little bit. What's happening? The stocks are rallying because the elasticity of the stock market was showing far more danger than the actual inelasticity of the underlying commodity market. Because again, you can change things over time, but just not overnight. And the commodity hadn't moved nearly as much as the politics and the rhetoric.
- [49:43]
Bill Smead
Yeah, you want to buy from people who are scared to death of the downside and you want to sell to people that are euphoric to the upside. I mean, it's just this business isn't that complicated. It's just the time in between those two extremes that make the human condition hard to deal with. It's the time.
- [50:04]
Cole Smead
So I want to end on kind of two things. I want to ask the question of where do you think we're at? You know, we're not, we're not, we are not bond people, but our brains work, luckily. So, you know, where do you think we are in the bond market? Where do you think we are in the treasury market? You mentioned you don't think inflation's in the bag as some people do. Where do you think we're just at kind of from a fixed income and risk free perspective?
- [50:35]
Bill Smead
Well, I think we're in the 1970s is where we are. And if the Fed capitulates and cut rates, they're going to run into the same phenomena they ran into the last time, which was, well, now, why do.
- [50:52]
Cole Smead
You think they would capitulate and cut.
- [50:53]
Bill Smead
Rates because as soon as there's significant signs of an economic slowdown, they'll cut rates. Even in the face of the fact that it will probably retrigger the next leg of the inflation.
- [51:05]
Cole Smead
Well, sure, because your point that we're, we're sitting short enough on the treasury market. I think someone had a number out there where it's like in the next four years we're going to fund like half of the treasury market. Yeah, okay.
- [51:17]
Bill Smead
Yeah.
- [51:18]
Cole Smead
And so to your point, would it be shocking to see the Fed lower short term rates at least somewhat? Why? It's good for the govy, it just is. It's good to lower their borrowing costs. The question is, can you maintain that level of funding?
- [51:33]
Bill Smead
And this all goes back to what we wrote about right after the election, which was Reagan and Volcker did the psychological and economic thing the next year and a half after being elected to kill inflation. Volcker with 18% short term rates and Reagan by standing down the air traffic controllers and breaking that psychology of union power. But they started out with record low equity participation. No one was in the stock market in 1980. There was no participation, only a few coupon clippers owned bonds. And it was just a moribund tiny industry. The investment industry was tiny and so there was nothing but upside even then. There was a 22% bear market for the first 21 months. This time we had record participation. Multiple financial euphoria episodes that just recently played out in the last three, four, five, six years. Everything from meme trades and bitcoin and, and growth stocks and just insanity. And now magnificent seven after Fang, et cetera. So we are just the opposite. And it would not shock us at all if there's a great deal of punishment handed out to people that have chased these fads.
- [52:57]
Cole Smead
Let's see really quickly remind me of the gentleman that you've always brought up over the years from Lord Abbott, who.
- [53:03]
Bill Smead
You'D read the tapes, McCarthy.
- [53:05]
Cole Smead
Yeah, tell that story because you have a good mic that you can actually do it here.
- [53:09]
Bill Smead
Yeah, so, so in, in 81, the long term treasuries peaked at 15% because the inflation that year topped out at 14%. And so to buy those bonds at 15% you had to bet that what Volcker and Reagan did would break the inflation. You had to bet on the come, you weren't, you didn't know that was going to happen. You had to hope it would happen. So, so what happened was the inflation broke.
- [53:40]
Cole Smead
But tell them, tell, tell people what Jack McCarthy would say and how you'd get his information. Because I just think this is like, oh, this is like awesome classic.
- [53:49]
Bill Smead
We got sent cassette tapes once every 90 days and we'd put that cassette tape into the tape player and listen to what McCarthy had to say.
- [53:57]
Cole Smead
And so do your best.
- [53:58]
Bill Smead
Do your.
- [53:59]
Cole Smead
Do your best, Jack McCarthy rendition.
- [54:00]
Bill Smead
Well, so in 84, in like May or June of 84, what had happened is the economy got so strong during 82, 83, 84, 5, 6% real growth in the economy, they were afraid that inflation was gonna get reborn. So the bond rates, which had moved from 15% on long bonds down to 11 in 83, moved up to 14%.
- [54:23]
Cole Smead
Because they feared that with the economy.
- [54:24]
Bill Smead
Strengthening, inflation would roar back 14% in May, June. And McCarthy sent out this tape and he said, all I want to say is B O N D S bonds. And he just screamed into this tape player and the trailing inflation rate was 4%.
- [54:49]
Cole Smead
So you're collecting like 10 plus percent raw inflation.
- [54:52]
Bill Smead
So here is Cole Smead sitting here with an expensive four year degree from Whitman College in Walla Walla that his mother and I paid cash for. And that was funded by buying zero coupon treasuries. 10 year treasuries at 14% compounded. You are guaranteed a quadruple in 14 years. So we put his custodial account in those bonds. And so just think, there was a 10% spread between the inflation rate and the interest rate you got. So it just, it was crazy. Now the only thing that comes close to that was the guy from Dan Fuss, brilliant guy from Loomis Sales Bond Fund who came out in the fall of 08 back when Buffett was saying buy American. I am. He said, hey, corporate, high quality corporate bonds offered equity like returns. And we had some legacy separate accounts. Yeah.
- [55:56]
Cole Smead
But Munger was saying that at the time, he said, listen, equities won't heal until the credit markets heal.
- [56:03]
Bill Smead
Yeah.
- [56:04]
Cole Smead
And so that was, by the way, so like I was sitting here thinking about this. I was like, I know there's no cassette tape out there, but it's like I want to get on our podcast and just be like, O I L oil.
- [56:18]
Bill Smead
Yeah, yeah, yeah.
- [56:20]
Cole Smead
Because again, like, it's like here we sit to these couple days where it's like, all right, markets look choppy and ugly and at the same time, like, what is going on with the oil price? Not rising, but those stocks are going up right now.
- [56:35]
Bill Smead
But in the inside money book, the problem for, for a great house like Alex Brown and Sons is leverage. And as we wrote in our piece in our missive, we have no, I have no personal leverage and our business uses no leverage. Therefore we don't have to worry about the main problem that occurs to make your way through these difficult circumstances is always leverage.
- [57:06]
Cole Smead
Yeah, I don't, I don't have any good leverage. I wish I could borrow a few billion. Maybe it'd be a good thing.
- [57:12]
Bill Smead
Or your 2.65 mortgage isn't quite enough for.
- [57:14]
Cole Smead
No, it's a 5.1 bill. Is it really high to upgrade a couple of years ago in full disclosure, since we're bearing our souls to our investors. I only own a personal residence at this point. That's my only my technical mortgage outside of some, some small car loans. So I, where do we, I know we've spent a lot of time on this before, so I don't want to like spend too much time. But just to be brief, you know, we're kind of touching around. We talked about the bond market, we talked a little bit about oil. Where do you think we are in the stock market? You know, we keep, we've been talking about this for a few years. Stock market failure. We advise investors who fear stock market failure. Where do you think we are on the stock market? You mentioned kind of what's begun to happen a little bit in the Magnificent Seven. I guess my question would be how bad do you think it could be for those Magnificent names, if you will?
- [58:05]
Bill Smead
Well, you're probably going above my pay grade.
- [58:09]
Cole Smead
Or am I feeding you red meat?
- [58:11]
Bill Smead
Well, so I'll answer this question over a ten year time period.
- [58:15]
Cole Smead
Okay.
- [58:16]
Bill Smead
Okay. So the chances are from the week after the election of Donald J. TRUMP To 10 years later, the S&P 500 is highly likely to not make any money.
- [58:30]
Cole Smead
Okay. So including dividends reinvested.
- [58:32]
Bill Smead
Including dividends reinvested. Therefore, we're going to try to carve out a way to make good money relative to the 4% treasury rates that people could accept in that difficult environment. Sure.
- [58:49]
Cole Smead
And also would you argue the inflation rate to whatever that is?
- [58:52]
Bill Smead
Yeah. And the inflation rate, whatever that is, could have an impact.
- [58:55]
Cole Smead
Okay. Yeah. Because I, I think, I think, I think we're, in many respects we're just as worried about the risk free rate as anything.
- [59:03]
Bill Smead
Yeah.
- [59:04]
Cole Smead
Because again, when people wake up saying, wait a second, if the government will guarantee me a rate even if it doesn't beat inflation and I can make that money compared to my opportunity costs, which are less attractive on a trailing basis, that becomes a very dangerous thing to risk capital.
- [59:19]
Bill Smead
I think 54% of the common stock is owned by people over the age of 60.
- [59:23]
Cole Smead
Correct. And those are people that can't afford to take the risk.
- [59:26]
Bill Smead
And they've been happy to, you know, for the last 15 years. The market opened and they lined up at the trough like Pavlov's dog.
- [59:33]
Cole Smead
And the bell rang.
- [59:34]
Bill Smead
And the bell rang and they started making money. And so, as I mentioned in the missive, the declines have been so short in duration that Buffett says when the tide goes out, you find out who's swimming naked. And the tide has only gone out far enough or in such a short duration that we've only got down to people's belly buttons. So we really haven't found out who's swimming naked for a long time.
- [60:09]
Cole Smead
Totally. Yeah. And, you know, to your point about John Kenneth Galbraith's book, A Short History of Financial Euphoria, I think he talks about it as there's, there's bezel out there, and then when it's exposed, we call it embezzlement. So it's like there's always bezel. The question has it been exposed? And when you find out who's swimming naked, you tend to find embezzlement.
- [60:31]
Bill Smead
Yeah.
- [60:32]
Cole Smead
Bill, thank you for joining me to share with the podcast listeners. What is on the Smead book list for our listeners? If you have a great book that you'd like to recommend, email podcastee, that's podcastmeadcap.com you can also send your suggestions to us on X. Our handle is eedcap. We'll give you a shout out in the next quarter when we do this again, as we usually do. Thank you for joining us for the Smead Book list on A Book with Legs podcast. We look forward to the next episode.
- [60:58]
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@smeedcap.com or by calling your financial advisor.