Cole Smead (3:23)

Yeah. By the way, a lot of people have recommended reading that book and immediately everyone wants to be like, oh, that book is a good picture. Now, his best book that I've ever read was about 0809. And the fun part to that book was Too Big to Fail. The whole fun to the book was it was just fun to figure out what was actually going on when you lived through it. But you weren't getting to see all these discussions and things. And so I point that out because I think everyone looked and said, oh, I might have a tool book for the next problem. And the answer is, we always have the best stories once the animals are

Bill Smead (4:03)

already out of the barn.08 was a black hole. Right. There was just so much you didn't know. To Cole's credit, something that was very valuable to our company and our investment decisions back then was we decided to take a look at who all was employed in one way or another in residential real estate, because the leverage upon leverage upon leverage that was being used in financing of the residential world was what made the depths of that such a problem. And Cole figured out that only 4% of adult employment was real estate agents, title companies, anybody involved in the process of building financing.

Cole Smead (4:47)

Yes, we figured you could have like 3% pick up unemployment from that. Yeah, you could, Lou, but it'd be tough to get 5 or 10%.

Bill Smead (4:54)

Yeah, you could lose 60% of the jobs in that arena. And that was only going to drive us to about 10.5% inflation. And if we were unemployment. Unemployment. And if we were only going to limit unemployment to 10.5%, it allowed us to be bullish about the future.

Cole Smead (5:10)

Because I and Amity Shley's book the Forgotten man, which was a really good frame to that,

Bill Smead (5:18)

that's what led us. That's what caused me to go to coal. Because we looked and said, okay. She did a great job of explaining what happened and how big of a fact the agricultural employment was. Because that means any bank that was in an agricultural area, people were losing their work, they were losing their home, and there was no deposit insurance.

Cole Smead (5:39)

And it just cascaded down and it's shameless plug. We've done Amity for both the Forgotten man, as well as her other book, the Great Society, which we did for the Oasis a couple years ago. So those are shameless plugs, but Amity's great. What other books do you have?

Bill Smead (5:53)

Maybe the most entertaining book that I've read in a long, long time. The Gambler, which is the story of Kirk Krikor, how penniless dropout Kirk Kirkman became the greatest dealmaker in capitalist history, by William C. Rempel. I mean, that book is just so good. I mean, deserves to have a movie made out of it. It's so good. So the immigrant family learns how to fly a plane, comes out to Southern California and starts flying people around because his skilled pilot is in the service and expands his skill. Pilot gets out of it, and then he creates kind of a regional carrier. He ends up buying Western Airlines. He goes to. He's shuttling people. His shuttle business is taking people from Los Angeles to Las Vegas. Kind of in that swingers movie. You know, the guys go from LA and swingers. Vince Vaughn, Favreau, Jon Favreau go out to Las Vegas for drive out there. Well, he was shuttling people and he ended up building the two largest casinos. He built the mgm. And the great thing about it, it's like one of the greatest entrepreneurial stories I've ever read. But what was so cool about the guy was not necessarily for religious reasons. He just dealt fairly with people everywhere along the line, which I just thought that was just so wonderful about the book, even to the point a lady that accused him of being the father of her child, which the test proved was not true, he went ahead and paid for that kid to be well taken care of as it grew up because he got close to the child. Sure. Yeah. So, and then we both read the Age of Extraction.

Cole Smead (7:46)

We had Tim at the Oasis.

Bill Smead (7:48)

Tim at the Oasis. And boy, the recent news just this week about Facebook getting sued for extracting out of kids and now kids having mental health problems. Very timely Age of Extraction by Tim Wu.

Cole Smead (8:07)

Yeah, because Tim really asked the question, what's beneficial? You guys don't know this on the podcast, Tim is famous for coining the term net neutrality, which we have been very critical of the idea of net neutrality for much of our time, if you haven't figured this out yet, despite that, we're pragmatists and we know that a lot of solutions are not easily solvable. And where Tim really is in, I guess, in agreement with our view of the world, which is like the most natural force you always have to have at Present is competition. Right. Because that's what creates the creative juices to make business more efficient and capital structures, et cetera. And that was one of his big things. Is it really a competitive landscape? That was his kind of open ended question. And we generally, you know, regardless of the side of the aisle you're on, we would generally agree with someone asking that question, is it that competitive? And I think that's one of the things that even though we disagree with Tim's view of the world in net neutrality, we agree with a lot of them. But like, what's good for our society is a really big open question right now.

Bill Smead (9:14)

Yeah. And then we read Campus Speech by Chim Marinsky and Gilman and it's a great book if that subject of freedom of speech on college campuses is a big issue now. Right. We've had practically intellectual wars going on at college. But I kind of had a headache by the time I got done because it was like almost every one of the key subjects ends up being kind of a catch 22. In other words, if you do this, there's a whole set of repercussions from solving that problem will cause new problems.

Cole Smead (9:57)

Yeah, yeah. It's Newton's third law.

Bill Smead (9:58)

Yeah.

Cole Smead (9:59)

Right. For every action, there's an equal and opposite reaction.

Bill Smead (10:01)

Yeah.

Cole Smead (10:02)

And full disclosure, that book came up because I saw that Erwin Chemerinsky had published, had co authored the book with Howard Gilman. I hope to God nobody knows this, but I actually went to college with Irwin's son, Adam Chemerinsky. So I reached out to an old fraternity brother of mine, said, hey, I see your dad's new book. I think it's pretty timely. We should have. You know, I'd love to read the book and would love to have on the podcast. So we're working on trying to get Irwin's schedule down, but we'd love to talk to him about that.

Bill Smead (10:31)

And I even knew, I just took one look at the name. I said, cole, this must be Chimmer's dad. And it was.

Cole Smead (10:38)

So let's see, on my list of things I read, so I read Evergreen by Trent Pressler. He really gives kind of, it's kind of an outside the box book. He really gives the history of trees. So for example, when I hear the word spread your seed, which is like an old word or old phrase, I don't think of a farmer, I think of a pine cone opening up. And actually, if you look at the history of trees, trees, coniferous trees were referred to as a virility. So the idea of Spreading your seed is like a tree thing. It's not a farming thing. But I just say that because he starts out with.

Bill Smead (11:17)

And it's not just from, oh, brother, where art thou?

Cole Smead (11:19)

Yeah, he starts out with Christmas trees. And it's kind of a fun thing because he bemoans the death of the traditional Christmas tree. And he talks about how many fewer Christmas tree farmers there are and things like that, which I think is funny. Cause, like, that is an internal turmoil subject for myself. I grew up in a family that did natural Christmas trees, even though they got pine needles and all that. I give Mom a lot of credit. She. Dad did very little of that. Just so everyone's aware. Mom did all that.

Bill Smead (11:46)

I went and got it.

Cole Smead (11:47)

Yeah, I remember getting it occasionally when we were kids. But over time, even. Even my mom ended up dominating that. So. So that's how I grew up. My wife decided the spores weren't good for her. So we've had, you know, fake Christmas trees, you know, despicably fake Christmas trees. Now, in fairness, I might be lazier than my father because I've had to do nothing the entire time. And it looks great and all that kind of stuff, and the kids don't seem to care. But I. When I think of, like, nostalgia and being a kid, I think of, like, a real Christmas tree. And so he gives. He really just kind of talks a lot about the history. He gets into some very unique histories. And Northern California, obviously, coming from the Pacific Northwest, we own some lumber company, like West Fraser, in our international portfolio. So there's a lot in those trees that we think about. That being said, I think it's really just kind of something to take your mind and say, let's learn a different history, a unique history. And again, I joked with him that maybe the new business model for the Christmas tree business is to take it to a premium or luxury good. For example, what if you could get your Louis Vuitton real Christmas tree, and you pay an obscene amount of money? And what I've learned in this lifetime is sometimes people will pay for that.

Bill Smead (12:57)

Well, it's funny you mention that, Cole, because from Northern California all the way through, through southeast Alaska is the largest farming that goes on in the entire United States, which is cutting down fir trees and then replanting. And it's a perpetual thing. Right? It's a crazy.

Cole Smead (13:21)

Yeah, but the demand's falling way off, so supply is staying the same. Demand goes down well for Christmas trees and pricing that's not good for Christmas tree farms, if you will, but not

Bill Smead (13:31)

for the wood to do other things.

Cole Smead (13:32)

Yeah. So his main thing is there's a debt in the business. And ultimately, because the fake Christmas tree is actually way cheaper to produce. So if it's cheaper to produce, guess what happens to demand? It goes way up. And so as we just bought a new one this last year with lights on it. And so that's kind of the question is, like, you're seeing classic supply and demand. Let's see other books. Polar War by Ken Rosen. This is not the first time the United States has had this grandeur of being big in the Arctic. The Russians, according to Ken's writing, are really the people that consider themselves Arctic experts or Arctic, you know, exceptionalism, to use the term, that's been thrown around. And the only issue is, like, all world powers aspire to this. You know, I think that my big takeaway from Ken's book, and he does a great job of talking about this, is, you know, there might not be much to it. These things come and go. And the United States has done this before. Right after World War II, we did it. So you mentioned the age of extraction, which is a fun book. The Crazies by Amy Gammerman. I love this because, again, like, different history, and it gets to some of the tensions that we see in American society, rich versus poor. It gets into some of the issues, like Old vs New. This is the way things were. How are people gonna adapt to it effectively? She tells a story. She writes for the Wall Street Journal in the mansion section of the Journal, which would be where they do all their, like, really cool, like, fun houses. And everyone sits back and says to their spouse, oh, wouldn't it be really cool, honey, if we could buy something like that someday? And eventually some people do, right? And so that's what she writes for. But she. She goes out and she sees this person's property out near big timber Montana, near the Crazy Mountains, AKA the Crazies. And what happens is she looks at this property, and a few months later, this person is in a lawsuit with their neighbors over a wind farm. And who's putting up the wind farm? A poor ranching family who's been in the valley there for, you know, been near the mountains for over 100, 150 years. And so it's really the story of, like, these big properties, this local town issue. She talks about stuff where it's like the local county commissioners have to get together, and all politics are local, especially in Montana. So what happens is, like, who wants to get in the way of these folks? And, you know, have to have this be their job because they took this county commissioner job assuming they had really nothing to do. And it's kind of like a notable thing in town. And sure enough, they wake up on a situation where neighbors are suing neighbors. And then you have things like zoning and power rules and all this stuff. She tells a wonderful history of it. But a couple things I would tell our listeners, like if you're listening to us and you're on the east coast, on the west coast, all things are local. I mean, especially true on the west coast. A lot of states like Arizona or Montana, they're just big, small towns. Even if in our case in Phoenix, where the fourth largest city in America and the fastest growing major city in America, it just reminds me the west is so untamed, not only in its geography, but really in relationship. It's so local and communal and unique in that respect.

Bill Smead (16:31)

This is the 48th state, correct?

Cole Smead (16:33)

It's the last state.

Bill Smead (16:34)

Third youngest state in the union.

Cole Smead (16:36)

Yeah, Youngest of the contiguous 48. Let's see. Laws of Thought by Tom Griffiths. Wonderful book for thinking about. I think the main thing I took away from his book was anything compute wise is just a reflection of humanity. And I say that because the positive, it's just a tool I like in getting overly excited about new technologies like this. That'd be like getting excited about the hammer at one point in the development of civilization. But here's another way of thinking about this too, and I had this conversation with Tom when we had him on the podcast is I've used, in full disclosure, I've used Claude quite a bit. And I've used Grok quite a bit Claude more recently. A lot more. And I'll give it a project. So just as something like, what can I get my arms around? That's very complex, has a lot of data, and it would be very expensive to have someone do for me. I went out and I put my entire financial life into Claude. Why? Because I wanted to build a budget. The thing I've learned, when you're young and poor, it's really easy to build a budget because there's not a lot of numbers to have to bring together. But when you get older and you get kids and you're married and your income grows, it's just a lot tougher to bring in. So I said, okay, here's a lot of data. I took my credit cards, my banking, my prior tax return, and my prior W2 loaded in, had it build me a budget, and I suddenly felt like I was dealing with like an intern where it's like you get it back and you're like, hey, did you think about this, this and this. And oh, Claude says yes, sorry I missed this, and I should break out this. And it's kind of like you'd go back and forth with an intern on it. So do, let's use the investment business or finance, you know, at larger scale. Do they hire interns each summer? Yes, they do hire interns each summer. And are those people capable? Yes, they're commonly capable. What do they lack? They lack a lot of experience on the subject matter. So therefore they're learning to try these things, teach them, they got to teach them. And so I'm watching an experience with Claude go on. Not dissimilar to a good intern, you know, an intern that's better than the average. But again, I'm still having to spend time with it and teach it. Well, here's how I'd look at that. And when you run into this, you need to do this, and here's how I would recategorize that, et cetera. And again, if I use Tom's book as a picture, that is what it is. It is a reflection of the human experience and it's a tool that's reflective of the human experience. The one thing that I do want to mention in the book that was like mind blowing. So Noam Chomsky, who's the famous linguist who did a lot of work on how to code linguistics, he said something in the book that was just earth shattering, mind blowing, where he said that the child that is born without intelligence or a system capable of doing so accomplishes a language. And he argues that there's nothing really to explain the fact that the human can do that. I'm sitting there reading that, thinking he's right. There is no really metaphysical reason to argue the child can do that. And yet it does. There is something what I would call awesome. Innate or divine. Like it's so incredible, it's divine. So I said that. When we chatted with Tom, I said that. And then I explained something talk that you and I had heard where we were at the COSM conference and one of the people speaking there, he went into this subject of where they've dealt with severed brains, because brain surgeon, because of where there's epileptic attacks, because the misfiring of the two sides of the brain, so they sever the brain. And what they've learned in studies is that you know, your left brained activities and your right brained activities, you know, have trouble understanding each other, at least metaphysically. And like your left side of your body or your left brain would, you know, obviously deal with your right side of your body and your right brain would deal with your left side of your body. So when they ask you a left brain question, you should respond like if you're doing a survey and you're clicking a mouse, you should respond ultimately with your right hand because it's a left brained activity and that functions to control the right hand of the body. What they found is that you're just as likely to click with your left hand, which, it makes no sense because metaphysically it should only respond on the right side of the body. And so connecting those two ideas up, they are analogous to each other is ultimately, in other words, there's something divine about what the person did in a left brain thought. And so I mentioned that to Tom and. And it's like, are there other divine experiences that humans do that breach the metaphysical reasoning? That is something I'm terribly curious about.

Bill Smead (21:23)

Yeah. He said that in 2000 brain surgeries that he's done, he concluded that reasoning doesn't come from either side of the brain.

Cole Smead (21:33)

Yeah. He argues that there is something else. He argues for the soul. But I just say that because if you can't touch it and you can't see it, there's something awesome about that because you can't really meet it in the natural world. And so that's why I use the word divine. It's something above what we can expect logically past our pay grade. Yep. 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 smeecap.com at our firm. We are stock market investors. We advise investors who play the long game 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 Smead funds distributed by Smead Funds Distributors llc. Not affiliated. Let's see. The other book is Original Sin by Katherine Page Harden. She goes by Paige. This was a weird book because, you know, a lot of these authors we get to talk to, they typically are closer to your age. And so I'm now talking to a woman who was born In, I think 82 or 83. It's like talking to a peer. It's like talking to someone you went to high school with. It was super weird where it's like, this is so bizarre. I mean, I'm talking about someone who's roughly my age, which I'd like to think of myself as a younger man. My teenage daughters called me an old man all the time. So I'm getting used to it, at least quickly. But her book is mainly. A lot of her work has been done around off of some of the twin research out there. So what was the documentary about? The three people, Identical triplets that were separated at birth. Identical strangers. Okay. And so it follows a lot of the logic, and there's research done in that where what they found is that twins, when separated at birth, for example, tend to fall into similar industries, tend to have similar religious practices and fervor for those religious practices. And a lot of it's actually explained by who they are physically, is what they are. And her work gets into that. You can see traits where it's like, okay, are they predisposed to committing crimes or doing things they shouldn't, et cetera? There are elements of that. And so it's not Minority Report where you're doomed to that, but there are elements of that. The second thing she talks a lot about, and this comes out of her experience with, like, a fundamentalist Christian household, was that, okay, what do you learn from your parents? So she talks a lot about the book about, like, biblical view, which she does not practice. You know, she's not like a practicing Christian. She doesn't got. Does not go to church, but she talks a lot about the context of that. And what she really argues is, yes, your. Your. Your DNA codes you, but secondly, your parents code you. So in the whole nature versus nurture debate, you know, you're coded by not just who you are physically, you're coded by the nature you're raised in. And then the last part she really makes the case for is that does not make you a victim, though. Right. She quoted the Bible, which says you're a sinner by nature and choice. But she points out that it's nature and choice, just like it's nature and nurture. You choose to do that or not. And she talks about kind of the paradox. It's like the victim's paradox. Like, yes, you might not have been born to the greatest home situation. You might not have the greatest parents, but you control your destiny, even though all those things do affect you and can cause issues in Your life. And so she does, I think, what was a really pragmatic way of trying to meet those things as they are for that discussion. And it was just a very cerebral conversation. I think it's a very healthy conversation because, I mean, Bill knows this, but I very much like the dunk on the millennials that are like, oh, you know, the boomers have really, like, left us as bag holders. Wah, wah, wah. As though, like, you don't have the ability to get up tomorrow and do what you want to do. And the future's always bright. So I think. I think what. I think what her book does a good job of explaining, like, who you are, where do you come from, how are you made? How were you parented? And how does that help inform you what you need to do in decision making?

Bill Smead (26:03)

Cole and I both come from a family. The Smead family like to take small financial risks. So we got into a business of taking financial risks, and we feel comfortable with that because it was in the family gene pool.

Cole Smead (26:17)

Yeah. I would argue to add on that they didn't take big enough risks on scalable things, and I think that's how we want to perfect the model. So let's pivot to what you're reading right now.

Bill Smead (26:28)

Yeah. Well, again, trying to get deeper into financial bubbles. I hope everybody knows that in 1636, you could trade one fine tulip bulb for a house, a fine carriage, and two good horses. About seven or eight hundred thousand dollars in today's dollars. So as we watch in the markets right now, bitcoin roll over, and various manias, it's just great to step back into the history and just make sure you understand the timelines and you understand the difference. There are differences, but there are rhymes, and we have to know those rhymes. Our job as we look after other people's money.

Cole Smead (27:21)

What's the name of the book, though?

Bill Smead (27:22)

Oh. Boom and Bust A Global History of Financial Bubbles by William Quinn and John D. Turner.

Cole Smead (27:27)

And we've had William McQuinn and John D. Turner on the podcast. They use like, a triangle. They explain it kind of like a fire. Their view was that, you know, you have the initial spark, you have to have oxygen, and so what provides the oxygen? Historically, they argued leverage was a way to provide oxygen.

Bill Smead (27:46)

Borrowed money.

Cole Smead (27:46)

Yeah. And then their other question of how long it rages. I can't remember the third leg, but I want to say it was something like, how economically damaging was it based on that?

Bill Smead (27:55)

That's exactly how the bubble in Florida real estate happened. Right. They started out, oh, you could buy a lot for.

Cole Smead (28:02)

On margin.

Bill Smead (28:03)

Yeah, they give you a margin, buy a lot and put 10% down.

Cole Smead (28:07)

Because I remember in Boardwalk Empire, the HBO television show with Steve Buscemi, the ugliest guy in the history of tv, where they allowed him to buy it on margin. You just pay part of it up front like you would a futures contract. The other book. So the other book that falls into that, if you're gonna go read that, I'll give you one other lens to look through. Harold James book, the Seven Crashes, which is also kind of in that ilk. And I think the one thing that I like about the boom and bust book is that they give examples. So they use the Australian real estate boom as an example in their book. And I think that was their first example. And what you'll learn from their book is real estate bubbles are truly different, as they say. They just hit differently. And so the real estate bubbles had to have leverage. Cause you always gotta have borrowed money on real estate.

Bill Smead (29:04)

So Cole and I had this wonderful experience where Cole was going through the CFA process back in 2011. And the guy that I was finishing it back then. Yeah, the guy that ran the program said, we have more candidates for CFA in the Far east than any place in the world. And the one thing we never have is anybody ever go talk to them about investments, about what to invest in and through coal. Tom Robinson, I think, was the guy.

Cole Smead (29:36)

Shout out to Tom, by the way, hey, Tom.

Bill Smead (29:38)

So he said, we will fly you to Singapore and these.

Cole Smead (29:45)

We're already going to be in Asia.

Bill Smead (29:46)

Yeah, yeah, to these places. And we'll have you talk to these CFA societies and we'll put you up and we'll fly you over there. And it was a great experience because we got to go into the heart. And that was at the height of the excitement about the brick trade. But really China, the growth in China, which was causing a boom in Western Australia, because that's. They'd load inputs in Australia on a barge and take it up to China. And it was causing this natural resources boom all the way around the world. And then soon after that, the guys from Australia did this show about the empty malls. In other words, they'd been building condo buildings. And people were buying these condo units as investments like hotcakes. Yet they're all empty. No one was living in them, and no one was going to the malls that were built in the same area of the cities where all these new condo buildings were being built. And that is a perfect picture of what you're Talking about in the financial bubbles and now the banking system in China has been poisoned by the fact that there's a lot of default associated with that.

Cole Smead (31:12)

Yeah. The interesting part, if you look at their book and you think about what we've seen and what we talked about with too big to fail levered real estate bubbles always deflate. If you're in a democracy, they deflate quickly. If you're in a communist society, they deflate slowly. I think that would be the one lens I would say those bubbles were there, but in the case of China it's just taken years. And if you look at the stock returns, you look at the banking returns, et cetera, it's happened very, very slowly over time.

Bill Smead (31:44)

So on our way over to fly the second time, Cole didn't go. I went to Shanghai and Beijing and on the flight over I told Cole's mom, Becky, I said, honey, I said, I want you to realize that every single person you're going to interact with while we're in China under The age of 35 is an only child. And that just, you know, for somebody that, you know, grew up in a family of four and we have five kids ourselves, I mean that you don't think about that. And that also means mostly male because they all wanted a name bearer.

Cole Smead (32:21)

Yeah.

Bill Smead (32:21)

Infanticide and so therefore infanticide. So there's way more boys than girls and every one of them is an only child. And I thought my mom was an only child and she was a wonderful woman, but she was a little psycho for that reason. And imagine a whole nation of people that are a little bit affected by being an only child.

Cole Smead (32:41)

Yeah. Let's see. The book I'm just cracking now is the Great Math War by Jason Socrates Barty. He's giving a history of really math and he does it through three people. George Cantor, which would be theory, Ellie J. Brewer, which is intuitionism, and then David Hilbert for formalism. And so I've kind of been in this like short history anthology. Like Tom Griffith's book was a great short history of like how do we get to where we are in compute. And so kind of like the wider math angle is something I was, I was looking for when I found that book. Let's pivot to, you know, what you've had recommended to you or books that you're waiting to read.

Bill Smead (33:23)

Yeah. A Will to Serve is actually a self written book by a guy by the name of Jim Ellis. And I've actually been tempted. One of the books I'm tempted to write is I've been told by a number of people since I didn't grow up in Seattle and I came there in 1980 and I lived there for 40 years. And I was heavily involved in the Rotary Club and we attended church there, et cetera. I picked up a great view. Well, my biggest argument of what's gone wrong in the city of Seattle is,

Cole Smead (33:58)

well, just by the way, if you don't know this, like downtown Seattle is not what it used to be. So that's like if you haven't been there, you know, it's not what it used to be.

Bill Smead (34:06)

So what's gone wrong is the people that came before my generation, my parents generation, they fought in World War II and they had a strong sense of civic duty. And the number one citizen of civic duty was this Jim Ellis. And he led the effort to clean up Lake Washington in 1950s and early 60s. You couldn't swim in Lake Washington, it was so polluted. So they cleaned up the sewage system. They did the same thing for the Puget Sound. And that's not a problem in Seattle right now. But what is a problem is there used to be a wonderful balance between the business community, the body politic and government service. So the two senators from the state of Washington were two of the most powerful senators in the country. The speaker, the head Senate guy and Henry Jackson, they were super strong.

Cole Smead (35:06)

The gold dust twins.

Bill Smead (35:07)

Yeah, they were there to bring federal resources back to all the major military operations that are strategically in the far northwest corner of the United States. Which helped the Boeing Company, which was the largest economic engine in the local area. So they got the Boeing Company got along great with the body politic. And then everybody felt a sense to serve. I was part of the largest Rotary Club in the United States at that time. At the peak 736 people started the Medic One program nationwide that was started in Seattle. And what's happened is as the most successful people the last 25 or 30 years became a completely different generation. The sense of responsibility to take care of the civic part of your community disappeared.

Cole Smead (35:59)

So are you like saying that the millennial's right, that the boomers just created bag holders? Is that what you're teasing? Well, again, to your point, I mean many of the wealthiest people in society are boomers today and it doesn't seem to have changed the leadership.

Bill Smead (36:13)

Well, think about, we had the two wealthiest people on the planet either come from Seattle and start their business in Seattle or. Or come to Seattle, raise the money for your business and become the wealthiest back to back and the local, whether it be Catholic Community Services or Salvation army or Seattle's Union Gospel Mission, were begging everybody else for money because they were not getting the most successful people in the city, were not taking care of the civic side of the city. And that has hurt the city.

Cole Smead (36:52)

Let's see, I got a couple books here. The Emergent Mind by Gaurav Suri. I also have Streetwise by Lloyd Blankfein. He's been out kind of doing a road show tour. It'd be fun to have him on. Let's see, our colleague Will recommended the House of Fidelity by Justin Baer, which obviously is the history of Fidelity. And then the last book I just had handed to me that I haven't, I've read it before, but I was reminded to come back and read it again, was Worldly Wisdom, which was Munger's talk at stanford in the 90s. And I got a little green copy of that year.

Bill Smead (37:26)

I got one more, I forgot, the Kid Stays in the Picture about Robert Evans by Robert Evans and his closest associate. If you've seen the show the Offer, which is a show about the making of the Godfather, you met Robert Evans and I'm guessing that this is going to be a just a fantastic book.

Cole Smead (37:48)

Yeah. So let's say so to cap it off, we, you know, we usually go to a couple questions and I had gone to our, our client service team and just asked like, hey, what are, what are things you're getting questions on? And the first question that we get, very commonly, I know I was on the road. You're on the road. Will energy stocks fall once the US Stops bombing Iran and the straight is open again?

Bill Smead (38:10)

Yeah, so. So I'll be a little wonky with the first answer to that question. We received a chart in April of 2020 that showed that.

Cole Smead (38:22)

But we had the chart numerous times before that.

Bill Smead (38:25)

The commodities were the cheapest relative to common stocks in the 220 year history of the United States. The prior low points were at the bottoms of the depression in 1932, at the bottom of depression in 1875, at the bottom of depression in1825. And so the answer is we are in probably a 15 to 20 year time period that began in 2020 where we have a rotational bull market in commodities based on scarcity, et cetera, under investment, underinvestment and scarcity. And we've seen it so far. Oil took off from 20 to 23. It corrected for a couple of years. We'll be happy to tell you how painful that is because you have to stay involved in it because we think it's going to be better later. And then a next leg starts. So we are in a rotational bull market in commodities, and over the course of the 15 years that end 2035, we expect that commodities will outperform common stocks like they have in all past. Mean reversion trades that started out the same way.

Cole Smead (39:40)

Yeah. And you know, one of the things that I think we have thought a lot about is, okay, so oil's up roughly call it 50% year to date. The commodity itself. Okay, so I go out and look at the stock and say, what are they up? Well, they're up about 50%, which doesn't make any sense. Just so we're on the same page, because if you look at, say, the EBITDA margins those businesses make, when your revenue goes up 50%, your profits don't go up 50%, your free cash doesn't go up 50%, they could double or triple, and in many cases their free cash on a daily basis is tripled. And so a company is a leveraged way to suck up pricing power and thus returns when abnormally high returns come about. How do you get abnormally high returns when there's a lack of competition relative to the change in supply?

Bill Smead (40:25)

Yeah, the ESG people scared everyone out of the industry for about four or five years under the idea we were going to make a complete transition away from carbon fuels. And now AI comes on and you're using a massive amount of natural gas to make electricity. And all of a sudden you realize, wait a second, we need oil and gas and we have not been poking holes in the ground for the last five years because we were shamed into not doing it.

Cole Smead (40:56)

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 plays the long game and want to invest in wonderful companies to build wealth, we invite you to visit smeadcap.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 Smead Funds Distributors llc. Not affiliated. Yeah, so what I'm probably most excited about is like when to see, when you start to see these quarterly reports and companies are explaining how much money they're making on a per day basis. Because if the stocks are not responding to the level that they should, what are these companies going to do? Real simple. They're going to buy back a lot of stock.

Bill Smead (41:58)

Buy back stock or swallow each other.

Cole Smead (42:00)

So I think that's where we're going. The other thing too is you just mentioned natural gas. And if our listeners don't know this, the value of natural gas is not based on how cheap it is to extract natural gas. I'll give you an example. If you go look at waha pricing, which would be, you know, the pricing you roughly get in Texas or Ako as they call it, when, when you're up in Alberta, you'll see those prices are really low. In fact, if you go talk to the companies we own, like for example, Diamondback Energy, they'll tell you they don't make any money, they actually lose money in their gas. So how is a company losing money in gas and supposedly we're going to use all this for AI? Well, it's because you don't actually make money in gas. You make money in gas that gets out of the basin that it's in. And why those basins are so cheap is because it's gas that doesn't get out. So you know, what do you get out with? You got a pipeline. And so when we talk about, you know, how do you get more nat gas when a country like Qatar goes offline? Well, the answer is it takes time and money because that's how you get things out of these basins through pipelines or transportation or to get it to a port. And so we're in this, like to your point about scarcity, we're in this old economics paradox where it's like we have an economic problem we need to solve. Huh, what's that gonna take, Bill? Well, it's gonna take time and money. And what's the only way to speed up time? Higher prices. Because that incentivizes entrepreneurs to say if you give me that price and I can lock that in, I will go out and take that risk. But so here's the weird part. The higher the prices go in the near term, the sooner the problem gets solved.

Bill Smead (43:39)

Yeah, high prices lead to lower prices and low prices lead to higher prices.

Cole Smead (43:44)

Now here's one big catch and there's a chart out. I just put this out on my handle on X and I'm sure we can reshare it. But if you look, historically speaking, the price of oil has roughly tracked the capex numbers until the last four to five years where prices stayed relatively high and capex is not growing.

Bill Smead (44:07)

Okay.

Cole Smead (44:08)

And so I point that out because, well, what's different? Well, if we were having this conversation in the 2010s and many of you know this, but we were bearish as all hell in the oil business because ultimately it seemed like idiots ran those businesses well.

Bill Smead (44:20)

And the brick trade excitement was causing there to be a huge premium.

Cole Smead (44:23)

Correct. But the capital allocation of those businesses were poor, were terrible. They were. So when you run all these coals,

Bill Smead (44:29)

they were getting by. It was in a boom time as nobody was paying attention to how well they were run, how their capital structure or their capital structure.

Cole Smead (44:38)

So it was just like it was just a lot of idiots. All boats float and then what happens is capital gets really scarce. And the case that was made on there, Forget this in 20, it's like, well, those guys are idiots. Those gals are idiots. They're never going to do things right. Well now you look five years later

Bill Smead (44:54)

like they've done a lot right and they get this.

Cole Smead (44:58)

So we always tell people, listen, people do not change over time or overnight. Like our wives will tell you, we're not gonna change overnight. But over time, yes, people adapt and they have time to adapt. And so what's interesting is to think about how many people said, you know, it will never change. And these companies have all adapted. Now as we talked a lot about the political regime and dialogue and, and ideas out there are that oh, these guys and gals are always going to drill and we're always going to have low oil prices. And because of that rhetoric, what is doubling down these energy companies on not investing any capex because they are so deathly afraid of the political environment that they sit around.

Bill Smead (45:39)

Well, and they can benefit so much more from getting a much fairer price for what they're doing than they can by making it up on volume. I mean, there's a Costco in the retail world. Right. And we own what we think is kind of the Costco in the oil and gas world, Diamondback Energy, because they can produce a barrel of oil at just about the lowest cost of anybody. We take a look at, I would

Cole Smead (46:06)

say maybe in the Permian, but then again those are shorter cycle wells. So there's inherent problems in any of these business models, which is that you ultimately at a high level, you have to reinvest.

Bill Smead (46:18)

Yeah. So basically the next five to 10 years is going to be the cutting of the biggest fat hog we think that they've seen for a long Long

Cole Smead (46:27)

time in that business. We were talking about this. But you know, 2020, to your point, was the best buying opportunity of the last 25 years in the oil business, full stop to your point, on a rotational bull market, commodities, the metals, actually their low was in early 16, so four years removed. But since oil is the biggest commodity market, you know, the ultimate the dollar weighted low in commodities was in 2020. So last spring, the spring of 2025, where we had the tariff tantrum, that was the second best buying opportunity in the energy business. So if I was going to give you a way of thinking about it, are you getting the best buying opportunity at this juncture? No. The mean reversion in multiples has taken place. Here's the catch, and this is to Bill's point is that the return on capital for these business is just gonna

Bill Smead (47:14)

be high, gonna explode.

Cole Smead (47:16)

So it's like it's taking a business that can make mid teens return on invested capital and they might go out and stomp low to mid 20s for an elongated period of time off and on.

Bill Smead (47:29)

And then as a backdrop to that, they're starting out being the energy as a part of the S and p bottomed at 2.1%. It was 16% back in 2014 or something like that. And so it's now gone from 2.1 to say 4.5. But from the scheme of things, how important is it as a part of the American economy? And the answer is it's incredibly more important than 4.5.

Cole Smead (47:57)

Here's another kind of physics equation to add to it. You know, like we said, Newton's third law is for every action there's an equal and opposite reaction. So I remember the first week this took place, the stocks didn't even go up. Yeah, it was like, who cares?

Bill Smead (48:10)

Yeah, because they're so used to getting tricked in the stocks.

Cole Smead (48:13)

Or also like Venezuela was short and cute, but it was adorable and it was over. Okay, so that was the first week. And then second week is like, hey, ending right away. And the third week it's like it's not ending again. And now we're in the mode of like people are kind of giving up on the short lived conflict. You know, you know, we're not there fully, but we're almost there.

Bill Smead (48:32)

Well, you've opened Pandora's box.

Cole Smead (48:34)

Correct. So those stocks are catching a bid. Now what else are we seeing? We're watching the big dominant big cap tech companies have trouble for whatever reason. I don't know, the future's unknowable, but, but I point that out because if the cool kids were big cap tech and they lose their cool kid status, there is so much capital involved in that. You know, to quote, since you mentioned the commodity chart, that came from Barry Bannister and I remember when he was talking about this in 2020, he said, yeah, when some of the capital comes out of the things that have been popular and goes into things like this, like the commodity space, he's like, it's going to be like shooting a fire hose into a teacup. Okay. And that is what is starting to happen, where some of the capital tricking out and saying, hey, what if we should do something else?

Bill Smead (49:19)

So I always like to say, why did Willie Sutton rob banks? And of course, the answer to that

Cole Smead (49:24)

is that's where the money's at.

Bill Smead (49:25)

That's where the money's at. So from a historical perspective, where we are right now is Americans own more common stock, just for example, relative to real estate that they've ever had. There's more confidence since the last 15 years had relatively short interruptions. The bear market in 22 and the 60 day bear market in 20 are basically the only interruptions from the bottom in 09 to now. Therefore, people have been sold a bill of goods that all they have to do is own the S&P 500 index and live happily ever after. And what markets love to do is to take the prior narrative and blow it up. They're going to blow it up. So if Willie Sutton wants to rob banks, which is, by the way, what's happening in the market every day right

Cole Smead (50:19)

now, There's a, there's a, there's a.

Bill Smead (50:21)

The money is in the Magnificent seven and the technology stocks that used to go with them.

Cole Smead (50:27)

Yeah, people are hitting the bid.

Bill Smead (50:29)

They're hitting the bid. They're saying, get me out of here, I'm going to go do something else now. It just so happens they're trying to get money out of private equity at the same time, which could make even more entertaining things happen.

Cole Smead (50:40)

So the other question that we're getting a lot right now is will home builders do well with all the affordability problems, High rates, high cost.

Bill Smead (50:47)

So I love this question because as an economic historian, Cole and I both love economic history. The weirdest thing is the homes that are built in the United States. The biggest home building booms were in 1972, 1978 and 1984. That's measured by how many homes were built, divided by population. We are trolling around right now 4/10 of a percent of population. And the peak in 72 was 1.15%, 0.95% in 78 and 0.85% in 1984. Now why is that important? Because the mortgage rate in all three of those instances was higher than it is right now. So this idea that all the problems of the home builders have to do with affordability problems is not the case. By the way, you weren't here yesterday. We were talking about what the body politic might do with this subject. And I got to thinking about it right now. A couple can only give their child $19,000 per spouse. That you can give $38,000 each year to your kids. Well, what if the United States government said, hey, for the purpose of buying a home, we'll raise that number dramatically to 100,000, to 100,000 or $150,000. Because what's going to happen is these baby boomers, we're all going to die in the not massively distant future. And would you rather have the inheritance be more valuable to the kids over their lifetime now, or would you rather have them be fat and happy as a 60 year old themselves?

Cole Smead (52:55)

Without kids.

Bill Smead (52:56)

Without kids. And so that hit us the last

Cole Smead (53:01)

couple of days when it's like a legacy issue. But here's another way. So let's just say let's not play the cards on the table. Let's just play the players at the table, right? Cards up, what matters. I think this is all going on under the heading of really two primary thoughts kind of dominating the market right now. One, that this spike in oil prices is definitely going to cause an economic recession. Now coming from the same people on

Bill Smead (53:34)

Wall street that said there can never be another recession.

Cole Smead (53:37)

No, no, no, no. That said that 22's rise in rates was definitely going to cause a recession.

Bill Smead (53:43)

And they got that wrong.

Cole Smead (53:44)

And now why do I mock that? Because if we're spending 7% of our GDP on deficit, primarily to Medicare and Social Security, can we have a recession? My theory is we can't. We just can't, whether we like it or not, because we normally only spend that in deep recessions. Okay, so is it going to be the economic problem? People argue? I'm not buying that. I haven't been buying that. And I'm not gonna be buying it until proven otherwise. Because as Munger says, fish. Where the fish are. And there happens to be a lot of fish betting against that right now.

Bill Smead (54:16)

Yeah, most. Most people. And the key to success is weak competition.

Cole Smead (54:20)

So that's the first thing the is the other big narrative going on. That again, I think is driving the home building stocks is back to your point of affordability. Well, if we're having this trouble in the oil market, do we have the same confidence around the federal government? What if we actually have some, you know, fiscal problems on our hands? Well, by the way, my friends, we've had fiscal problems for five years that we're begging on. We didn't care about it for most of the five years.

Bill Smead (54:44)

Well, and also.

Cole Smead (54:45)

Let me finish, let me finish. So I say that because what is not being said is what could happen here is that the stock market gets poor enough in terms of doing poorly for forward returns for investors. The idea that investors won't go out and buy Treasuries, the AKA risk free rate, they will go buy Treasuries or

Bill Smead (55:08)

this takes me right back to. I came in the investment business in 1980, I started cold calling people in November of 1980 and I would call a business owner and if they were willing to take my call, I'd ask them what have they been investing in. They said, well, I own the building that my business is located in, I have two rentals, I have a couple of oil stocks and I own some gold. Okay, that's what people are doing. So Cole's point is well taken. The fact is that people. The average age of a first time home buyer is 40 years old, which just blows my mind away in the

Cole Smead (55:51)

last 12 months, that is.

Bill Smead (55:52)

Yeah. And having someone loan you money for 30 years to buy an appreciating asset with tax deductible interest is the greatest thing that happens to 70 or 80% of adults in the United States. You're much more likely to create wealth in a normal 20 or 30 year timeframe from that forced savings plan than you ever would with the behavior of normal common stock owners. Meaning people get into the stock market does bad for a while, they get out of it and then they're not around for when the rebound is. The human condition is not that high. A percentage of people normally do well in the stock market, which is why they used to hire professionals to do it for them. But The S&P 500 has been almost a perfect place for 15 years and now is loaded with the stocks that are going to get robbed when Willie Sutton comes looking for money.

Cole Smead (56:51)

Yeah, I think there's three things that can go well on the rate side for the home building business at large. One is how do you get out of these big government debts? It's called you put too much cheap money out there. And you inflate your way the heck out of it.

Bill Smead (57:04)

Inflate your way out.

Cole Smead (57:05)

So will I be shocked if we wake up and the short end of the curve is at 3%? No preview of coming attractions, my friends. That's one. Two is that stock market troubles become great for bonds because ultimately if you're not a volatile size, you're scared, you're great. Cause you get a fixed return and you have less volatility. So that's two. Okay. The third part to this I think is, is the interaction of this. So for example, let's say you have a stock market does poorly and you're like, huh, that thing just went down 25 or 30%. My home's gone nowhere. That seems like a much better place to invest. So where we get beyond this idea of affordability, rather it becomes a conversation of what's my opportunity cost?

Bill Smead (57:47)

So just so the listeners know, Cole's college education was funded with 10 year zero coupon treasury bonds that were paying 14% compounded guaranteed by the United States government in a custodial account. Where I didn't have to pay the

Cole Smead (58:09)

tax because it was, it was below the level.

Bill Smead (58:11)

It was below the level, the threshold. Yeah. So think about where we've come from.

Cole Smead (58:18)

Well, and by the way, here's the other thing too is if you want to, here's some quick math. If you want to use this as like a self help thing. Let's say you have a mortgage that you'd Write today at six and a half percent. Let's just say, okay, so 30 year fixed at six and a half. I think I saw that's what Wells was writing earlier this week. Six and a half percent. Okay, Free advertising for Wells Fargo there. So at that rate, right. What does it take, an after tax income? Well, you just take your tax bracket and you know, so if you got a 25% tax bracket, you divide that by 0.75 and that would be get you your pre tax, multiply it by 0.75. No, no, no, divide it by 0.75 to get you your pre tax return that you're getting when you pay it down. When you'd also have to adjust that by, is the tax deductibility. So you'd have to account for that too because you get to write off the interest. So you take that, you take off the interest that you get, deduct from your taxes and it'd bring you somewhere down lower on your cost. Here's what I don't get most. First time home Buyers, everybody, they're not in high tax brackets, shock. So the people that benefit the most off of paying down their mortgage would be actually high tax brackets. Because what it does is your high tax bracket means your pre tax return is higher compared to your after tax money you pay your mortgage off with. So the idea that everyone would benefit from paying off their mortgage. No higher incomes with higher tax brackets pay off, benefit from paying off their mortgage. If inflation's running high and you get a, you have a low tax bracket with high deductibility, you win. But the problem is back to like Smead's playing these games that they could take risk. You can't win a lot of money playing poker every night. And that's what the Smead family learned. You can make a lot more money day after day after day in the long run playing risk in the stock market through common stocks. And it's a more scalable business. So the great part about a house is it can build you a certain amount of net worth in a non scalable way.

Bill Smead (60:13)

And they don't put the price in the newspaper every day. And that's what everyone's forgetting right now is when the s and P500 turns sour and that price is in the paper every day, it's going to be crazy watching people fight to get out. Therefore, the home builders, one thing they have going for them right now is, is they're not a very big factor market cap wise. In The S&P 500 index, if you look at the top 100 market caps, that's where the money is, that's where Willie's going to rob.

Cole Smead (60:44)

Yeah. And just like where we've been in the last 12 months in the oil business, to go back to our prior question, the thing you really wanted to buy, if someone's like, hey, what do you want to buy in the oil business? I call it torque. Right. Where the revenue growth in the business relative to the fixed cost on operating leverage causes the free cash flow to explode. That's where we're at in the home builders right now. The most attractive risk in my opinion is where you get torque. Where the change in the business prospects over the next two to three years can take the fixed cost structure and drive the highest amount of free cash flow growth. Because if you go out right now, it's like we're getting the most questions on the home builders. People think they have this very dour picture. We were joking about this the other day. If someone goes back and says what were the best buying opportunities we ever had in the home builder business when no one could see a bright future.

Bill Smead (61:33)

2012, 2011, or in the middle of the pandemic. It was the most. Well, first of all, it was a depression in home building, correct? It was the most anemic economic recovery coming off a deep recession in U.S. history because it was a recovery that didn't include home building. And they beat President Obama up about that, but he had nothing to do with it. But here we are. Right now, there are more people between 25 and 40 than there's ever been in the history of the United states. It's a 30% larger group than when the baby boomers, who used to be the biggest group, came through that age. Now they're waiting later in life to get married if they're going to have a kid. They're waiting way later. But at some point in time, the set of circumstances might cause them tofor the guys to quit spending all their money in bad sports bets and volunteer to be civilized by a fine woman. And if that happens, there is going to be a steady stream of home buyers for the next 10 years. So the demand for homes is going to be there. We don't get to choose when the high rates and the the difficulties of right now abate. But you're likely to get better prices when there is no end in the difficulties in sight than you would if you wait.

Cole Smead (62:56)

See, I forgot something earlier, but I will mention, because you're touching on it, our buddy and friend Superfan Steve had two book recommendations. I'll dovetail what you said. He said the Evolution of Cooperation by Robert Axelrod. He said this kind of falls into the human behavior biology idea. But on your note that you just touched on Superfan Steve's closer to my age and he said, he mentioned to me that he's having his first child, his daughter, soon. So he's been reading the Expectant Father by Armin Brot and he also says but if Bill is offering any parenting classes to let him know. So, you know, for all of our listeners that are in that season, we will have to do like the Bill's how to guide of parenting. You know, at least I'm here functioning as an adult and I don't seem to have the miscoded DNA or parenting that's terribly ruined me and I haven't done enough dumb myself.

Bill Smead (63:53)

I think Cole wants to get me arrested because, you know, when I was growing up, it was spare the rod and spoil the child. Right. So I don't think that flies in today's world, but. Well, that's a nice compliment, but Steve, I you might be able to do better.

Cole Smead (64:10)

So we might have to do like a special episode where like Bill and Becky's how to parent in 2026 for all the millennials having kids and buying houses post the age of 30. Dad, thanks for joining me today and sharing with our 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 podcastmeecap.com that's podcastmeedcap.com you can also reach out to us on X. Our handle is Meadcap. We'll give you a shout out the next quarter when we do this again like we do with Superfan Steve. Thank you for joining us for a Smead Book list on a Book with Legs podcast. We look forward to the next episode.

Podcast Host (Intro/Outro) (64:51)

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,

Bill Smead (65:28)

Sam.