The Smead Book List - Summer 2025

Summary

A Book with Legs: The Smead Book List - Summer 2025

Release Date: June 30, 2025
Host/Author: Smead Capital Management

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1. Introduction

Cole Smead, CEO and portfolio manager at Smead Capital Management, opens the episode by welcoming his colleagues Shamish Sullivan, Nick Garcia, and Will Keenan. They introduce the episode as their quarterly book list discussion, emphasizing their commitment to value investing through diverse literary insights.

“At our firm, we are readers and we believe in the power of books to help shape informed investors.”
— Cole Smead [00:21]

2. Recent Reads

Nick Garcia’s Insights

Nick Garcia shares his recent readings:

• "Quit" by Annie Duke: Duke, a professional poker player, challenges the negative stigma around quitting. She advocates for decision-making based on expected value rather than societal perceptions of perseverance.

  “There is virtue in abandoning something that doesn't have a positive future.”
  — Nick Garcia [01:56]

  Key Points:

  • Reframing Quitting: Shifting the perspective from viewing quitting as failure to recognizing it as a strategic decision.
  • Cognitive Biases: Addresses biases like sunk cost and loss aversion that inhibit rational decision-making.
  • Real-Life Examples: Discusses Muhammad Ali’s prolonged career and Mount Everest climbers as cases where quitting had significant consequences.

• "The Man Who Solved the Market" by Gregory Zuckerman: Chronicles Jim Simons and the rise of Renaissance Technologies, highlighting the intersection of mathematics and finance.

  “Greg’s a great writer and that must have been a fun book.”
  — Cole Smead [05:35]

Shamish Sullivan’s Selection

Shamish Sullivan discusses three lesser-known books:

• "The Living Company" by Aria de Gosse: Explores companies that have thrived for centuries by emphasizing adaptability, knowledge sharing, and decentralized structures.

  “Adaptability, knowledge sharing within the company and without and decentralized structures.”
  — Shamish Sullivan [06:34]

  Key Points:

  • Adaptability: Companies must embrace diverse ideas to navigate unpredictable futures.
  • Knowledge Sharing: Promotes intergenerational learning and decentralized decision-making.
  • Examples: Japanese trading companies like Itochu and Mitsui, Shell, and even a comparison between titmores and red robins during historical adaptations.

• "The Courage to Be Disliked": An exploration of Alderian psychology, focusing on self-definition and the importance of not seeking external validation.

  “Am I working hard, am I doing the best I can, am I being honest with my family, am I being a helper to the group or to the community.”
  — Shamish Sullivan [13:15]

Will Keenan’s Reads

Will Keenan shares his recent books:

• "Uncertain World" by Robert Rubin: Offers frameworks for decision-making in unpredictable environments, emphasizing probability-weighted outcomes.

  “Robert Rubin had a wonderful framework that he used to make decisions during the Risk Arbitrage Group.”
  — Will Keenan [Will's discussion around 05:14]

• "Built from Scratch" by Bernie Marcus: Chronicles the founding and growth of Home Depot, highlighting the importance of understanding a company’s DNA beyond financial statements.

  “Bernie Marcus was the founder of Home Depot, and understanding the DNA of a company beyond public disclosure is very important.”
  — Will Keenan [Will’s discussion around 24:08]

3. Current Readings

Nick Garcia

• "Play Nice" by Jason Schreier: Investigates the business challenges faced by Blizzard Entertainment, detailing the tension between creative passion and corporate reality.

  “Their story is they get caught up in a whirlwind of M and A... eventually they end up being owned by Microsoft.”
  — Nick Garcia [21:06]

Shamish Sullivan

• "Philosophy of Walking" by Frederick Ross: Explores the mental and physical benefits of walking, drawing parallels to personal and professional life balance.

  “Walking is something people don't think a lot of but it kind of just forces you to get out of the everyday grind of stuff reset your brain.”
  — Shamish Sullivan [22:39]

• Additional Titles: "The Logic of Human Density" by Robert Wright and "Non Zero" [30:12].

Will Keenan

• "Built from Scratch" by Bernie Marcus: A deep dive into Home Depot’s inception and growth.

• "Made from Scratch": Focuses on Kent Taylor, founder of Texas Roadhouse, emphasizing attention to detail and long-term business success.

  “Attention to detail when he was running the business. They got roughly 2 to 4 inch deep bins to make sure they had the freshest lettuce possible at all times.”
  — Will Keenan [32:19]

4. Book Recommendations

The team shares books they recommend or plan to read:

• Nick Garcia: "The Power of an Idea" by Paul Kachow and "Shoe Dog" by Phil Knight.

  “Teach me about the business and learn that way what you can't learn through financial statements.”
  — Nick Garcia [27:47]

• Shamish Sullivan: "The Logic of Human Density" by Robert Wright and "Non Zero".

  “Despite the setbacks, history directionally focuses towards integration and complexity.”
  — Shamish Sullivan [29:49]

• Will Keenan: "Made from Scratch" and "Non Zero".

  “Non0 is a terrific book. I would highly recommend that.”
  — Will Keenan [30:18]

• Cole Smead: Upcoming titles include "Empire of the Elite" by Michael Grunbaum and "Anointed" by Tony Stewart.

  “These books are going to be coming out. 'Empire of the Elite' is about Conde Nast and their media trajectory.”
  — Cole Smead [32:19]

5. In-Depth Discussion: Homebuilding Business

The hosts delve into the current state of the homebuilding industry, addressing challenges and opportunities amidst changing market sentiments.

Question Addressed:
“How do you look at the current low sentiment in the homebuilding market with factors like high mortgage rates and slowing markets?”

Will Keenan’s Response

Will emphasizes the cyclical nature of the industry and the importance of fundamental business improvements:

“A longtime mentor of mine, Bill Miller, said in this business that you make the money at the turns.”
— Will Keenan [35:04]

Key Points:

• Quality Improvements: Transition from capital-intensive models to land-light models, freeing up cash and enhancing return on capital.

• Countercyclical Investing: Similar to Texas Instruments, homebuilders reinvest during downturns to drive economic value over cycles.

• Economic Scaling: Large builders like Lennar and D.O. Horton benefit from economies of scale, reducing costs and increasing margins.

  “They have switched to a land light model where they use options, which freed up a very significant amount of cash on the balance sheet.”
  — Will Keenan [36:04]

Nick Garcia’s Perspective

Nick views low investor sentiment as an opportunity:

“Dour investor sentiment isn't a reason for us to not be in the space. It's actually a reason to be interested in the space.”
— Nick Garcia [39:37]

Key Points:

• Differentiated View: Recognizing opportunities where others may not see them due to pessimism.
• Demographics: Continued household formation supports long-term demand despite short-term challenges.

Shamish Sullivan and Cole Smead’s Additions

Shamish highlights the resilience of top builders and the importance of market share acquisition during downturns:

“Every time this happens, you're just building up more market share and you're slowly consolidating to the point where smaller players aren't able to compete.”
— Shamish Sullivan [43:09]

Cole connects the discussion to broader economic principles and investor behavior:

“The implied value of owning the S&P 500 the next 10 years is to plausibly lose money, you have to account for that in making your decisions.”
— Cole Smead [44:14]

6. Current Events and Market Analysis

The team briefly discusses the impact of geopolitical events, such as the "12 Day War," on oil prices and their investment strategies.

• Hedging Strategies: Ensuring that companies are hedged against temporary price fluctuations.

  “Our investment thesis isn't based on short term move in oil prices.”
  — Shamish Sullivan [48:12]

• Long-Term Outlook: Maintaining a focus on robust free cash flows and superior capital allocation irrespective of short-term volatility.

  “We think it's going to be higher for longer over the long term.”
  — Will Keenan [46:44]

7. Conclusion and Future Engagements

Cole wraps up the discussion by encouraging listeners to recommend books via email and social media, promising shout-outs in future episodes.

“If you have a great book that you'd like to recommend, email podcastmeadcap.com or reach out to us on X.”
— Cole Smead [51:32]

The team expresses enthusiasm for future episodes, highlighting the value of ongoing literary exploration to inform investment strategies.

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Notable Quotes

• "There is virtue in abandoning something that doesn't have a positive future."
  — Nick Garcia [01:56]

• "Adaptability, knowledge sharing within the company and without and decentralized structures."
  — Shamish Sullivan [06:34]

• "Am I working hard, am I doing the best I can, am I being honest with my family, am I being a helper to the group or to the community."
  — Shamish Sullivan [13:15]

• "Dour investor sentiment isn't a reason for us to not be in the space. It's actually a reason to be interested in the space."
  — Nick Garcia [39:37]

• "Our investment thesis isn't based on short term move in oil prices."
  — Shamish Sullivan [48:12]

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Key Takeaways

• Strategic Quitting: Understanding when to abandon unproductive ventures can lead to better decision-making and resource allocation.
• Business Longevity: Companies that prioritize adaptability, knowledge sharing, and decentralized structures are more likely to thrive long-term.
• Cyclical Investing: Recognizing and acting upon cyclical patterns in industries like homebuilding can unlock significant investment opportunities.
• Continual Learning: Ongoing engagement with diverse literary sources enhances investment strategies and business understanding.

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For more insights and to explore Smead Capital Management’s investment strategies, visit smeedcap.com.

Transcript

[Podcast Announcer]

You're listening to A Book With Legs, a podcast presented by Smead Capital Management. At Smead Capital Management, we advise investors who play the long game. You can learn [e-mail] or by calling your financial advisor.

[Cole Smead]

Welcome to A Book with Legs podcast. I'm Cole Smead, CEO and portfolio manager here at Smead Capital Management. At our firm, we are readers and we believe in the power of books to help 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 June 30, 2025. This is our quarterly book list where we talk about books, books, and, yes, more books. Hosting this with me are three of my colleagues, Shamish Sullivan, our senior analyst, also my other two. Joining us is Nick Garcia and Will Keenan, also analysts here at SME Capital Management. Guys, thank you for joining me.

[Will Keenan]

Great to be here.

[Nick Garcia]

Thanks for having us.

[Cole Smead]

You guys ready to have some fun?

[Nick Garcia]

Oh, we're ready.

[Cole Smead]

All right. So as we usually do, we always start talking about what we've just recently read. So, Nick, I'm gonna kick it over to you. What did you just get out of?

[Nick Garcia]

So I just finished two books. The first one is called Quit. It's by Annie Duke. She's written a number of other books. Poker player. She gets very good framework on how to make decisions. And this book in particular is about the connotation. She starts with the negative connotation of quitting, which is just abandoning a venture. Right. So she shows or she talks about how sticking to something has a better positive connotation where you should be evaluating things based off expected value.

[Cole Smead]

Right.

[Nick Garcia]

So there is virtue in abandoning something that doesn't have a positive future.

[Cole Smead]

Right, sure.

[Nick Garcia]

So how do we reframe our thinking from quitting is bad and sticking with something is good? She kind of gives us a framework to make that decision. And it could be anything from a bad relationship to a bad job to a bad investment. How do you make that decision to abandon versus stick with it? So part of the problem is the only way to know if something truly is going to work out is sticking with it, which gives us that bias to stick with a losing prospect. So we have to lay out. It's interesting because she lays out a lot of the different cognitive biases that contribute to this. Right. You have sunk cost bias, where you don't want to abandon something that you already have. Time into money, into effort, into Loss aversion. Right. The idea that a loss hurts more than a win feels good. Equal losses.

[Cole Smead]

Sure.

[Nick Garcia]

So these sort of things manifest themselves. And she gives some examples. Two that I thought were very interesting was the career of Muhammad Ali. Right. He persisted in his career theoretically longer than he probably should have. He ended with Parkinson's. It had terrible effects on him as an outcome. So when was the right decision for him to quit? She posits that potentially he missed that window where the world was telling him to quit and he actually should have.

[Cole Smead]

Sure.

[Nick Garcia]

But the negative connotation of it drives you to stick with it.

[Cole Smead]

Yeah. And also he had some money problems that I think he stood with it.

[Will Keenan]

Right.

[Nick Garcia]

So. Right. So there's outside circumstances that influence that as well, which is why it's not. We're not completely rational actors, as we know. So that's why you have to be aware of these biases, even though you'll be subject to them.

[Cole Smead]

Sure.

[Nick Garcia]

She gave another good example of people climbing Mount Everest. Right. So your goal is to reach the peak of Mount Everest, but you have to beforehand set out the parameters on what you're going to turn back, AKA quitting your goal of reaching the peak. Right. But there are circumstances that you can better evaluate pre your before you're in the situation.

[Cole Smead]

Sure.

[Nick Garcia]

You could better evaluate it, but then you have to stick to it when those circumstances come. So she gave a story of these guys that turned back before they got to the top of Everest and these other guys that didn't turn back before they got to top of Everest. The guys that turned back are alive. The guys that didn't, didn't make it.

[Cole Smead]

Sure.

[Nick Garcia]

So that decision to quit was a positive thing.

[Cole Smead]

Sure. To your point, I think the worst part of this is it's one thing to lose money on a stock, it's totally another thing to marry the wrong person. It has all kinds of negative outcomes. What was your other book, Nick? And I think this is a more known title if I remember correctly.

[Nick Garcia]

Yeah. So the other book I read was the man that Solved the Market by Gregory Zuckerman. It gives the story of Jim Simons and how he founded Renaissance Technologies, how he became to get into the financial markets, which I thought was really interesting, him being a very like a math wizard, very math oriented guy.

[Cole Smead]

Sure.

[Nick Garcia]

In the beginning, going into academia with great success. But in terms of life satisfaction, he wanted more. He wanted more challenging.

[Cole Smead]

Yeah. And Greg, we did Greg Zuckerman's book, the Frackers, obviously here on the podcast. And I think the one Thing that obviously you're getting at is it's much better to be a mathematician in the business world than it is in academia from a financial incentives perspective.

[Nick Garcia]

Exactly.

[Cole Smead]

Greg's a great writer and that must have been a fun book. Seamus, what about you? Would you just get done reading?

[Shamish Sullivan]

I got three and these are probably, I don't think they're very well known. One's the Living Company by Aria de Gosse. Essentially what he talks about is companies that have been able to maintain themselves for hundreds of years. We looked at the Japanese trading companies, Itochu, Mitsui, he used those as an example. Shell as an example. I know today it's been in the news.

[Cole Smead]

Yeah, he actually technically it's not because it's June 30th, remember? Sorry.

[Shamish Sullivan]

Okay, nevermind. When you're watching this, he actually worked at Shell. His dad worked at Shell. He worked there for about almost his entire career. And the focus is essentially saying these companies that have all survived long periods of time had very distinct characteristics. Adaptability, knowledge sharing within the company and without and decentralized structures. And really kind of the way he looked at the adaptability is. One example is used is in terms of companies not trying to predict the future, but throwing out a whole bunch of different ideas and understanding each one of those concepts. Right. So when you try to predict the future, you're narrowing your tunnel, your cone in terms of when something happens. If you haven't gone outside of that cone. And it's very hard to adapt, it's hard to address what's going on. Change, pivot. If you, if you kind of look at the view of this could happen, this could happen, this could happen and make it broad and address them, it's, it's harder. But when you get to that point, you've, you're mentally, you're able to address it and recognize it for what you have already thought. So not trying to predict is a huge thing. Adapting is a huge thing. Knowledge sharing. And this is a kind of an example. He used one of many, which I think is really great. In Britain they have two types of birds. They're both robins. One's a titmore and one's a red robin. And during pre world War, people brought milk to each door. So the robins figured out they can come drink it. Both of them figured that out. Both of them evolved physically to adapt to that. And then World War II hit and all that happened. They started putting in technology, I guess they started putting lids on the top of them with tin. One of the birds figured out how to punch a hole in the top, and so did the other one. But the titmore was able to thrive where the red robin actually didn't. And one of the examples is it's very important within cultures, within companies, to have an active sharing mechanism. Right. So the reason the titmore did very well is because when they are, they go from place to place. They're not territorial. And they go in groups and people. Certain birds will leave that group and go to others. So they're able to. He called it intergenerational learning. And so they were able to teach each other how to do that. Where the red robins were territorial, the males stayed in one place. One or two may have figured it out, but as a group, they couldn't. So they dwindled and the other one didn't. So examples of kind of that. He liked decentralized structures, people. If you had. I think I brought this up in the office. If you had an issue with your superior, they made it very hard to push up the ladder. Everything was dealt with down below, and they decentralized and gave power to the people near the base of it. And very conservative in terms of what they did. They focused on the company surviving. And there's another example. I won't use it here, but it's when you're in an environment where you're doing something and you're making it extremely efficient, and in that environment, it works. And then that environment breaks or changes. You've dialed it down so tight that when it breaks, you don't have any tensile strength. You don't have the ability to adapt. And so when you look at companies, sometimes, if they have things in there that seem like they are distracting or they're weakening, let's say the market margins reserve, they actually can be longevity enhancers. Right. Because they're not good now, but when environment changes, when things change, they're able to use those to adapt. So.

[Cole Smead]

Sure.

[Shamish Sullivan]

That was one of them.

[Cole Smead]

Your next book's more exciting in title. This is the kind of stuff that I like thinking about.

[Shamish Sullivan]

Yeah. The Courage to be Disliked.

[Cole Smead]

No, it's your other one.

[Shamish Sullivan]

Which one? How to make the Pavilions.

[Cole Smead]

Yes.

[Shamish Sullivan]

Sorry. Okay.

[Cole Smead]

Your Courage to Be Disliked. That's adorable.

[Shamish Sullivan]

I like that one.

[Cole Smead]

What is Seamus really trying to tell me?

[Will Keenan]

Guys.

[Shamish Sullivan]

Hey, I picked it. I thought it was a good one.

[Cole Smead]

Yeah. Talk about both of them. Sorry.

[Shamish Sullivan]

No, it's okay. Will brought this to my attention, so I pick it up. And he was actually just in the Wall Street Journal. I think a little bit ago, making a bid, we were just talking about a bid for some of Home Depot's or something that Home Depot was looking at. They outbid him. He reminds me a little bit of Ken Langone in terms of how he thinks about things. He talks about ROIC is a big focus for him. Data. Having your mental health in the right place, going through cycles, going through setbacks is very important. So he talks a lot about that. I was talking earlier about something I use with my kids. Now I know you have kids. It's like we always ask him about their day and he said, I do this thing where when they come home, I ask them about the best part of their day. Tell me the one thing that was the best part of your day. And I started doing it. And it's funny because it goes from, you know, my day was okay, or it was a bad day or it was whatever. And it goes to this thing this morning me and my buddy did, and it was awesome. And like creates kind of an everyday. You're not asking him just for generic up and down stuff. You're asking for them to think about the best part of their day and keep it. And it's kind of a positive way of thinking about things. He also talks about being dialectical, which is essentially just being able to perceive other people's viewpoints and other people's reasoning, rationale and come to a conclusion that may be different than theirs, but understanding it. And it's really important in I think what he does, what we do is you can reason or you can understand where people are coming from. And if you can grasp that, you can still disagree with it and hold it at the same time. And like Ken Longone, he talks a lot about being very authentic and honest about dealing with mergers. This guy rolls up companies for a living. He did it three different times. United Rentals was a trading company before that. Now he's doing building materials.

[Will Keenan]

Qxo.

[Shamish Sullivan]

Qxo. There we go.

[Cole Smead]

All right. So, Seamus, what about your last book? Supposedly my favorite book.

[Shamish Sullivan]

I like it because it really goes to kind of, I think, how we think about ourselves and maybe how we invest. In some ways it's the courage to be disliked. And it's really Alderian psychology versus Freudian psychology. The focus being you are kind of what you make of yourself at the moment. You're not beholden to what has happened to you before. And a lot of it is focused on not trying to please other people, not trying to get praise from other people. You talked about it. I think the sparrow, sparrow think about the hawk or something along those lines. He's like, he doesn't think about it. Our goal, I think sometimes we get towards focusing on how can I make this person think highly of me, how can I make them like me? That shouldn't be the goal. The goal should be am I working hard, am I doing the best I can, am I being honest with my family, am I being a helper to the group or to the community, those types of things. And that brings I think a better sounder structure within yourself. And it goes right to our investing. We are in a position sometimes where we are not favorably looked at. We can't always be. We wouldn't be able to make the profits or we wouldn't be able to make the returns that we do for investors or do as well as we do if we did that. So I think it was a great read for me is just really focusing on who we are, what we do well and being okay with being uncomfortable.

[Cole Smead]

Nice. Will you got a couple titles that I'll kick over to you.

[Will Keenan]

Thanks Cole. To Nick and Seamus Points before I recently finished in an Uncertain World by Robert Rubin and the Yellow Pad, also by Robert Rubin. Secretary Rubin was Secretary of the treasury under President Bill Clinton and previously before that ran the Risk Arbitrage Group at Goldman Sachs. It's the next point. We are in the decision making business. Bob Rubin had a wonderful framework that he used to make decisions during the Risk Arbitrage Group. Since we are in the decision making business but we cannot predict the future. No one can. We spend a lot of our time trying to probability weight expected outcomes. That was a a nice reminder. In that framework, the Yellow Pad really goes into greater detail on how he makes decisions. He used the yellow pad in order to frame his thoughts while he was running his group at Goldman in the 80s. Lastly, I would just say another big part of our business is studying excellence in whatever field you're in to study the greats. The Risk Arbitrage Group had one of the deepest benches of talent during the 1980s with many members of of that group going on to start great funds on their own. Such as most notably Tom Steyer. And Eddie Lampert.

[Cole Smead]

Sure. Nice. Let's see. A lot of mine are obviously books that we had on the podcast here recently. So the last few titles we did was American Oasis by Kyle Pauletta, which is a great story of the Southwest Uncertainty Enterprise by Amar Beday. Amar's book, it hit me like a rock. And back to your point on the season that we're in, Seamus, it hit me like a rock because. Because uncertainty is a constant in life, okay? And the question is, how often do we recognize uncertainty to be present really has to do with a lot of the volatility of life, right? So, you know, there's these things that you just cannot calculate. If you can calculate it, you know, those are calculable risks, and we can price those, like in insurance, okay, what's the likelihood? I, you know, get. I run over another person in a car or hit another car or, you know, anything like that? We can price it because, you know, we have quite a bit of data around that. It's the uncertainty of life that you can't really predict. And because you can't predict it, it's tough to price. And what I find really interesting is not necessarily that uncertainty is ever present. It's that the way the humans, you know, undulate up and down around uncertainty. You know, suddenly uncertainty hits and they're more aware of it than ever. And then uncertainty isn't perceived or experienced for a long time, and therefore they forget about it's uncertain. And it has a lot to do with their view of the future. If there is no uncertainty, they're very optimistic about the future. If there is a lot of certainty, they become very negative about the future. I thought a lot about that, but I think that wasn't the most important thing out of Amar's book. Amar said, ultimately, you can't reduce uncertainty. And because you can't reduce uncertainty, you have to meet the human and the person that's dealing with that, with prose and art and language and really the humanity. And when I think of humanities, I mean, broad humanities, like, we think of it from a subject and college perspective, it's your writing, it's your ability to communicate things like that. And the thing that just ruminated out of that book was Buffett's Buy American I Am piece that he wrote in the New York Times is op ed because effectively he wasn't saying, you know, with all this uncertainty around us, I know xyz, he walked people through his way of thinking. And the fact that you could connect with that thinking and understand, okay, here's how another human's dealing with this. That was seminal, I think, for a lot of people to read what Buffett said and said, you know, what, based on what he's saying, that makes sense. And I can't change the uncertainty of today, but that's helpful for me to frame what I have to deal with in the uncertainty. So I really like that book for thinking about Buffett's letter, because I think in my career, that was a seminal piece. He wrote a couple others. I've been in New York for a little bit here doing business meetings and Taking Manhattan by Russell Shorto is a wonderful, really, history of why New York's a melting pot. Very fun book. The other one, Mellon versus Churchill. In this world where we have all these, I call it the two big Fs, as I'm sure you guys know, fiscal and foreign policy. And in this world where we have foreign policy issues and we have fiscal issues, well, that's a lot like us coming out of World War I, where our Western allies owed us money and we were gonna hold them to it in some ways, and yet the Germans owned them money. And so you kind of have this mix between fiscal problems and foreign policy, and you walk into the book kind of liking Churchill. I naturally do. And you walk out actually really liking Andrew Mellon because he was such a pragmatist. Back to your points earlier, Seamus. In terms of how do you address these things? And have an aperture where it's open? It's not set because he had to deal with politicians. Not a shocker here. That have a set aperture. It's very narrow. And if you don't fit that, guess what? That's what their constituents, as they say, believe.

[Podcast Announcer]

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 play the long game with a discipline that has proven success over long periods of time. Learn more about our [e-mail] 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.

[Cole Smead]

Not affiliated. Let's. Let's pivot. Let's talk about what you're currently reading. I'll kick it back over to Nick.

[Nick Garcia]

Yeah, so I'm currently reading. I started this book called Play Nice by Jason Schreier. He's sort of an investigative journalist, does like, deep dives on different topics. So he did this piece. This book is about a company called Blizzard, and they made this video game company. It's about these three guys, Adam or Alan, Michael and Frank, who created this company. And they're very passionate about what they do. But what interesting about it. What's interesting about it to me is they find they're not business people. Right. They are these video game creators. That's their primary job, that's what they're interested in. But they were met with the realities of business and how do they fund their business. So they, their story is they get caught up in a whirlwind of M and A. They get have an interest owned by them in Davidson Associates, which then goes to Vivendi, which creates an interesting relationship where they're this company in Los Angeles but they're associated with this French company that they don't have much connection to other than financial. Eventually they end up being owned by Microsoft. So it's kind of a business meets. These guys just want to do this thing which is make games but they have to meet the business reality. So that's kind of what brought me to that book. So it's pretty interesting so far. It's very well written.

[Cole Smead]

Yeah, well. So you're saying you can't just have passion.

[Nick Garcia]

You can't just have passion. It meets economic reality, right?

[Cole Smead]

Yeah.

[Nick Garcia]

And that's what they found out.

[Cole Smead]

Gotcha. Okay. Seamus, how about you? What are you currently in?

[Shamish Sullivan]

I'm on the Philosophy of Walking by Frederick Ross and I don't know where I got this. It might have been from another book that I was reading. I'm early on in it, but it was interesting because it reminded me of. We lived in Pasadena and Caltech's over there. And on my afternoon walk with my colleague we'd bump into a guy professor over there is well renowned and he walked eight miles every day from North Pasadena to Caltech. And I, I thought about it afterwards, after I started reading it. Walking is something people don't think a lot of but it kind of just forces you to get out of the everyday grind of stuff reset your brain. There's a lot of physical mental stuff that it helps you just work through. He starts talking about just the physical motion of walking. You don't have to think about it, you're just doing it. You're out in either nature or wherever and your brain, it's fun. Our colleague Connor, I was talking to him because when he's on the phone he's walking back and forth and he talks and walks at the exact. And I go. I do the exact same thing. And my wife always yells at me because I'm walking and I'm yelling in the house and I can't sit still and so, yeah, this book just talks about kind of a little bit about motion people, you know, how people think, helping them get through stuff. And so it's kind of, kind of interesting.

[Cole Smead]

Will, how about you? What are you in?

[Will Keenan]

I'm currently reading Built from Scratch by Bernie Marcus. As we know, Bernie Marcus was the founder of CEO along with the aforementioned Ken Langone, Home Depot, of Home Depot fame. As long term, qualitatively oriented value investors, we really want to do our homework. We've owned Home Depot since the inception of the fund back in 2008. Just. Just trying to get incremental knowledge any way you can on a company is very important. We like to do our homework. Buffett famously mentioned that when he purchased bank of America, he could make the decision quite quickly because he read a book on it probably four decades ago. Really understanding the DNA of a company beyond public disclosure is very important. Just enjoying that story. It's always fun to read books about American capitalism and entrepreneurship.

[Cole Smead]

Yeah. And back to connect that up with our prior thing. When we read Greg Zuckerman's book on the Frackers, it taught us a lot about who the players in the oil and gas business were back then to ask, to your point, Will, what's their history? What's their track record? Can they take a punch? Things like that. So the book I'm in, I just cracked it. I'm just in it right now in the first few pages. But it's Meltdown by Duncan Maven. It's the downfall of Credit Suisse, which Credit Suisse at this point, I know this is gonna probably be offensive to some people, but like Seamus said in his prior book, I have the courage to be disliked. So Credit Suisse at this point, it's obviously now combined into ubs, but it reminds me of kind of like a footnote. I remember in Too Big to Fail. If you guys go back and read the book Washington Mutual's Downfall, and effectively them being bought out was like a footnote in that. And I wanted to go back to kind of go through the history, Will, to your point, of what were the places this business made missteps all the way? Who were the people? Why were those decisions made not in many cases by a person, but accepted by wider groups of people? Because, you know, I think it's a business that won't be as remembered as it probably should be because it's not a major US Bank. It does not sit on the East Coast. Yes, it was big in Switzerland.

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So.

[Cole Smead]

I kind of want to touch that. I think These guys know this, but I was in London on the Sunday that the merger between UBS and Credit Suisse was announced. And so I have kind of like just strong feelings about kind of being there. And I was doing some back of the envelope analysis back then. And these guys could tell you about my frustration with that. So that's the book I'm currently in and it's a new book that was just recently published here. Let's jump over to books.

[Will Keenan]

I'll add a quick aside to that that you might find interesting. Chris Hone, who's one of the best concentrated value investors in the world today, had a very interesting story at smead. Back to disclosure. We're quite wary of businesses that are black boxes that we can't really understand the inner workings of. Chris Hone has a story of going to Brady Dugan, who was running Credit Suisse at the time. I believe this is right before the 2008 financial crisis. He brought a copy of the annual report and had the annual report flipped open to the balance sheet. He put the balance sheet on the conference room table between them to Brady Dugan and he said, can you explain your balance sheet to me? He says, I don't understand it. Chris Hone is of course, a renowned value investor. Brady Dugan said, I don't understand it either. I think that was quite telling.

[Cole Smead]

It's never a good start. We'll kick over to books that you've had recommended to you or that you just haven't cracked yet. What do you guys got? Let's start with you, Nick.

[Nick Garcia]

Again, actually, this ties back to what Cole and Will were talking about in terms of business history books that are actually really interesting to me right now. Two that are on my list that I want to knock out soon are the Power of an Idea by Paul Kachow and Shoe Dog by Phil Knight. Two very famous books on business history of two different businesses. Those are ones that I really want to crack open. Teach me about the business and learn that way what you can't learn through financial statements.

[Will Keenan]

Right?

[Cole Smead]

Yeah. By the way, Shoe Dog is a fantastic book. So you're gonna have tons of fun with it. To your point, I think a lot more about the business elements of that book. And I'll just give a breadcrumb out there because you think about branding and business, we always talk about brands, how powerful brands are and how sticky that can create the attachment of the customer or ultimately to the product. And thus, you know, that's what creates high returns on invested capital. To go back to Our prior discussions. Right. And he talks in the book about, you know, just do it. They weren't branding a product, they weren't branding a service. They were branding the mentality of the customer. And to our discussion about like never quit. Right, right. You're saying like, hey, don't be that person. Just do it.

[Nick Garcia]

Yeah.

[Cole Smead]

Okay. And I. And they talked about how powerful that kind of branding was because you were branding and speaking to the mind of the. And drawing them in. And then the question is just what products do they buy? Which is a very different brand business experience. And I know we've talked a lot about this internally is like, who is our investor? What kind of person is that? What are the reasons they come to us? And I think that's what Nike did. He explains pieces of that in the book that were just incredible. And obviously you learned that Phil Knight's kind of a freak. Freak for all good reasons. For Phil Knight, in full disclosure, I'm not a University of Oregon Ducks fan. Just not going to go there right now on the podcast, but we can do that offline sometime. Seamus, I'll kick it over to you.

[Shamish Sullivan]

Yeah. The Logic of Human Density by Robert Wright. Basically, I don't know much about it yet other than talks about. Despite the setbacks, history directionally focuses towards integration and complexity and we're seeing more and more of that. Yeah, it's an Interesting one.

[Will Keenan]

Non0 is a terrific book. I would highly recommend that. Seamus. The idea of Non zero refers to the fact that in a transaction in economics, the beauty of capitalism is that it's a win win scenario, which I think.

[Cole Smead]

Yeah, it's a positive sum.

[Will Keenan]

Exactly. Positive sum. And it can often be lost on the current generation, unfortunately. It's certainly eye opening and wonderful book.

[Cole Smead]

Yeah. What do you have for books that you've had recommended or things that you got on your shelf that you haven't read yet?

[Will Keenan]

Still on the business history theme here. Recently recommended by a longtime portfolio manager in the industry who is an IPO investor in Texas Roadhouse called Made from Scratch as opposed to Built from Scratch. My previous book I mentioned, this is a book about Kent Taylor who founded Texas Roadhouse. Interestingly, I was running the numbers today. Even though it hasn't done quite as well as Google, the long term returns are roughly comparable. Both businesses went public in 2004. Google has compounded at 20% up to the current day. Texas Roadhouse is at 17%, both handily outpacing the S&P 500. I think it's always fun to find Lesser known businesses that have done quite well over time run by owner operator entrepreneurs. Another key theme I'm noticing here is attention to detail. This longtime portfolio manager who recommended the book noted that when he was talking to Ken Taylor about a competitor, he noted that the beds, like the plastic containers, the bins where they store their lettuce at the competitor were quite deep. As a result, by the time they got to the bottom of the bin, they were serving customers very old lettuce. Ken Taylor was very focused on attention to detail when he was running the business. They got roughly 2 to 4 inch deep bins to make sure they had the freshest lettuce possible at all times. With any entrepreneur, whether it's Bernie Marcus, Kent Taylor or even Dee Hawk who ran a digital business at Visa that Nick mentioned. Very focused on attention to detail and maniacal on long term success of the business. It's a 247job.

[Cole Smead]

Let's see the books that I have not cracked yet. These are new books that are going to be coming out. But I saw them as I was, as I was looking across some books for the next few months. Empire of the Elite by Michael Grinbaum, which is a book about Conde Nast, the Conde Nast family and really what's now the Newhouse family. I mean obviously as you guys know and our listeners might not be aware, we used to own Warner Brothers Discovery who has Newhouse in their cap table. We don't currently. Just to make sure everyone understands. So really what's been the trajectory of that family in media? It's been an incredible run for them. And so just understanding what were the, the start of that, where did that go? Things like that that I'm kind of looking forward to. And then there's another book and this kind of goes under the Malcolm Gladwell kind of thinking about business. It's written by Tony Stewart. It's called Anointed. And his theory that I read in kind of the initial notes of the book is that businesses aren't, they're effectively anointed. There's a reason and a timing to why businesses have success. To your point just a second ago, will Texas Roadhouse. If someone says what's the most common address of Texas Roadhouse? I would say it's on Frontage Road in Texas, somewhere next to the freeway. That's what I know. And I don't think of that as anointed. So I'm really interested to kind of think about his book and ask the question, okay, are there just quite a few examples where we can kind of point out, say in the stock market to say, oh, those were anointed. But in reality there's a lot under the surface that just aren't as known to us, but have had a lot of success and that's maybe just missed in the writing. So kind of testing the theory, if you would. So let's see. So the question I want to throw out to you guys because, you know, I know we've had a lot of questions on this, but I just want to kind of throw out, just kind of like extrapolate out some of our thoughts. We've got a lot of questions around the home building business. As you know, many of our listeners might know we've owned the home building business going back all the way to 2013, originally with NVR and then we owned Lennar a few years after that and we ended up getting involved in Dr. Horton in 2020. Ultimately, we've benefited from owning those businesses. But we're at a juncture today where sentiment is very low. There's a lot of bear cases built up on the space. Common thing would be high mortgage rates. Certain hot markets like Florida and Texas have marginally slowed down. There's actually some markets that have seen pricing drops year over year for the first time. To throw that out to you guys. How do you look at that? How do we look at that? What would be your rebuttal and taking that in and what would be our reply?

[Will Keenan]

I can kick that off, I would say at smead, we found a lot of opportunities recently in higher quality cyclicals. A longtime mentor of mine, Bill Miller, said in this business that you make the money at the turns. We think that in the homebuilding business we have found a turn where the quality of the business is secularly improving over time across all three of our builders. As long term investors, we understand that there will be up cycles and down cycles. We really focus on fundamentals in terms of our businesses. These management teams, whether it's Stuart Miller at Lennar or the management team at D.O. horton or at NVR, they're doing exactly what we would expect them to do in a downturn, which is to lean into share repurchases.

[Cole Smead]

Let me ask you this, Will. When you say the quality of business is improving, let's use Lennar. What do you mean by that? Capital structure wise, how have these businesses changed?

[Will Keenan]

Rather than focusing on what home sales will be in the next few years or what interest rates will do in the next few years? Because we frankly don't have a house view and we can't know the answer to that. We focus on the fundamental business model here. The home building business going back to 1990 was previously highly capital intensive, where they owned the lots outright and they would build homes on the lots that they owned. Since then, beginning with NVR in around the mid-90s after NVR filed for bankruptcy and now finally transitioning to Lennar and Horton, in the most recent years, they have switched to a land light model where they use options, where they have the option to buy the land rather than a huge amount of land which appreciates typically in line with inflation, 2% to 3% per year. They just have options on their balance sheet now, which freed up a very significant amount of cash on the balance sheet as a result. These are effectively now with a spin off of Lennar's Millrose Properties. These are effectively home manufacturing businesses that are high return on capital and just focus on building homes.

[Cole Smead]

Quick counting on that will. So just to kind of like help people understand what you're saying, there is the rough math that we're kind of sharing out is if you get rid of the land, obviously you don't need as much book because the land was a lot of the book in the past. But doesn't it also set up kind of a countercyclical investing period? So, for example, let's say home sales are slower. Okay? So if home sales are slower, I might not carry as much inventory on hand because demand might be marginally lower for, I don't know, three, six months, maybe nine months. So I would sell out my existing inventory, but I don't reinvest as quickly. People are kind of dour about the prospects. Doesn't that give me excess cash sitting around at more cyclical low points in the stock price? I mean, that's my read, but I think that's what. But it's a countercyclical model now versus before it was a pro cyclical model. Is that fair?

[Will Keenan]

Interestingly, another comp to that is perhaps Texas Instruments, which is in a completely different industry. That's another management team that is in a cyclical industry that is willing to invest countercyclically, whether it's Dr. Horton right now or Texas Instruments in 2008 buying fabs. Any management team that is in a cyclical industry needs to be able to and willing to reinvest countercyclically, because that is the best way to drive per share economic value through the cycle. Precisely.

[Cole Smead]

Sure.

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[Cole Smead]

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[Cole Smead]

LLC not affiliated Seamus Nick, what jumps out to you on that question? Anything we missed and just trying to think about the home building business because obviously we get to hear a lot of negatives these days.

[Nick Garcia]

I would say what sticks out to me with this question is if the investor sentiment is low, well then we have to analyze do we want to be do we align with that sentiment or do we have a differentiated view from the general market? I would say a lot of our analysis on the demographics hasn't changed. To Will's point, the business model is improving. I think the lowered investor sentiment actually creates an opportunity for Smead Capital to take that countercyclical or counter view of the general investing market. In my opinion, dour investor sentiment isn't a reason for us to not be in the space. It's actually a reason to be interested in the space and keep continuing doing our work on the space.

[Cole Smead]

Sure. To Will's point earlier, it's those turns. I don't want to belittle this because it's something we've talked about often, but builder confidence is a stat that's put out all the time and every time that hits a low, it's so attractive because when the builders get depressed, it tells you that things are going to be better at some point in the future. You don't get to know when to our discussion earlier, you just know that it's not going to be that depressing for the builders. The other thing too is we touched on this but household formation still carrying at a higher level than building. And I've also thought a lot about in physics, Newton's third law is for every action there's an equal and an opposite reaction. So if we go back and say let's just let me take one of the arguments on its face, okay, so interest rates are going to ruin this because affordability is worse. Okay. So the catch is that like I would point out to people, it doesn't just affect housing. If that's a theory, okay. Now, admittedly we know that we've built, bought and sold more homes at worse affordability. So we don't necessarily believe the arguments true on its face. But let's just again, let's think about the path, let's go down that path and let's ask ourselves certain questions. So we know that when rates rose in 2022, that a lot of multifamily housing, their cap rates went higher. And a lot of investors couldn't go out and finance new projects because the money had become so expensive that the investor demand the cap rates, they just didn't work out. So there was a period of time where we just didn't put any shovels in the ground in multifamily housing. So that's how rates affected multifamily housing. Now, okay, what is the effect of that on single family housing? And the answer is less competition moving forward compared to rates being higher. And so you can kind of build a scenario where if we're light on multifamily, unlike we were when rates were lower, you could see the ultimately the rental price increases on existing multifamily pickup in such a way where it kind of forces the, okay, the home is not affordable, but my rent's increasing quicker than I would have expected. So again, equal and opposite reactions. The equal reaction is affordability got worse in, you know, home builders. But the opposite reaction is it causes tightness in other markets that drive people towards your product. And I think that's something else that I don't think people are necessarily thinking about because it takes time for the lack of rental increases in apartments to then turn around. And then what happens is you have another market feeding the trough of housing that people couldn't see in the near term.

[Shamish Sullivan]

Also, Colt, it kind of reminds me a little bit of Credit Acceptance Corp. Which we own, is all of these builders are dealing with the same thing. The top three have far more tools to put to use the scale, the knowledge to be able to weather these. So every time, like Lennar talks quite a bit about, you know, we're going to build through the cycle, that's what you'd want to see. We want you to, during downturns, take market share because every cycle this happens. Every time this happens, you're just building up more market share and you're slowly consolidating to the point where smaller places aren't going to be able to compete.

[Will Keenan]

I would add to Seamus point, there are material economies of scale in this business with Lennar and Horton gaining such a large share of the market. Bricks and sticks in industry parlance. That's lumber and cinderblocks and the like. The fact that they are buying in such volume can significantly decrease their pricing, further adding to their margins.

[Cole Smead]

Yeah, I agree. The other book, these guys have heard me talk about this a lot. The other book that we did not that long ago with Max Froomes was Caesar's Palace Couple. And so back to what Will mentioned. When you take the property aspect out of an industry, right, which is the land in this business and in the hotel business, it's the actual physical property of the hotel. And in the casino business, it's the casino property and the hotels that go with it. When you do that, what you actually do is it creates a lower cost of funding for the property company. So beyond Melrose, I know I have certain friends that are out there that are trying to build some of these land businesses because there's a nice margin to collect for land. And so there's private operators out there building that and trying to build those up and maybe they go uprate them at some point, I don't know. But I just say that because when you get a lot of maturity in the property business, their cost of capital goes down because investors kind of identify it, know what it's end user for investors is, things like that. But the flip side is the operating companies consolidate rapidly. So you know, think of how many hotel brands there was when I was, you know, nine years old in 1989 and it was a highly fragmented business. And today, I mean like when I say, hey gentlemen, how many hotel companies are there? What would you say is the number roughly?

[Will Keenan]

Five?

[Cole Smead]

Yeah.

[Shamish Sullivan]

Three, four?

[Cole Smead]

Yeah, but I say there's really three majors and five in total. And there's some tertiary brands that might kick up here and there, but versus, you know, I mean, when I was a kid, there must have been 40 brands in comparison. So think about the casinos. I mean, did, did sports betting stop the consolidation in gambling? I don't think it did. That was another Propco OPCO model to Will's point a second ago. We just think that consolidation is going to pick up. Here's what I'll throw out there because I dream wild dreams. I would not be surprised to see a merger announced here in the next six months because again, the best time to do that was when sentiment's low, both for investor sentiment and then secondly the builder confidence has been really low. You get that aligned up with lower consumer confidence. I think that's Kind of like the Holy Trinity for opportune times to go out and buy. Next question is how did we here recently in June look at the short term shock of oil prices with the Israel, Iran and what's now being called the 12 Day War. What would be kind of our highlights on that question?

[Will Keenan]

We were very focused on making sure that our companies were hedging and taking advantage of anywhat has proven to have been temporary pricing increases. I think a lot of our holdings will end up. The ones that do hedge will be hedged through the end of the year. The last point I'll make on that is our highest cost producer now is APA with a $50 breakeven. While we don't have a house view on the near term direction price of oil, we think it's going to be higher for longer over the long term. All of our companies make very robust free cash flow at $55 to $65 mid cycle WTI. We think those stocks can work. By work we mean getting an expected return higher than the index over a full market cycle simply through superior capital allocation.

[Cole Smead]

What else? Nick, Jamie, other things that come to.

[Nick Garcia]

Mind in that question, I would agree. In terms of Will's point of view, our investment thesis isn't based on short term move in oil prices. This 12 day volatility, you know, it comes with commodity markets, you know that's baked into our investment decision. But for our investment thesis to play out, we don't need oil to double. Right? So we have that. That is inherent in our thesis. So I would say the short term movement in the price is of less concern to us than the long term economics of the oil market.

[Shamish Sullivan]

Sure Jamis, I'd second the same thing. When oil was 80 we were geniuses. And now when oil is 60 or whatever, all of a sudden we don't know anything about oil. And why do we own oil? It's like well we own it because we think long term it's going to work. They're good businesses, they're consolidating, they've been disciplined and all the things that we've all talked about that we've been very consistent about. We have the courage to be disliked, right?

[Cole Smead]

Yeah. Back to the consolidation thing, we think that's going to end up being the railroad business. How many railroads we have in America, how many railroads we have in Canada as an example, we think it's going to go along the same paradigm. To connect it back with, I think it was Will talked about return on invested capital early in the podcast in one of his books. That's what we're really getting. We talk about free cash. We're getting attractive returns on invested capital. And in a lot of cases, we're either just paying return, we're just paying what their total invested capital is, or we're paying less. And so, you know, most of this is opportunity cost back to Nick's part earlier is like, okay, what's the outcome like? What's the implied value? And when we sit in a world where the implied value of owning the s and P500 the next 10 years is to plausibly lose money, you have to account for that in making your decisions. Now, admittedly, and you gentlemen know this like anybody, but we don't. We know there's a lot of the people that don't value that outcome at all. They think it's an impossibility. And I know you guys have probably seen, you know, them look at you weird or them look at me weird and say, do you really think that's possible? And by the way, it happened more than once over the last hundred years. But again, they don't think there's a path. And I think we're long term, we love stocks, we enjoy owning stocks. It's who we are. We're stock market investors, as we say. That being said, we have to know the paths and probabilities of what the possibilities are. That is why it's so compelling to be involved in that space. Can't reduce the cyclical commodity risk. It can't reduce people's uncertainty or their willingness to be involved in the business. But ultimately, like Will was talking about, Texas Roadhouse stocks don't know you own them. They compound regardless of who the owner is or they underperform, regardless of the owner is. And the idea that because we're in a minority of the investors out there, it doesn't necessarily mean that that proves whether you're right or wrong. Ultimately, time does. But it'll be. I'm. It seems to be that some people were way too bearish in early April in that business so far. And yet the uncertainty of the world seems to be actually already benefiting those businesses. Let's see, gentlemen, this has been fun. I assume we got to do this again at some point, don't we?

[Shamish Sullivan]

Definitely.

[Cole Smead]

Seamus, Will and Nick, thank you for joining me. To share with 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 podcastmeadcap.com that's podcastmeadcap.com you can also reach out to us on X. Our handle is meedcap. We will give you a shout out next podcast. I know we've had a lot of our favorite listeners have that in the past. Thank you for joining us for A Book with Legs podcast. We look forward to the next episode.

[Podcast Announcer]

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 [e-mail] or by calling your financial advisor.