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- [00:00]
Cole Smead
Foreign.
- [00:03]
Bill Smead
You're listening to A Book with Legs, a podcast presented by Smead Capital Management. At Smead Capital Management, we advise investors who fear stock market failure. You can learn more@smeedcap.com or by calling your financial advisor.
- [00:21]
Cole Smead
Welcome to A Book with Legs podcast. I'm Cole Smead, CEO and Portfolio Manager here at Smead Capital Management. At our firm, we are readers and we believe in the power of books to help shape inform 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 December 30, 2024. It's our fourth quarter book list where we talk about books, books and more books. Hosting this with me is our Chief Investor officer and chairman, Bill. Bill Smead. Dad, thanks for joining me.
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Bill Smead
Glad to be here.
- [01:02]
Cole Smead
So let's start out as we normally do. What have you been reading lately?
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Bill Smead
Well, I've been reading a totally fascinating book called Bubble in the sun by Christopher Knowlton. I don't know if.
- [01:14]
Cole Smead
Oh, this is what you read?
- [01:16]
Bill Smead
I'm almost finished with it. Well, yeah, and read Technology Revolutions and Financial Capital by Carlotta Perez.
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Cole Smead
And what's that about?
- [01:26]
Bill Smead
Well, it's a whole theme that we're working on. The evidence to us in our work is that this is the fourth major financial euphoria episode of the last 100 years. So our reading seems to be taking us to trying to learn about the other ones so that we can handle this one better than we might have handled it if we weren't very familiar with the way these things play out.
- [01:51]
Cole Smead
Sure.
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Bill Smead
And so. And of course, we did Brett Gardner's book on Buffett's early investments, which is spectacular. I keep complimenting everybody to read that. He did an incredible job of research to do that book, which makes it even more impressive. And it connected up with a bunch of things that I knew about from reading books about Buffett in years past.
- [02:15]
Cole Smead
Wayne, really quickly on that because I agree with you. So I just think of all the work he did to compile that. Now, if you're watching this podcast and thinking, like, why in the heck do these guys do this? I mean, we can attain that information for $35. I mean, the arbitrage there. Brett spent tons of time and the fact that we all as humans can take and capture his information and the value of that at $35 is absolutely fantastic. And by the way, what a great system we live in. Capitalism is Amazing. I hope Brett makes a million dollars off that. That'd be wonderful. But I just say it because I was sitting there thinking, what time would this have taken me to compile that data and go back? And it's like. Cause you could kind of. You can see traces of that in certain places, but to be able to get it in one place is incredible.
- [03:11]
Bill Smead
Some of it, you know, I'd gotten out of books about Buffett. I'd gotten some of it from books about Ben Graham. We just ran into a Ben Graham ism this last couple of days that I hadn't thought about for a while, which was, in the short run, the market's a voting machine. In the long run, it's a weighing machine. And it's good to get reminded of things like that. And so Gardner's book did a fantastic job to put the meat on the bones that you needed to really step back and think like Buffett did in about a 12 to 13 year stretch.
- [03:47]
Cole Smead
Yeah. The other part of the book that was interesting was his success was not foreknown. In other words, it's not like people sat down in 1960 when they met Buffett and were like, oh, my God, you're gonna be the greatest investor of all time. They later recognized that when his cumulative advantage had been built to where it was, obviously he had done something discernibly different. But. But at that time, we have this chronological snobbery. We look back at the past like, well, duh, I mean, you met Warren Buffett, but when you met Warren Buffett in 1960, you didn't know that. And like he said during the book, one of the guys kind of mocked, oh, this is the guy from Graham's firm. Kind of like, oh, why are you giving me this really stupid person again? And just think that person was saying that about Buffett. And so I think you don't recognize genius until it's after it's happened.
- [04:41]
Bill Smead
Well, and here's the other irony. I get a real irony thing out of this. First of all, everybody knew he was a smart kid.
- [04:49]
Cole Smead
Yeah, right. So he's very smart academically, aptitude wise.
- [04:52]
Bill Smead
Yeah, academically, he was a really smart kid. His dad was an admired man. He was a congressman. They lived in Washington, D.C. for a while. And Omaha is kind of the New York City of the Midwest. It's got a lot of connection to the East Coast. But then also in the books about Buffett explains it. He was going to the horse track and Axar Ben. And what he did was he created a tip Sheet. So he figured out how to make money from the racetrack without actually having to be right. But he did have a tip sheet so people would buy his tip sheet. So his advice, that means he was handicapping the horse races in his teens and selling the tip sheet. And what that shows is an incredible urge to like taking risk. Right. In the stock picking world, if you don't like taking risk, don't come here. You have to like it. You have to like it. And you have to love the urge to put yourself out there and look completely stupid in the effort to make multiples of your money over a long period of time. And that's Gardner's book. Did a great job of showing how that developed from the tip sheet to the education to working for Newman and then into the early ideas that he made money on.
- [06:17]
Cole Smead
Yeah. Let's see the other book that we read recently there.
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Bill Smead
Yeah. Wilbur Ross, Risk and Returns. That is just such a great book. I've now told the story about the Dakota Apartments probably 40 times already to people. Wilbur Ross lived in the same Dakota apartment in New York that John Lennon lived in. And the story about David Geffen, the music exec, one of the most admired people in the entertainment industry, figuring out that they had to put a memorial in Central park that they call Strawberry Fields so that the 2,000 people that were coming to their apartment complex every day to honor John Lennon would move to the park so that they could come in and out of their AP complex. Was that's just as good as it gets.
- [07:07]
Cole Smead
Well, yeah. And I think the other thing, what was fun about reading Wilbur's book, I think it gives. He did a very good job of really previewing the coming Trump administration, which is something. That's one of the questions we'll talk about later that I know someone had brought to us for this discussion today. But I think the other thing too is in this era where everyone's like, you know, Bob, you just gotta buy a quality business and you just kinda sit on it and the game's easy and that's all we ever have to do. Well, guess what? Wilbur Ross made his money in cyclical industries, in bankruptcy court in a garbage pile. The opposite end of the spectrum. And by the way, did it in businesses that people thought would. I mean, the coal business is one of the places he made money. So I point that out because it was just refreshing to be reminded that it wasn't always like this, for better, for worse. And obviously I use even Mr. Ross. Would someone have sat down with Wilbur when he was 20 years old and been like, yeah, this kid is gonna be worth a lot of money someday and have a lot of success and be known. That was not foreknown in his life either.
- [08:14]
Bill Smead
And also your business career is a marathon, not a sprint. So there were lots of interludes in there. But Cole's right, but he chose to be extremely effective in an arena that most people of his educational background and social status did not want to get heavily involved in. Therefore he got higher returns out of that because of the lack of competition. Cause what's the key to success, Cole?
- [08:44]
Cole Smead
It's weak competition. It's weak competition. Yeah. And obviously now that Palm beach is like, it's where you go if you want to do politics these days, right? So I say that because obviously Wilbur lives in Palm Beach. He's in the center of that. I will say Wilbur has a strong shoe game. Those Palm beach leather loafers he wears I'm quite a fan of. So I haven't bought him yet, but I'm itching. Let's see. So a couple books I've just done. Can't Deny it by Doug Terrison, the former oil analyst at Morgan Stanley. He is writing this kind of looking back at his personal career. He is a Louisiana boy who worked on shrimp boats and ended up on oil rig and just incredible history. He talks about the super majors merging in the late 90s. He talks about the idea of what he called pledgers. In other words, you're pledging that you're going to set return minimums in your oil business, which obviously didn't happen. Most of the industry was unwilling to do that. Now here's what was interesting. I'm like reading the book thinking like, I don't know Doug. I wonder what he's going to say at the end for today. And I'm not gonna give it away to our listeners cuz you should read the book. And I'm sure we'll end up having a conversation with Doug. But Doug thinks just like we do.
- [10:04]
Bill Smead
Well, it's funny you mention that because in talking to people I try to explain why Philip Morris was the best performing stock of the last 50 or 60 years on the New York Stock Exchange. And it's because they sold way less of the same thing at dramatically, dramatically higher prices because of the moral shame that they put on everybody associated. And it's an addictive legal drug. Cigarettes are an addictive legal drug. And inexpensive energy is an addictive legal drug. The world functions on fossil fuel energy because it is the least expensive form of energy.
- [10:56]
Cole Smead
Yeah. The other book I just got done with this week, actually, the Power and the Glory by Adrian Tenneswood. We've talked a lot about how insane the second home, luxury home, community kind of thing on second, third and fourth homes is. Well, his whole book is about the wealthy people in the English countryside from about 1870 to 1914 up to the. Up to World War I, which I would argue was the end of the Gilded Age, was the end of the monarchies of the beginning of the end of the monarchies of Europe, et cetera. And what I appreciate about wealthy people, the past is they have the same problems they have today. They have mistresses and infidelity and money problems and children who aren't calling myself not included. We don't have that. But I say it because I asked him, I said, Adrian when I was. Cause we just got done doing a podcast with him. I said, adrian, you know, in my reading right now, I kind of felt like I got a little. Stayed like I kind of got stuck in a rut. And I said, your book was great. Cause it was so eclectic. It was like a social history. And I said, but just the gossip alone was just kind of intriguing to hear what's going on. And Adrian goes, I love the gossip.
- [12:10]
Bill Smead
It makes you want to watch Maggie Smith some more, you know.
- [12:14]
Cole Smead
Cause, well, he commented on Downton Abbey because parts of that, you know, haven't. But here's what I will say, you know, never forget those houses were never owned by those families forever. Yeah, okay. And I think the most damaging thing is the idea of permanence in this life. Oh, it's always gonna be that way, you know. You know, I think, for example, one of the Rothschilds actually created Palm beach back to kind of connecting up with Wilbur and. But again, there's no permanence to this. And I also think, you know, if you read that book, you'll recognize that, you know, you could be wealthy and you could be miserable at the same time. Couple other books. Start Thinking Rich by Brad Klontz. I'm not a big fan of self help books. Brad does a good job explaining what kind of good mindset someone that has, you know, builds wealth does, which would be like delayed gratification, for example. We talked about that. But something else you should read is book four or something I think is really valuable for people is retirement is overrated. It's not good. We weren't made for it. And in many cases people do a lot of either financial damage or personal damage to themselves because ultimately we're here to work. You know, I'll use the biblical example. God worked six days and rested a seventh. That was 85% of the time. You know, go do the math on your life. That's a pretty good way to think about it. Couple others. White Shoe by John Ahler. All about the big. What are now today, the big firms. People like Paul Kravitz at that time. It does a great job of talking about how lawyers, before conflicts were around, could have way greater roles. For example, Sam and Chase of like Chase bank fame was a lawyer, Ohio senator, governor. He was also the treasury secretary under Lincoln. Lawyers played much bigger roles in a prior world because they had no conflicts ultimately. And as conflicts arose, they had to disperse the legal work to more places. But John's got a great history of Sullivan, Cromwell, all the big white shoe firms. And then the other one that I want to mention is all the President's Money by Megan Gorman. We had Megan on the podcast. She was great. Did you know Thomas Jefferson died poor?
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Bill Smead
Well, a lot of people died poor back then.
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Cole Smead
Well, no, he just like. I mean, he was wealthy for much of his life, but he was always scared of the problems he had with money. And that was not unique to him. And so I think it's always helpful to look at the whole human and it just reminds us that, like, what it takes to be president is you gotta have a zeal for wanting to do that. As we can see, you gotta go.
- [14:58]
Bill Smead
As big as the earth.
- [14:59]
Cole Smead
You gotta believe that you could be ultimately the leader of the free world. And what drives you to do that, it might have nothing to do with financial wisdom. It might have nothing to do with the personal wealth you've built up. So the idea that financial success and being present are integrally tied to is not historic, it is not normal. And she does a great job of telling of how that manifests itself in various different presidents over time.
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Bill Smead
Yeah, when you think of Jefferson, we idealize the good things that the best presidents did.
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Cole Smead
Well, romanticize it.
- [15:34]
Bill Smead
They romanticize it. And it was a rough and tumble world then. And you know, people forget this these last two elections. People forget for the first 70 year history of the United States of America, you had to be a landowner to vote. So when I hear people peeing and moaning about the electoral college system, I mean, they just sat down, they said, well, wait a second, we don't want the two most populous states in the union to elect the president every time. So they put that into place and it's still working now it's still working.
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Cole Smead
And it's still represented by land. Because obviously if your mom, Montana, your land per person is insane compared to other states, and therefore your land actually decides part of your power.
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Bill Smead
Yeah, exactly. So it's an interesting thing to romanticize. I mean, think of President Carter, one of the most decent people that's ever been president of the United States, a very admirable guy and also an incredibly smart guy. I mean, nuclear physics background and military background, et cetera, et cetera. He successfully got elected president, did not get reelected, but yet we remember Roosevelt got us through the Depression. Well, if you talk to my dad, he'll tell you he thought he was terrible, but he got us through the Depression. And so everybody think, oh, Franklin D. Roosevelt, he was the bomb.
- [17:13]
Cole Smead
Yeah, let's see. So let's pivot to what we're reading. You mentioned Bubble in the Sun. Could you kind of teach us about the book and what the background is?
- [17:20]
Bill Smead
This is fantastic. Christopher Knowlton has written this book and what it does, it takes you through the twenties as the land was developed into hotels and places where people could go in Florida. It reminds me of the way it is today and yesterday here in Phoenix. My first trip to Phoenix was a Drexel Burnham incentive trip at the Arizona Biltmore, about a mile and a quarter away from here. And I played golf. It was 75 degrees. I got done golfing. I went to Cole's. Mom was sitting by the pool. I said, honey, this is robbing from nature. So what these land developers did is they went down Meisner Fisher, these guys, and they set up so people could go rob from nature by going where it was warm in the wintertime from the East Coast. Well, my first incentive trip in Florida was at the Breakers Hotel in Palm beach, one of the first hotels developed in this book. And sat and watched the Geraldine Ferraro George Bush Sr. Vice presidential debate with I.W. burnham, the founder of the company. I was working for Tubby Tubby Burnham, who had started the company in 1935 in the middle of the Depression. And then one of our. Not too long later, the Boca Hotel and Club, I did it. We had an incentive trip down there also. And so reading this book and finding out who built these hotels, who developed this, how it got to be a mania. It got to be a total mania. These people were buying raw land and selling lots just like hotcakes and so forth, and how important that actually was to developing the circumstances of the depression because 15% of the American population was speculating in Florida land. And in the common stock market, only 1.2 million out of 118 million people were owning common stocks at that time. So they make it sound like. Cole and I have talked a lot lately about how dangerous the current situation is because the wealthiest people all own common stocks up to their eyeballs right now.
- [19:44]
Cole Smead
And the largest wealth concentrations of wealth are in the stock market.
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Bill Smead
Exactly. So if we get into difficult markets for an extended period of time, it will probably have a very big dampening effect on the overall economy because they are. My age group is spending like drunken sailors on leave especially.
- [20:06]
Cole Smead
Well, we talked about it in light of comparing. If someone says, okay, what was the Most like the 29 bubble? Well, if you look back 100 years, Japan was actually a lot like the 29 bubble. It was a euphoria in both land and stocks in a country versus we've had euphorias and stocks, obviously, like 99 was euphoria in stocks. But we did our land bubble, you know, ultimately, about seven years later. Yeah, we did our land bubble. About seven years later. We peaked it. At least I should say. And so we. At least, you know, we're a little more discerning in our bubbles. Yeah, but we talked about it in light of what was so damaging about 0809 is that the average person was tied up in the euphoria in real estate, which is why it was so devastating economically, why it was so devastating to banks and credit, et cetera. Now, if you look at today, you know, we think there's a euphoria in the stock market, as we talked about, but if you look at the percentage of homes that are owned outright, it's never been higher.
- [21:14]
Bill Smead
Never been higher.
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Cole Smead
If you look at the equity in homes at large, it's never been higher. If you look at the average income of a first time homebuyer, it's ever been higher. You look at all the things that you would normally get bothered by, and they're great. Now, to Bill's point, that doesn't mean you can't have problems. The question is, what's the gravity to your problem?
- [21:30]
Bill Smead
Cole and I have a good friend who for a while was a mortgage broker for JP Morgan Chase. And I used to check in with him during that silliness to find out what was going. He had a $25,000 income, single adult woman who was trying to buy an $850,000 horse ranch in Issaquah. Okay. So it's like none of the numbers worked out. And then the other thing that was humorous at that time is Cole's school, Christian School. They had a radio station. I used to listen to the radio station and they were running an ad where the mortgage company says, the future belongs to you. In other words, if you borrow this money, the future belongs to you. And we used to laugh about it at the time because it's exactly the opposite. The future belongs to the people that don't borrow that money right now because it ended up a hellhole.
- [22:27]
Cole Smead
Hi, I'm Cole Smead, CEO and Portfolio Manager here at Smead Capital Management and host of this podcast. If you enjoy this podcast, I'd like to invite you to check out out smeedcap.com at our firm. We are stock market investors. We advise investors who fear stock market failure with a discipline that has proven success over long periods of time. Learn more about our funds@smeedcap.com past performance is not indicative of future results. Investing involves risks, including loss of principal. Please refer to the prospectus for important information about the investment company, including objectives, risks, charges and expenses. Read and consider it carefully before investing. Speed Funds distributed by UMB Distribution Services llc. Not affiliated the book I'm reading right now is called Capitalism Without Capital by Jonathan Haskell and Stan Weslake. It was published. This is about a six year old book. The reason why I want to read it is because you know the idea of I'll call it Asset Light. I'm not saying it was new in 2018, but it's not as over informed as it is now. And they argue through the book how much the economy has changed, how much business has changed, et cetera. Now I would argue on some levels that ultimately what we've done is we're in Adam Smith's specialization. So what do you do? The consultant from Bain or whoever comes in and says here's the deal, you got a good business, but here's the most capital intensive parts of it. Let's outsource that to someone else. And by outsourcing those functions to someone else, they can be more efficient, thus driving better returns in that business. That's less meaningful from a return perspective than the thing you get to focus on. So I'll use our business right. You know, there's, there's a lot of things we outsource because can we drive great scale and gains and benefits from that? The answer is no. And so we are accruing higher margins in what we do by focusing on, you know, the most valuable things to our business. Now that sounds great. Everyone's doing that. The question is can you. What's that?
- [24:31]
Bill Smead
What's the limit set? Well, use our home builders. They're offing the development of the lots to someone else.
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Cole Smead
Correct.
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Bill Smead
That makes a lot of sense because that's where all the capital's tied up. And the worst cyclicality in the industry is attached to the money they used to borrow to own raw land and to turn it into buildable lots. And they made their money selling the lots at a premium and by putting a house on it. Now they make all their money by putting a house.
- [24:57]
Cole Smead
Yeah. Here's the issue I have with the argument is I think people have got up, trapped up in the idea of, okay, why do you want a business that needs less capital? Because historically those produce higher returns. Okay, well, the weird part to today is you can go look at businesses that don't need a lot of capital and they're not producing any returns and their returns on capital low.
- [25:20]
Bill Smead
And there's, there's companies that are capital more capital intensive, that are producing better returns, that are producing better returns and nobody wants them.
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Cole Smead
Correct. So, so, so it's, you know, it's.
- [25:31]
Bill Smead
Because there's no, there's no stock picking left. I mean, but virtually.
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Cole Smead
But the business returns haven't anything to stock with. My, my point is just that there, there's, it's one thing to say, hey, we could be early on in an era where secularly businesses are going to transition to being more asset light. To your point where that's gone on in the home builders. I mean, if homebuilding is doing it, who doesn't know it in the economy? But therefore, what kind of return streams once the chips have all settled, are you getting. And it is actually not giving as much advantage to the asset light businesses that are either being created today or are in place as much as you'd expect.
- [26:06]
Bill Smead
Scarcity creates value. Scarcity creates value.
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Cole Smead
Let's see. So let's pivot to books that you haven't started reading yet.
- [26:15]
Bill Smead
Yeah, I just got recommended this Coming Apart by Charles Murray. It's the state of white America from 1960 to 2010. And I just, I read the first little bit of it just to know that I'm going to like it. And so I've been thinking about this a lot lately. You know, when you get to be 66, I'll be 67 years old. There's such a tendency in April, in April, there's such a tendency for guys like me to kind of like, well, things were better back then, you know, the good old days kind of thing.
- [26:50]
Cole Smead
By the way, when Bill says tendency, they do it.
- [26:54]
Bill Smead
Except I'm not a guilty guy. Because the beauty of it is I remember exactly the kind of things that totally irritated my dad. Yeah, okay, so the perfect example of that was one of the big post. What was the big rock concert out in the field in New York?
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Cole Smead
Woodstock.
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Bill Smead
Woodstock. In the aftermath of Woodstock, there were a number of these concerts that occurred around the country, including one in my little hometown of Washougal, near the Washougal river, the Sky River Rock Festival. And a lot of the major bands came. And my dad was so upset. And the reason he was upset was he thought. And by the way, he was correct. He would have made a lot of money being long this trade that. That was going to introduce a lot of drugs to our little communities that had never been there before. And to this day that community's been suffering. So what he saw was a. A very damaging decay factor that was developing in our society. And so I'm reading this and you know, I grew up as a Sunday school kid. Red or yellow, black and white, they are precious Indesite. Jesus loves the little children of the world. Okay. That's my mentality. We're all, you know, but watching what goes on in our society right now between. Look at the TikTok debate. Just today they're working on TikTok, trying to get China out of TikTok. Why? Because kids are absorbing a massive quantity of this stuff and I'm not very sure that it's good for them. I'm not sure that you shouldn't stop kids from having access to a lot of this media until they're, say, 16 or 18 years old. Because I just don't think young minds are able to keep up with how sophisticated and manipulative a lot of these media devices are.
- [28:58]
Cole Smead
Let's see. So the book that I'm about to start is called the Hopeful History of Uranium by Lucy Jane Santos. It's a brand new book that she just published. I'm digging into it because if someone says, cole, what's the history of uranium? I would say, I know that the Hanford nuclear waste site is in eastern Washington. I can, I can tell you about Oppenheimer, but I can't really tell you the history of uranium. So I'm really looking forward to that.
- [29:29]
Bill Smead
A Whitman grad was very involved in why that's there.
- [29:32]
Cole Smead
Yeah. So let's see. So some other book recommendations we had. I checked in with superfan Steve. If you're out on X, he's. He is At Steve is at. I want to say it's az. No, no, no. Steve is like Labrador something. Anyway, for some reason I don't have it here in my notes, he talked about the Caesar's Palace Coup by Mark Frumez and Sajit Indep. He said that Munger had mentioned this in the 22 meeting. Okay. And I think it's what happened with Caesar's. The debt used to take over Caesar's, et cetera. So that's something I want to throw out to our listeners. Chase Emerson, a friend of our firm at AZ Land, investor on X. He mentioned Common Stocks and Common Sense by Edward Walkenheim iii, which a lot of people are aware of. That book. The other one he's reading is Four Loves by C.S. lewis. We're big C.S. lewis fans, so always, always interested in anything C.S. lewis writes. Let's see, the other recommendation we had from someone anonymous on X came to us. It's called the Demon of Unrest by Eric Larson. It's a book of the early stages of the Civil War that was recommended to us. And so I want to throw that out there and thank them for sharing that title with us. So let's pivot now because I want to ask. It'll be a bigger question, but I kind of want to hit topically on a couple of different things. So the question we get a lot of in the last, you know, 60 days, you know, around the election and now since the election has been around, like, what's the impact of, you know, at first it was, you know, depending on who wins. And then the second question has been, you know, what's Trump's impact, you know, as we move forward and what's Congress's impact? So I wanna kinda hit a couple different facets to this. Cause obviously there's certain ones that our mind go to. But let's just start out with, like to ask that question in light of the federal budget, the federal deficit, the federal debt. Let's kinda start there as the question of, you know, what's our view and take and opinion on that. And then we'll go to some other policy stuff I think would be good.
- [31:39]
Bill Smead
Yeah, well, I'm the wrong guy to ask this question because the day after the election, when the market exploded to the upside, I was reminded, of course, that I went through that with Ronald Reagan in 1980. Now that was at the end of a miserable 12 to 15 years in the stock market, high inflation for an extended period of time, very tight credit. The first of two recessions back to back in a three year stretch. And Reagan got elected and the market exploded 21 months later. The market's down 22% this time. And equity ownership, household equity ownership was at historic lows of only 8 or 9% of Z1. Federal Reserve household assets in common stock, direct and indirect. So then fast forward to today were at record high equity ownership. People thought inflation was defeated until we saw the dock workers and the machinists get 8.5% compounded four and six year wage increases and a $10,000 signing bonus for the machinist. Watch the Starbucks union if you want to keep track of what inflation's going to do. And so the, the contrast is we are at a polar opposite of what you get paid. What you're gonna get paid on a bet on American exceptionalism is the lowest point in a 50 year timeframe. Our exceptionalism, as exemplified by the enthusiasm for a pro business oriented president is very low. What you can get from betting on that over five to 10 years is the lowest it's been for decades.
- [33:35]
Cole Smead
Yeah, so let me add a couple things on that because I think people are, I would say either conflating or obfuscating in that they're associating policy decisions that may be helpful to the economy to mean there's automatic transferred success into corporate profits and thus stocks. So for example, do I think that there are analysts out there saying, well, if the Trump administration can get us from 21% down to 15% tax rates, I can add a point or two on the PE ratio of the S&P 500. We know they're doing that. They started doing that as soon as the election took place. Now that's like looking at all the good things in life because it's all a positive feedback loop. Hey, inflation comes in a little light. Hey, that's great for stocks. Hey, inflation came in a little tougher. Hey, that business is going to pass on prices. Anything that happens, it's all positive. The catch though is that in the long run, what the risk free rate yields is a problem or it's a benefit. One of the two long term, the risk free rate goes down. You look like a frigging genius owning almost anything, including bonds, which don't tend to do very well.
- [34:53]
Bill Smead
Net inflation rates float when rates go way down.
- [34:55]
Cole Smead
Correct. And we're all sitting around dancing victory laps while we sit on massive debts, we sit on massive deficits and the ability for the treasury to fund is getting shorter and shorter and shorter. And yet we think the end of the story is and they all live happily ever after. Amen. Praise be the Lord.
- [35:17]
Bill Smead
Yeah. So you don't think about this from a stock market standpoint, but you think of it from a humanity standpoint. In 2011, we thought the seven men that ran the command economy of China were the most.
- [35:33]
Cole Smead
The Politburo.
- [35:33]
Bill Smead
The Politburo was the most brilliant people in the world at the height of the brick trade in 2011. Today, there's a billion people in China. We think the Politburo is the dumbest bunch of people in the history of mankind.
- [35:45]
Cole Smead
We being the people at large, the consensus of people.
- [35:47]
Bill Smead
The consensus of people is that they're dumb. They're never going to come back. How are they going to get out of this terrible circumstance? Well, guess what? Give me a billion highly intelligent people in a society that values education and I'll give you some real good outcomes over say, a ten year time period. Now, we can't buy it because you don't own anything. There's. But you can own things that will benefit from the Chinese comeback, okay? Which is mostly surrounding commodities, oil and gas and other things. By the way, you sent out a thing about there's more coal being used now in 2024 than ever in 2024 than ever. And that will even get greater because China is coal fired, Japan is coal fired, Germany has coal fired, et cetera. So that's a good bet. There's a great risk reward relationship on that. And then the opposite of that risk reward relationship is betting at 27 times earnings that on an earnings yield of less than 4% that over 10 years, you can make more money owning the S and P than taking the guaranteed 4.545 from the treasury rate and get state income tax free on that. Is that somebody calls me, says, okay, I'll give you $100,000 the S&P 500 index, or I'll give you $100,000 treasury at 4.5. I won't be able to say treasury fast enough to make myself happy.
- [37:22]
Cole Smead
Well, yeah, and then like going back to it makes you think of Gardner's book. A lot of what we do as investors from a broader perspective, like Buffett has to do for the internal workings of Berkshire, is you have to ask yourself, where do I get paid enough odds to take risk relative to the risk free rate? There is not enough compensation to go out and take a longer odd bet. The safe bet is the most attractive bet if you have to be widely diversified. Now, full disclosure, Bill and I, we are not widely diversified. We own two portfolios and those are concentrated portfolios and we're taking different bets, if you will. But I just say that because most people, back to Bill's earlier point of like taking risk, the idea that the stock market was made to get everybody rich, that's one of the most damaging parts of this psychology. In other words, like, you know, it's like everybody's going to wake up, they're going to buy a common stock, an index, a portfolio of whatever, and they're all going to do well.
- [38:25]
Bill Smead
Yeah. So in 99, 2000 at the dead flat top, 30% of the stock market was completely goofy, ridiculous, which was capitalizing that the Internet would change our life, which it did, which they were right about. But they lost their soul and they lost all their money betting on that.
- [38:50]
Cole Smead
At the end of May, the volatility was more than they could take.
- [38:53]
Bill Smead
So at that time, 70% of the market was fairly or cheaply valued and 30% was as ridiculous as it's ever been. And this time, 70% or 80% of the market is as expensive as it ever gets. And only 30 or 20% of the companies in the S and P are actually providing a good risk reward relationship. And that is, that's why they say, well, Bill, this is a lot different than 99. Yes, yes. This is more all encompassing. It's got the 60 times earnings, Costco and the Bitcoin and all the blue.
- [39:33]
Cole Smead
Chips are going off at dot com numbers.
- [39:35]
Bill Smead
Yeah. All of the wide moat high quality growth stocks are going off at multiples that cannot work out over 10 years.
- [39:46]
Cole Smead
We hope you're enjoying the podcast. You know, we work hard putting together this show, but we work even harder for our investors at Smead Capital Management. At Smead, we believe in disciplined investing, which is why the SMEAD funds have a proven track record of long term outperformance. If you're an investor who fears stock market failure like I do and want to invest in wonderful companies to build wealth, we invite you to visit smeedcap.com Past performance is not indicative of future results. Investing involves risks, including loss of principal. Please refer to the prospectus for important information about the investment company, including objectives, risks, charges and expenses. Read and consider it carefully before investing. SMEAD funds distributed by UMB Distribution Services llc. Not affiliated. I want to come back to one thing as we start on the deficit. Scott Besant was talking about where they'd like to get the deficit to. He said their goal is 3% four years from now. And I was listening to Jason Furman shout out to Tom Keene, he was. They had Furman on surveillance and Tom Keene asked Jason Furman a question around the difference between him and Mankiw. And Mankiw was at Harvard and Mankiw is who wrote my economics textbook in college. So I have good thoughts of Mankiw. But he was asking the question around what the deficit is. And Furman said, I think he based this on the CBO estimates, which if the Trump administration is gonna criticize the CBO estimates is they produce numbers based on low growth. So it's like 1 to 2% growth, which according to the Trump administration, they're right on this, that they did not produce that lower growth, therefore they could cut taxes and growth was stronger than that. So debt to GDP contracted. But Furman said this. He said if the CBO estimates are right, we won't end up, if we renew the Trump tax cuts, we won't end up with 6 to 7% GDP deficits like we have. We'll end up with 9 to 10%. Okay, so like the fly in the ointment would be, what if we have a recession? Finally? Did I just say that we could have a recession at some point? What if we had a recession at an ill timed moment? Right. Just one of those things you can't expect at an ill timed moment where even though we're trying to do the right things in the economy from a policy perspective, for the government to cut taxes and whatnot, that it actually drives short term deficits that we've never seen, what kind of pressure does that put on the funding of the risk free rate in the bond market? I think we're gonna see. I think we're gonna see one for the record books in terms of scaring the hell out of people. Because again, the idea that government is gonna be any better than any of us managing that, that's just foolish. And the security behind that is foolish too.
- [42:30]
Bill Smead
And that brings us to what was on TV today, which is talking about what the Federal Reserve just did. And again, we're at the low point for thinking what the seven politburo people can do. And we were at the high point recently of what they thought the Federal Reserve Board members in the United States could do. And both sets of them are as well educated as any set of people in either China or the United States. But the Chinese ones are never gonna be right about anything. And the US Ones are gonna be right. And you wanna be short the US Federal Reserve and you wanna be long the Politburo.
- [43:08]
Cole Smead
Yeah, let's see. So the Other topic I wanna talk like the idea of antitrust. The well known fact as of right now is that the Trump administration is gonna be so much more business friendly and business is not gonna have any trouble with the Trump administration at all. How would you look at that? Bill, obviously know that Lina Khan's on her way out, but at the same time we have an FCC leader who's coming in that doesn't exactly like big tech companies censoring people. Or we have JD Vance who is more of a Josh Hawley antitrust thinker.
- [43:48]
Bill Smead
Yeah, yeah, I wrote a piece this week. You can get it@smeecap.com, don't trust antitrust. Albertsons and Kroger were going to merge. One of my good friends from college, shout out to Bert, is an expert grocery industry consultant for 40 years and he tried to explain to the FTC that if Kroger and Albertsons merge, it's to gain scale on logistics which would allow them to provide lower prices. And they got rejected for monopoly concerns because the feeling was if they merge it was gonna raise grocery prices. Their market cap combined is 49. Those two companies is 49 billion dollars. Walmart is 750 billion and Amazon is 2.4 billion. Who has been cutting to kill for the last 15 years in the marketplace. And what the Federal Trade Commission just did was stopping any effort to get in their way, which should have happened a long time ago because they were already violating the spirit of Sherman's Antitrust.
- [45:11]
Cole Smead
Act right from the get go, I'll call it. It puts non scaled businesses in a position of being weaker to survive. Whatever tumult comes about in the future.
- [45:20]
Bill Smead
It just makes it very incredibly difficult. And so that fact. So Lina Khan actually had the support of Josh Hawley and the support of Cecilini. Yeah, Cecillini, the head of the House Judiciary. But the crazy Senator lady Warren. Senator Warren, they were in agreement.
- [45:47]
Cole Smead
Sometimes known as Pocahontas.
- [45:49]
Bill Smead
Yeah, when you, when you put Senator Warren and Senator Hawley together, you got to stop and think, well, wait a second now, by the way, she actually has a lot of good ideas and forces people to think about outcomes that they hadn't thought about. So she's got her strengths. Okay. And by the way, I admire her. Anybody that does government and public service, we all should thank them and admire them and pray for them because it's a terribly thankless thing. And if they get their jollies by being on TV all the time, more power to them. But the point is that we now have seven companies that are the most massive concentration of capital in vast combinations that we've ever had in history. We got in the way of Standard Oil, we got in the way of AT&T, we got in the way of IBM, we got in the way of Microsoft and now we have not got in the way of these seven companies.
- [46:49]
Cole Smead
Well, and during, as I read from White Shoe, we got in the way of the steel trust that JP Morgan built up which was all put together in a trust era. Obviously Teddy was involved in that and Taft followed that. And by the way, just to show how important it was, Taft went onto the court later after being president.
- [47:09]
Bill Smead
Yeah. And by the way, the, these top tech, the people that run these magnificent seven companies are going and kissing the ring.
- [47:18]
Cole Smead
Yeah, they're kissing the ring.
- [47:20]
Bill Smead
A million dollars for the inaugural party and kissing the ring and sucking up to Trump because they've had all power, they have owned, the Biden administration, literally owned it. And because they own that now, they've gotta go try to own this set of public leaders.
- [47:38]
Cole Smead
And ultimately they're playing on the fact that humans love money and they got lots of money, particularly stock based compensation. And that's the easiest way to get people to dance and do anything you want. Let me pivot to another discussion because the other question we've had a lot around the Trump administration is the idea of drill baby, drill. As we've talked a lot about, we have trouble finding, you know, supposedly who's going to drill because, you know, unlike some people believe governments don't drill, they just set policy that allows other people to do things. And so at $70 a barrel, that would be like saying someone's going to wake up being willing to collect a net $56 from federal lands to get a barrel of oil, which you'll be really hard pressed to find anybody that makes a meaningful profit on new Capex at that.
- [48:29]
Bill Smead
If you're, if you're a large oil and gas company, let's say larger than $50 billion market cap in the United States and you've got a choice of poking holes in the ground or buying one of the companies that trades at less than $20 billion market cap, that you can get all their oil at a much lower cost per barrel. Why would you, why would you poke holes?
- [48:56]
Cole Smead
Yeah, and I think, you know, people forget that we are the largest non OPEC producer from a growth perspective, looking back 20 years, we've actually, if you look at the global aggregate demand and said, where did the demand of the last 20 years come from? It was The United States of America. We created all the supply to meet that demand. Now the catch is that we are either in a no growth or just the lowest growth we've ever had in 20 years from a production perspective. And if you look at the other eras where prices had to move higher to incent supply to meet the market, it was where non OPEC production curtailed or declined or flattened. And so this is a supply curve function. Supply is not growing. Anytime we get the business where no one's growing supply, like in oil, like in malls, like in home builders, you just get really interesting dynamics when no one can predict the future. But yet at the same time you have a pretty good certainty around supply and you just don't know when that's going to benefit you. And that's the season you got to be in. Because you know, we knew supply of homes were large coming out of 0809 but you couldn't have predicted that supply was going to grow this lethargically.
- [50:13]
Bill Smead
If you take the $7,500 tax credit out of buying an EV, which by the way one of the, I think Ford or somebody just announced that they're slowing down the electric truck. Right. The demand just isn't there. So the reality is that the revolution to having 30% of the vehicles being driven on electricity is not happening.
- [50:44]
Cole Smead
It's dying in the new car market.
- [50:46]
Bill Smead
Which by the way, the lack of quick adoption of EVs is probably one of the reasons behind Nissan and Honda merging because everyone in that industry is having to reorient themselves now to the new reality. And what's happened is three to $4 gasoline has made those unattractive. $6 gasoline made them attractive on a relative basis. So therefore we have got one hot mess going. By the way, the price of electricity is going to explode. 40% of electricity is made with natural gas. Natural gas hit 350 today. Eight months ago it was a dollar eighty and we wouldn't be surprised to see ten bucks at some point here. By the way, they announced they're going to start a nuclear reactor and that utility stock goes up 20% in one day. Whereas the chance of filling the needed electricity as we shut down coal fired plants by anything other than natural gas is almost zero.
- [51:54]
Cole Smead
Yeah. In the long run, as nuclear has declined as a percentage and coal has declined outright. Nominally speaking here in the United States, natural gas has been the biggest grower off of that. So to your point, and it's the kind of thing that's super dependable, it's accountable Et cetera. The one thing I am really excited for that Tesla has brought to the forefront is not the electric car, it's the driverless car. I mean, I think, and again, any technology that comes about, we never do less, we always do more. So I think our car will be a platform for living. If you look at the size of cars today, they argue that we're getting bigger and bigger and bigger. Yes, Ford, I want a 2025 Ford Excursion, brand new, out of the line. But here's what I want. I want it with a small traction motor, I want it with the turbo diesel, and I want it self driving because ultimately what I want to do is I want to sit back and read a book while I'm in the car, rolling to wherever I'm going for a kids event or whatever. And we'll use the car as a platform for more, not less. Which means the total demand of energy will be greater because we'll do more. I always, I always point out to people, you know, your home has got more efficient and yet we use way more electronics. I mean, just think of like streaming. It's like you got the router firing, you got the TV firing. What are you doing? You're just doing way more. The house is better lit. And so even as we get more efficient, we use more and more and more. And you know, I personally, I personally think that what we're not accounting for is the economic activity that will be driven off of. If you're not driving yourself, what else do you do? You do something more productive and therefore it's more profitable.
- [53:35]
Bill Smead
You can tell Cole is half his mother and half his father. I've spent the last 45 years trying to do more or do less and make more. And he is doing that on the investment side. At the same time, he's like his mother. He's just trying to do more and more and more and more and more and more and more and more every. And try to milk every day as much as he possibly can.
- [53:59]
Cole Smead
Have you ever seen the opening to Pinky and the Brain?
- [54:01]
Bill Smead
No.
- [54:01]
Cole Smead
Oh, and Pinky and the Brain. Pinky says to the Brain, he goes, brain, what are we gonna do today? And the Brain says the same thing we do every day, Pinky. Try to take over the world. So I would highly recommend our listeners, if you have not seen that, that captured me when I was a kid, that that will never change my mind.
- [54:23]
Bill Smead
I think that's your motto. That's a good life motto for you.
- [54:28]
Cole Smead
Yeah. So I would just say for our listeners Keep sending your book recommendations. Keep sending your questions. This has been a total pleasure, Bill. Thanks for joining me to share with podcast listeners what's on the Smead book list and what we're thinking about these topics. If you have a great book that you'd like to recommend, email podcastmeecap.com that's podcastmeedcap.com you can also reach us on X. Our handle is eedcap. Give us a shout out. Next quarter, we'll do this again. We'll look for your recommendations. Thank you for joining us for A Book with Legs podcast. We look forward to the next episode.
- [55:04]
Bill Smead
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@smeecap.com or by calling your financial advisor.