A Book with Legs: The Smead Book List - Winter 2024

Released on December 30, 2024

Welcome to the Winter 2024 edition of A Book with Legs, the podcast hosted by Smead Capital Management. In this episode, Co-Host Cole Smead and Chief Investor Officer Bill Smead delve into their latest book selections, exploring the intersections of literature, investment strategies, and economic insights. This comprehensive discussion offers valuable perspectives for investors, business professionals, and curious minds alike.

1. Introduction

Cole Smead opens the episode by emphasizing the firm's commitment to reading and leveraging books to inform investment decisions. Drawing inspiration from Charlie Munger's philosophy of using multiple mental models, Cole and Bill aim to analyze influential works through the lenses of business, markets, and human behavior.

2. Current Reads and Book Reviews

2.1. "Bubble in the Sun" by Christopher Knowlton [00:21 - 17:19]

Bill Smead introduces "Bubble in the Sun" as a compelling examination of Florida's land development boom in the 1920s. He draws parallels between historical land speculations and contemporary market behaviors, highlighting how 15% of the American population was involved in Florida land speculation during the Great Depression—a stark contrast to today’s high equity ownership among the wealthy.

Bill Smead [00:52]: "We're in the fourth major financial euphoria episode of the last 100 years."

2.2. "Technology Revolutions and Financial Capital" by Carlotta Perez [01:14 - 17:19]

Bill discusses Carlotta Perez’s analysis of technological revolutions and their impact on financial markets. He underscores the importance of understanding past financial manias to navigate current market euphoria more effectively.

Bill Smead [01:24]: "It's important to get reminded of things like that."

2.3. Brett Gardner’s Book on Buffett’s Early Investments [03:10 - 17:19]

Cole and Bill praise Brett Gardner’s meticulously researched book on Warren Buffett’s early investment strategies. They appreciate how Gardner connects historical insights with Buffett's long-term investment philosophies.

Cole Smead [02:14]: "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."

2.4. "Risk and Returns" by Wilbur Ross [06:21 - 17:19]

Wilbur Ross’s "Risk and Returns" is lauded for its deep dive into cyclical industries and the strategic maneuvers within bankruptcy courts and undervalued sectors like coal. Bill shares anecdotes linking Wilbur’s experiences with broader market trends, emphasizing the significance of contrarian investment approaches.

Bill Smead [07:00]: "Wilbur Ross made his money in cyclical industries, in bankruptcy court in a garbage pile. The opposite end of the spectrum."

2.5. Additional Book Recommendations [17:19 - 55:03]

Cole and Bill also recommend several other noteworthy books:

• "Can't Deny It" by Doug Terrison: A memoir of a former oil analyst, providing insights into the oil industry's dynamics and the concept of "pledgers" setting return minimums.

• "The Power and the Glory" by Adrian Tenneswood: A social history of wealthy individuals in the English countryside, drawing parallels with modern-day affluence and its inherent challenges.

• "Start Thinking Rich" by Brad Klontz: Explores the mindset required for wealth accumulation, focusing on concepts like delayed gratification.

• "White Shoe" by John Ahler: Chronicles the evolution of major legal firms and their shifting roles amidst growing conflicts of interest.

• "All the President's Money" by Megan Gorman: Highlights the financial uncertainties faced by U.S. presidents, including Thomas Jefferson's financial struggles.

Cole Smead [12:14]: "The most damaging thing is the idea of permanence in this life."

3. Investment Insights

3.1. Reflections on Buffett’s Investment Philosophy [03:10 - 17:19]

Drawing from Gardner’s book, Bill revisits Warren Buffett’s strategic patience and disciplined investment approach. He reiterates the importance of understanding market cycles and the value of long-term thinking.

Bill Smead [03:50]: "If you don't like taking risk, don't come here. You have to love the urge to put yourself out there."

3.2. Current Market Conditions vs. Historical Bubbles [19:44 - 26:10]

Cole and Bill compare the current stock market euphoria to past bubbles, such as Japan’s asset bubble of the late 20th century. They note that today’s high equity ownership among the wealthy poses unique risks, especially if market conditions deteriorate.

Cole Smead [21:14]: "The largest wealth concentrations of wealth are in the stock market."

3.3. Asset-Light vs. Capital-Intensive Businesses [24:31 - 26:10]

The discussion shifts to the debate between asset-light and capital-intensive business models. Cole challenges the prevailing notion that asset-light businesses inherently offer higher returns, pointing out that many such companies are underperforming compared to their capital-heavy counterparts.

Cole Smead [25:19]: "Businesses that are capital more capital intensive, that are producing better returns."

3.4. Equity Ownership and Its Impact on the Economy [19:44 - 26:10]

Bill highlights the substantial equity ownership among affluent individuals and its potential impact on the broader economy, especially during prolonged market downturns.

Bill Smead [21:14]: "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."

4. Political and Economic Policy Discussions

4.1. Federal Deficit and Debt Implications [31:39 - 42:30]

Cole and Bill analyze the federal budget’s trajectory, discussing projections and the potential consequences of sustained deficits. They reference discussions from notable economists like Jason Furman and express concerns over increasing debt-to-GDP ratios.

Cole Smead [35:17]: "Debt to GDP contracted. But Furman said... we'll end up with 9 to 10%."

4.2. Impact of Election Outcomes on the Market [31:39 - 42:30]

Reflecting on past elections, Bill draws parallels between the market's reaction to Ronald Reagan’s presidency and the current administration's policies. He cautions against overly optimistic expectations tied to policy changes, emphasizing the complexities of market dynamics.

Bill Smead [32:00]: "The market's down 22% this time."

4.3. Federal Reserve Policies and Future Outlook [31:39 - 42:30]

The Federal Reserve's recent actions are scrutinized, with Bill expressing skepticism about the institution's effectiveness compared to China’s Politburo. He advises investors to reconsider traditional trust in federal monetary policies.

Bill Smead [42:30]: "You wanna be short the US Federal Reserve and you wanna be long the Politburo."

4.4. Antitrust Regulations and Their Effects [43:07 - 47:38]

The conversation turns to antitrust issues under the Trump administration. Bill argues that the current regulatory stance hampers healthy market competition, allowing monopolistic giants to thrive unchecked.

Bill Smead [45:11]: "We have now seven companies that are the most massive concentration of capital in vast combinations that we've ever had in history."

Cole Smead [43:47]: "It puts non-scaled businesses in a position of being weaker to survive."

5. Energy Sector Insights

5.1. US Oil Production and Supply Dynamics [48:28 - 53:34]

Cole and Bill discuss the U.S. as a leading non-OPEC oil producer. They highlight the challenges of maintaining supply growth amidst stagnant production rates and the implications for global energy markets.

Bill Smead [48:28]: "We are the largest non-OPEC producer from a growth perspective."

5.2. Electric Vehicles and the EV Market [50:43 - 54:23]

The prospects of the electric vehicle (EV) market are debated. While Cole is optimistic about driverless technology, Bill points out the practical challenges facing EV adoption, including high costs and fluctuating gasoline prices.

Cole Smead [53:34]: "The revolution to having 30% of the vehicles being driven on electricity is not happening."

5.3. Natural Gas Prices and Implications [50:46 - 54:23]

Natural gas prices soar, driven by increased demand and limited supply options. The duo discusses the impact of rising energy costs on various industries and the broader economy.

Bill Smead [50:55]: "Natural gas has been the biggest grower off of that."

6. Conclusion

Cole and Bill wrap up the episode by reiterating the importance of disciplined investing and continuous learning through reading. They encourage listeners to engage with their book recommendations and share their insights, reinforcing Smead Capital Management’s dedication to informed, strategic investment practices.

Cole Smead [55:03]: "Keep sending your book recommendations. This has been a total pleasure, Bill."

Notable Quotes

• Bill Smead [03:50]: "If you don't like taking risk, don't come here. You have to love the urge to put yourself out there."

• Cole Smead [21:14]: "The largest wealth concentrations of wealth are in the stock market."

• Bill Smead [45:11]: "We have now seven companies that are the most massive concentration of capital in vast combinations that we've ever had in history."

Final Thoughts

This Winter 2024 episode of A Book with Legs offers a rich tapestry of insights, blending historical perspectives with contemporary investment strategies. Cole and Bill Smead provide a nuanced analysis of economic trends, policy implications, and sector-specific developments, all through the lens of their curated book list. Whether you're an experienced investor or a curious thinker, the episode delivers valuable wisdom for navigating the complexities of today's financial landscape.

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