Lonely Contrarian Divergence

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In previous missives, we have gone into considerable detail regarding the historic ascent of index concentration, coupled with the heightened prevalence of passive investing. Fundamentally, both of these phenomena share a common deficiency—a lack of independent thought. Prominent figures such as Howard Marks, David Einhorn, and Ben Inker at GMO, individuals whom we deeply respect, have consistently underscored the necessity of conducting one's own research, forming independent conclusions, and always incorporating a margin of safety. They contend that adhering to these principles is vital for achieving differentiated performance compared to the broader market.

At Smead Capital Management, prioritizing independent research is not only integral to our evolution as investors but also reflects our commitment to those on whose behalf we invest. Being different is inherently uncomfortable in every possible way, and although it doesn’t guarantee superior returns, we consider it a prerequisite for potential outperformance. As Marks put it, "The real question is whether you dare to do the things that are necessary in order to be great. Are you willing to be different, and are you willing to be wrong? In order to have a chance at great results, you have to be open to being both."1

higher tech

Needless to say, our belief on where value is situated in today's markets diverges from the consensus. We see today’s investment psychology as a combination of the Nifty Fifty era and the Tech Bubble. It’s a dangerous combination of investors enthusiastically allocating large percentages of their capital to ten or fewer companies, with little thought as to why, other than it’s the easy decision. This lack of any need for independent thought has been persistently reinforced through market capitalization growth fueled by valuation-agnostic passive investment vehicles. Flywheel engaged. And as you can see, endowments, often considered “smart money,” have capitulated as well.

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