Each year we like to drill down on the wisdom imparted by Warren Buffett and Charlie Munger at the Berkshire Hathaway Annual Meeting. This year, we thought there were four key takeaways we can consider in running our portfolio of common stocks at Smead Capital Management.
As many of you know, we admire Warren Buffett and his “sidekick,” Charlie Munger. They seek out quality businesses at bargain prices and have a stunning record of success. Both personally and with stock ownership, they are notorious tightwads with their own money and the money of our common stock holding, Berkshire Hathaway (BRK.B).
Like a good attorney, we rarely ask a question for which we don’t have the answer. In the case of looking at sentiment in the economy and in the stock market, we like watching to get a feel for what our professional and individual investor clients are going through to see if it matches what we are hearing and seeing.
The current circumstance in the U.S. stock market reminds us of the mid-1960s. We thought it would be helpful to review what was going on back then and what took place in the following 16 years. It makes us believe that you want to own wonderful businesses and de-emphasize trust in the stock market’s ability to meet the financial goals of long-duration investors.
March 10, 2017 was the 8th anniversary of the bull market in stocks that began in 2009. While the economic recovery from that same period has been labeled many things including “muddle-through”, “new-normal”, or other various metaphors suggesting anemia, the stock market recovery has been quite the opposite.
On a recent business flight, I watched The Beatles documentary (Eight Days a Week) which featured the song “A Hard Day’s Night.” The movie chronicled, via previously unseen footage, the early years of The Beatles and the mania surrounding their tours and albums. This documentary and song could teach us about how to navigate the stock market in the U.S. and what demographics mean to American culture and economic trends.
A number of factors in the U.S. stock market are at historical extremes. We at Smead Capital Management like to look for what we call "well known facts" in the marketplace, also thought of as areas of extreme optimism and pessimism.
In September of 2010, we argued that oil prices were trading on psychology and entrenched beliefs, and could possibly have a real price of $10 per barrel. Investor bullishness was driven by the belief in peak oil theory, the slow transition to electric and hybrid engines, and the use of the commodity oil as an investment in the China boom.
At a recent industry conference, we were confronted by a chart, a presentation and a song. In early 2017, we find ourselves in an investment world where the merit of stock picking and "active" portfolio management are challenged regularly, which has contributed to a mass exodus of assets from "active" funds to low-cost index portfolios.
In a recent TV appearance on CNBC, the legendary portfolio manager, Bill Miller, argued in favor of owning shares of Amazon (AMZN) because of the immensity of their "addressable markets." As contrarian investors, this got us thinking about our three core tenets of investing, what markets we want to address, and how to spot industries which are near what Sir John Templeton called "the point of maximum pessimism."