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by William Smead, Smead Capital Management

Dear Fellow Investors:

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We’ve never quite understood why most sensible people don’t apply the same economic logic to investing that they do to any other business. Take plumbing for example. If your town has 10 main plumbing companies and 10 more move into town, your economic mind tells you that the added competition will drive down profits. On the other hand, if five of the plumbing companies go out of business, profits should rise over time.

This is especially true when it comes to industries with numerous publicly- traded companies. Not only are profits squeezed by added competition, but stock ownership is diluted through public offerings of new shares via IPOs and secondary offerings. For instance, the advent of the internet and explosion in technology in the 1990’s caused a huge number of companies to enter the information tech arena. Profit growth for companies like Cisco (CSCO) and Microsoft (MSFT) were stratospheric. To this day, we believe an unusually large number of bright software engineers wake up every day and attempts to obtain part of those profits for themselves.

Therefore, the number of new companies being birthed through venture capital and/or IPOs exploded in the second half of the 1990s. A fever took hold of investors. They called it a “new era” and the feeling of being a pioneer caused them to pour money into these new companies. Added competition eventually caught up to the existing companies and profits ultimately declined. On top of the negative affect this had on stock prices, the dilution from having a plethora of new info/tech choices in the stock market served to torture the investor concentration. Put this all together and you had an 80% decline from March of 2000 to late 2002 in the info/tech-heavy NASDAQ index—too many plumbers indeed. Investors got destroyed by something that they should have learned in their undergraduate economics classes.

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About the author

William Smead

Chief Executive Officer/Chief Investment Officer

Whitman College, B.A. Economics 1980

William is the founder of Smead Capital Management, where he oversees all activities of the firm. As Chief Investment Officer, he is the final decision-maker for all investment and portfolio decisions as well as reviewing the implementation of those decisions in the firm’s separate accounts and mutual funds.

William began his career in the investment business with Drexel Burnham Lambert in 1980. He left Drexel Burham Lambert in 1989 as First Vice President/Assistant Manager and joined Oppenheimer & Co., where he stayed until joining Smith Barney in 1990. William remained at Smith Barney until September 2001 when he joined Wachovia Securities becoming the Managing Director/Portfolio Manager of Smead Investment Group of Wachovia Securities. In 2007, William left Wachovia Securities to found Smead Capital Management.

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