The Way We Were

by William Smead, Smead Capital Management

Dear fellow investors,

In 1973, Barbara Streisand came out with the song, “The Way We Were,” and the movie with co-star Robert Redford. It was a smash hit. Barry Bannister at Stifel Nicholas just came out with a slide deck which has charts that show the way we were in past stock markets. These are not “scattered pictures” and they shouldn’t give you “misty watercolor memories” because of the risk these charts preview:

Someone once observed that you want to buy low and sell high. Therefore, the chart shows that you wanted to buy in 1920 after World War I, in late 1939 during the Great Depression, in 1974-1981 after a huge inflation episode and in 2008-2009 at the height of the financial crisis. You sold high in 1929, in the 1960s, in the late 1990s and in the last three years.

Can it be that it was all so simple then?
Or has time re-written every line?
If we had the chance to do it all again
Tell me, would we?
Could we?

We do have “a chance to do it all again” because we would like to make money and survive an era dominated by unwinding what Charlie Munger calls “the biggest financial euphoria episode of his career because of the totality of it!” Therefore, we believe we must make investments that did well in the 1970s and from 2000 to 2010. Here is a picture of what worked and didn’t work from 2000 to 2010:

Source: Bloomberg. S5INFT: Tech; S5ENRS: Energy; S5COND: Consumer Discretionary.

This leads us to today when the extremes of enthusiasm for the largest of the large-cap tech stocks look like this:

Memories
May be beautiful and yet
What’s too painful to remember
We simply to choose to forget

We at Smead Capital Management have our faults, but we never “choose to forget” what has happened in past stock market cycles. For this reason, we are very over-weighted in energy and very under-weighted in the glam tech sectors which have totally dominated the first half of 2023 and the last 12 years in the stock market. “Memories may be beautiful and yet” we believe that forgetting what has happened in analogous situations is a ticket to stock market failure!

Fear stock market failure,

William Smead

The information contained in this missive represents Smead Capital Management’s opinions, and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, CIO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.

©2023 Smead Capital Management, Inc. All rights reserved.

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