The Pictures Say It All

by William Smead, CIO, Smead Capital Management

Dear fellow investors,

Dow Jones (publisher of The Wall Street Journal) announced that Nvidia (NVDA) will replace Intel (INTC) in the Dow Jones Industrial Average. Intel was brought in to replace Union Carbide four months and nine days before the peak in Intel’s stock price. Union Carbide became Dow Chemical via merger. The shares of Intel are down markedly over nearly 25 years in price and provided a total return of 3.2%. Dow and its components gave a 326% total return over those same years.

The question is, “Can you hear the bell ringing?” Here is what Andrew Grove, the CEO of Intel in the 1990s said:

“The person who is the star of previous era is often the last one to adapt to change, the last one to yield to logic of a strategic inflection point and tends to fall harder than most.” – Andrew Grove

We have reviewed the changes the Dow Jones team has made in the index over the last twenty years. Overall, the changes look respectable. However, Charlie Munger consistently warned about financial euphoria episodes being “like a chain letter or a Ponzi scheme.” And Munger said it is worse if there is a legitimate development like artificial intelligence or the internet or walking on the moon or the advent of the radio business. Since we believe we are in the late stages of a financial euphoria episode, replacing Intel with Nvidia looks even more egregious because it rose 24-fold in six years compared to the nine-fold gain of Intel.

We beat dead horses for a living, so let me expand. Radio Corporation of America was the Intel/NVDA of 1929. It went from $10 to $115 from 1927 to 1929 and woke up in the low teens per share in 1941. Disney (DIS) and Coke (KO) were two of the most exciting of the 24 stocks in the two Nifty Fifty lists at the end of 1972. They lost 82% and 64% respectively over the next two years. Throw in the disasters of 2000-2003 and you complete what happened as we unwound major euphoria episodes exponentially expanded by legitimate technology developments. Will this episode be any different?

In conclusion, we believe this is another obvious way to refute the arguments that are given to us that this episode is not as ridiculous as the 1999-2000 DotCom bubble. Remember, Munger said, “This is the biggest financial euphoria episode of his career because of the totality of it.” Add this Dow change to a long list of visible warning signs for investors.

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.

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