The Smead Book List - Fall 2023

0:02You're listening to A Book With Legs, a podcast presented by Smeed Capital Management. At Smead Capital Management, we advise investors who fear stock market failure. You can learn more at SmeadCap.com or by calling your financial advisor.

0:20Welcome to a Book With Legs podcast. I'm Cole Smead. I'm the CEO and a portfolio manager here at Smead Capital Management. At our firm, we are readers and book junkies. It can be said that leaders are readers, and we believe books provide us a great source of information for filtering what is and isn't important for us as investors. Investing is the last great liberal art and the best way to spend a lifetime of learning. This podcast is for readers, thinkers, business-minded people, and investors who want to grow their knowledge from great authors and their writing. Charlie Munger often talks about using multiple mental models and analysis.

0:53Our aim for this podcast is to help listeners test Munger's theory in business, markets, and people. See, today's date is October 2nd, 2023. investors and people we run into often ask us, you know, what books are we reading? What's on our reading list? This is our quarterly episode for us to talk about books, books, and as I always say, more books. Joining me to talk about our reading list is our chief investment officer and chairman, my dad, Bill Smead. Thanks for joining me, dad. Thanks for having me. So I'm, as usual, like, you know, we got some fun books that we got to go through, some stuff we got to discuss.

1:27us. I think, you know, in the liberal arts sense, it's kind of fun to watch us jump around on some of these topics. So let's start out by, you know, what have you recently read? Well, of course, we read the Warner Brothers book by Chris Yogurtst, and that was just fantastic. Cole's mother and I, we watched Turner classic movies, which is just loaded with Warner Brothers movies from the past, and connecting all those dots, and these brothers and their immigrant background. And then the way that they were kind of the conscience of the movie business at the same time that the one guy had the least conscience among the brothers was a very successful producer.

2:10So it was just a fun book and a great book. Well, yeah, and this will be a podcast that's coming out here in October with Chris. And we'll have some bonus content off the podcast as well. But to Bill's point, I think it really tells a different narrative of the Warner Brothers, you know, another family, but obviously the studio itself, it shows you that family starts with an F for a reason, as you mentioned with Jack Warner, he, you know, he did some strange things to his brothers. But the other thing too, is, you know, I think, you know, you kind of hear these like very stereotypical stories of like, well, you know, the movie studios were Jewish, and that's why they were out to get society and so on and so forth.

2:51And then you read the Warner Brothers book, and Harry Warner, to your point, was this moral leader. A model patriot. In America. Yeah, a model patriot. Correct. And so I think it really breaks down that stereotype completely and eviscerates it versus, you know, the other thing, I think the other sensitive subject that it got into that's, again, it's a very sensitive subject is, were the movie studios profiting off of the Nazis? which has been a historical dialogue that's gone over and over and over again in the discussion of the Nazis it's interesting I think the movie that really typified that the Warners don't hold to that idea is the Confessions of a German Spy which was a very popular movie at that time and so I think it's a really good book to take history, take it for what it is, take it on face value and really study who these people were and Chris does a great job he's just kind of like a Hollywood super fan and is a wonderful book and highly recommend his book for people listening.

3:52And obviously Bill and I both read that. So what else? Yeah, Graveyard of the Pacific by Randall Sullivan. Very fascinating background. A guy wrote for Rolling Stone for 20 years, wrote this fantastic historical piece of the importance of the meeting of the massively powerful Columbia River with the ocean. at the bar and the danger and a long history of people meeting their death on that body of water. Just an incredible—it's a great geography book, it's a great history book, but yet it's also a great story about him and his friend and dealing with some rough issues in their upbringing. Well, yeah, and this is a little more close to home for you because obviously your dad got his living on the river.

4:43Yeah, he talks about and shows how incredibly difficult it was to get from a pilot boat onto a ship and vice versa. And my dad would get on those ships just inside the bar, whereas the bar pilots would be doing that out 25 miles off the coast and how dangerous all of that was. Yeah, because Harold Smead, just so if you're not picking up on this, was a Columbia River ship pilot. So he would be taking boats from Astoria once they came across the bar and taking them as far inland as Lewiston, Idaho, which I think is the furthest inland port. The dams kind of put the kibosh on any trips longer than that.

5:23When he was a tugboat skipper, yeah, they went all the way up there. But really, long view for logs and Portland and Vancouver for anything from containers to cars, etc. And this is all pre-GPS. So like whether we're talking about the bar pilots or like grandpa as a Columbia River ship pilot, you were going off of memory and experience. Oh, yeah. Yeah. It you had to know the bottom of that river, every inch of it and everything that went along with it. One of my one of my favorite things was that dad used to say I get to go around the world without leaving town. So all these foreign ships come in to bring their goods.

6:09So one time he's on a ship coming up the river with a Japanese skipper who saw Mount St. Helens before it blew up. And he said, oh, Fuji. It looked a lot like Mount Fuji to him in Japan. And my dad just loved that, the spice of his life effectively taking him around the world for six-hour trips every year. Yeah, so let's see. books that I just got done reading, you know, we, we, a couple of these are, are, I think all these actually already released, but we did Cage Kings by Michael Thompson, which is, you know, phenomenal book. I think it really talks about, it's a media book is what it is. I know it talks about, you know, the history of fighting and things of that nature, but it's really interesting.

6:52You know, we have right now WWE merged with UFC to create a new company called TKO Holdings that is led by Ari Emanuel of Endeavor fame, the agency. And it's interesting to think about in the environment where what is sport, what is the value of sport? It's terribly tangible. It's terribly expensive. And at the same time, it still captivates large audience. So I think it was a wonderful media book. The other book that we also did on the podcast was Gallop Towards the Sun. The most complex thing. So in this world where it's easy to be skeptical of the past, And I think that's like a common theme, like people being very highly skeptical of the past.

7:33And what I would argue people often use is revisionist history. It was interesting to think about Tecumseh, the Shawnee chief, and William Harrison, who ended up becoming obviously President Harrison later in his life, where Thomas Jefferson or James Monroe, what they wanted as president might be different than what William Harrison did on the frontier. In other words, local policy can be superseding federal policy, which was allowable back then. Could I go back to your cage kinks for just a minute? Yeah. I was on a flight coming back from Europe recently, and I watched a movie that was almost like a documentary telling the George Foreman story.

8:15well it just struck me how the world of boxing has kind of receded dramatically because people enjoy the the cage fighting matches or they get paid better to do other things in sport yeah exactly but it was just interesting it was a great story by the way about george foreman and i enjoyed the movie a lot but it just reminded me of how much things have changed that 40 years ago we'd gather in the fraternity to watch a big boxing match, and that was a big thing. Well, those fraternities today are probably gathering to watch the Cage Kings. Well, but the interesting part is if a UFC fighter boxes, they still make more money in their career for that first boxing match than they do their entire UFC career prior.

9:00So, for example, Conor McGregor made more money fighting Floyd Mayweather than he had ever made in his entire UFC career combined. so again you know it asks the question what's a value and I think one of the criticisms that Michael Thompson put out was how small the pay is to UFC fighters relative to the overall revenues yeah it's only 20 percent of their EBITDA and it's very common for that to be 40 percent in most sports like football like others so let's see the other book uh just got done reading and and really enjoyed, this is a little bit selfish for Bill and I, but it's Taming the Street by Diana Henriquez, which is the history of the SEC and the 1934 Act and the 1940 Act.

9:45And I said this to her because I got the sense out of the book, but she really paints the picture that William O. Douglas is the patron saint of the SEC, which, as most people know, he went on to the court, and he's known as being on the Supreme Court for decades. But she kind of argues, and I would say, as a Supreme Court judge, I don't think of it as much. I think of him a lot more as an SEC person because that's where I think he had his finest moments. but a lot of the rules, regulations, restrictions that are purposeful and beneficial to people that are still in the books, we run the 1940 Act mutual funds, we're subject to 34 Act restrictions, et cetera, are due to the thoughtfulness of William O.

10:29Douglas, who wasn't the first chair. The first chair was Joe Kennedy, right? Who was, some could argue, the biggest huckster up until that era. And Cole and I took classes in the school building at our alma mater, Whitman College, named after William O. Douglas, maybe the most famous graduate of our alma mater. Yeah, so that was a lot of fun. And I highly recommend to our audience, when you listen to that discussion, you'll hear a very intriguing discussion at the very end where Diana and I, we debated labor versus capital. And I don't think Diana and I come from the same political party, but I unequivocally agreed with her that labor is going to be capital.

11:14I argued it's going to be economic powers that drive that. And I think it was a very fun discussion. You know, if you're wondering, like, you know, how do you be pragmatic in this world? I think that was a very pragmatic discussion that we had together. It was awesome. So I really appreciate Diana for that. So let's pivot, Bill, to what you're currently reading. Yeah, well through both Life After Capitalism by George Gilder and A Question of Power by Robert Bryce, the two intersect at one point in both books where Bryce kind of more comes from the political left but is trying to emphasize how incredibly important electricity is.

11:54And boy, that is so apropos for what's going on today, which is everybody wants this to be an electric society, but they're all forgetting about how you make electricity. And then George Gilder has some of the same thoughts in his life after capitalism, but his is more, he's concerned that we won't be releasing enough CO2 to produce the agriculture to feed the world. So it's just very, both of them had incredibly interesting twists to current discussions, which leads you to believe that a lot of the supposed mainstream thoughts on those subjects are maybe not accurate and maybe are more political than they are sensible.

12:44Yeah, and obviously, we've done a podcast with George on his book, Life After Google, which is a great kind of framework. I really think of George as a great framework thinker. I think he really does a great job of understanding how the world should be ordered to a certain extent. Do I think George is perfect on everything? The answer is no. But I think from a framework perspective, a lot of George's thinking has seeped through to how we look at things, your point, how we look at, you know, how energy markets are going to be ordered, how we look at human progress, technology, things of that nature.

13:19So I would, I would highly recommend George's writing. Yeah. On a recent drive vacation with my wife of five days, we drove past where he started his life after Google, which is the server farm that's planted right next to the Dallas Dam. In fact, there's two of them and, and replacing what used to be an aluminum smelter. Everybody that uses a massive amount of electricity for what they do wants to be closest to the dams because the electricity is the cheaper, the less far it has to be transmitted. The book that I'm currently in, I just cracked, is Escaping Gravity by Lori Garver. And Lori was the deputy administrator at NASA during the Obama administration.

14:03and she was the person and she had a history of being involved with NASA but she was the person that actually brought in the agreements with Blue Origin and SpaceX and you know Richard Branson's entity I want to call it Battlestar Galactica but that's but that's not it's Virgin Galactica and Virgin Galactic Galactics yeah sorry and so I actually how I got to you know learn about her book was I was up at one of our vendors, you know, partner to us that we'll take our business to for our SaaS software to run, you know, our firm operationally, Ridgeline, they had her come speak up there. And she came off, you know, again, very pragmatic as someone that was dealing with government.

14:51I mean, you want to talk about a nightmare, a bureaucracy like NASA, she talked about the billions of dollars being spent every year in NASA. So a couple things, and this is why I'm really interested in the book. She pointed out when Nixon signed the Space Shuttle Act, we were supposed to be going to space something like 30 to 40 times a year. And I think in the entire prior 30 years, we'd only gone to space like 130 times. So we were only going about four times a year. And she also talked about, again, incentive structures. And I think this is what her book will get at. And I'm really excited for her, because obviously Munger talks a lot about incentive structures.

15:29She talks about how the incentive for Boeing and Lockheed Martin was to just keep the money rolling. It wasn't to innovate or do it cheaper or more timely, because again, that's not how the contract was structured. To suckle. Yeah, to suckle. And so versus how do you make a change to contracts that do cause good incentives or good behaviors? and that's a process. And so after hearing her talk of what that was like, I'm really interested to get deeper into that book. She knew Elon Musk early on, before we consider him this very wealthy person and before people ascribed the intelligence that he probably had back then, but they obviously ascribe it to him now.

16:13The wealthier you get, the smarter people think you are. So it's just a very interesting book and I'm really interested to get deeper into Lori's book. So let's pivot to lastly, books we've had recommended to us. I'll go first. So there's three books coming up that I've came across or I've had someone recommend to me. Money Kings by Daniel Shulman. I read his prior book, which was Sons of Wichita, which is all about the Koch brothers. The Money Kings is really about the Jewish investment banks. And I'm really excited to get into that. Obviously, just love Wall Street history in general. I'd like to be included in that one.

16:50The next one is the ruble by Ekaterina Pravalova. It is a history of Russia through the ruble. And so she's using the currency as a way of talking about the cultural and political history of Russia. And that'll be a fun one to crack into. The other one that I had someone recommend to me and actually saw a clip of him speak is Science After Babel by David Berlinski. And he was on Joe Rogan. If you want a very interesting discussion, you know, watching a guy who believes in intelligent design discuss this with Joe Rogan. And Joe Rogan, you know, is sits in a very what I'll call he sits in an evolutionary theory camp, I think, is where he sits.

17:34It was just interesting to watch the dialogue back and forth between these two gentlemen. I have not cracked David's book yet, but I kind of have a sense of what could come out of that. And so that'd be a fun book to get into. Bill, what books are you looking forward to? Well, I've started Long Street by Elizabeth Varon. Fascinating book about a guy who grew up in the Old South, effectively on the wrong side of the slave issue. A successful military man. Southern general. Southern general fought for the South and then recognizes his error later in life and makes it a career of trying to reverse the wrongs that were perpetuated by his original work.

18:22Quite a redemption kind of a story. Yeah, James Longstreet being the Southern general that Bill's mentioning. and it's funny because I think it was Grant by Ron Chernow Ron Chernow talks about how Lee was romanticized after the war and again we want to be pragmatists in what we do James Longstreet changed his tune as Cain says when the facts change I changed my mind he changed his mind and Lee and other people they were never pragmatic They never changed their mind. Well, and this guy put up with a lot of abuse because he wasn't willing to toe the party line and— As a Southerner. As a Southerner, fit in with the powerful Southern Democrat defense of slavery and their willingness to discriminate and torture people just because of the color of their skin.

19:24So let's see. We had a couple other books recommended to us by Chris from Ohio, is how I'll refer to him. Um, he recommended, uh, the fourth turning is here by Neil Howe. And, uh, I I'm somewhat familiar with Neil because he wrote the fourth turning, uh, and I can't remember the other gentleman he wrote it with, but I heard, um, double lines, um, gun lock, gun lock. He had mentioned it in a TV spot. Um, and, and the fourth turning has to do with what I know of the writing is there's these turning points in cultural society from a political and demographic perspective. And they're kind of arguing that here we are now, their original book they wrote quite a long time ago.

20:07And so I, so that's one book we had recommended to us. The other one that Chris recommended was Ubiquity, Why Catastrophes Happened by Mark Buchanan, which I have not looked into that or cracked it. So I don't have any feel, but just wanted to mention those because Chris recommended. I didn't have any from super fans, Steve. So it will be unrequited this quarter. The kind of turning that you might be referring to would be, we have argued that the baton is being passed to the millennial group from the baby boomer group, the two largest population groups up till now. Yeah, but it's more than demographics.

20:43They talk about just things needed, environments needed. So they put other things into that, but demographics do have something to do with it. Um, so that, so, you know, uh, I, I want to pull out kind of a question from the question bag, um, because I know we've talked a lot about this. I know that we get questions around this. Um, so the question I want to pose, uh, to, to discuss bill is, you know, we've gone from really low interest rates to much higher interest rates. The last time interest rates were above 5 % was 2007. So, so far in my life, in my adult career, it's only happened twice thus far.

21:24And it took, you know, effectively 15 years, 16 years to get back to something like that. So why hasn't the mean reversion from low interest rates to higher interest rates been more damaging for assets? I have a book that might answer that question. It was called Who Moved My Cheese? Which, yeah. Was it Stuart Spencer or something like that? Yeah, I think so. Anyway, the point was you had these three mice and they used to go to the same spot every day to get their cheese. And then all of a sudden the cheese dried up. And so the story was how the three of them reacted differently to having to adapt to go find cheese someplace else.

22:05Yeah. And and and what we've got is a stock market that that just is so used to getting their cheese from the same places that the low interest rates caused to be the best place. And they're just not very willing to give up on that that spot. So it'll be interesting to see how much torture it's going to take to move people off that old spot. Well, so when you say, well, let me add one thing. So we have seen the effect of interest rates in certain markets, though. Okay, so if you think about the carnage of the bond market at one point, you know, bond market investors got damaged in a way they didn't think they could.

22:42So we've seen this in the credit markets. High price to sales, glamour stocks, the Pelotons and the Beyond Meats and some of those things. Correct. So, you know, the SPAC thing has cooled down. The IPO market has cooled down. You know, I'll use an example. We've talked a lot about this. I think it was Howard Hughes Corp, their CEO, said they went to 47 banks to try to get a multifamily apartment loan. and they couldn't get one out of 47 banks. I have some friends locally. I mean, this is Phoenix. There's a lot of real estate that's done in this town. And a friend who builds multifamily apartments, I asked him what a construction loan costs right now to get a property, a new property developed for multifamily.

23:23And he said a minimum of 10%. Okay, so if short-end treasuries are at five and a half, the bank's saying for me to take any risk, I need 450 basis points over my funding costs, my overnight costs. When I'm hearing, when we're talking to people that do other things in the investment business, I've been hearing it's not outlandish to see mid-teens interest rates being thrown out at banks. And obviously, we all know what happened with Silicon Valley Bank and those kind of banks. So it's interesting that we're seeing this in credit-funded markets. Underneath the surface, though. Underneath the surface.

23:59and but yet the equity market seems like it's doing just fine yeah well they they again you you you can you you can ignore things for quite a while in the investment business but the the tendency is it'll go that way for a substantial time and then it will correct incredibly abruptly at some point in time everybody go gosh where did this come from well the answer is all all the time that people were oblivious to it while it already existed. So one other thing to add to this, and I'll ask you it, Bill. So we're talking about what it does on asset markets. What do you think the effect will be on the economy?

24:41And let's just use, I mean, we're at historically low unemployment. What do you think will happen to the economy and unemployment in comparison to what we're talking about in asset markets? Well, there's things that we think we have skills in predicting. and there's things that we don't have skills in predicting, and we try to stay pretty close to the things that we do. But from a historical standpoint, and you and I have already talked about this, this is just really normalizing interest rates. So normalizing interest rates is ultimately going to have some economic fallout and investment fallout because you have this gravitational pull that Buffett talks about.

25:30So price-earnings ratios are 20, 21 times earnings. Well, for years, we were always nervous when the market P.E. got above 14. But with 1 % interest rates, that wasn't shocking. but we've already normalized and and yet that the the price earnings ratio is 20 or 21 so so again you'll you can ignore that for a while it just it'll it'll happen abruptly when it happens we and i think about it like so yeah i think everybody wants to look back at 07 to 09 and say like okay what happened then and how did that be my playbook for living life which is um by the way that that treats it like a formulaic rote process and it's impossible and it didn't it didn't there There was bad demographics.

26:16There was just totally ridiculous real estate speculation. But in many respects, whether we're talking demographics or anything like that, the economy grabbed the hand of the asset markets and said, hey, let's go to hell together. But it was the economy that really led the asset markets. This time, I think it's the inverse of that. The asset markets will grab the hand of the economy and slowly pull them into hell because, again, are we seeing damage in the economy from higher interest rates? No. We don't see it in jobs. We don't see it in house prices. The things that would affect the mainstream middle America economy, it is asset-related.

26:54It's credit-related. It's what wealthy people deal in. But, again, those kinds of things have 12 to 18-month lead times. Correct. To where it will eventually affect the real economy, but it will take time for that to eventually happen. I mean, as an example, I mean, yeah, no one's getting poorer in their home right now. Now, let's go call the average real estate agent in America and say, hey, what do your recent 1099s as a contractor look like in home sales? 70 % fewer listings. A good friend of ours that's a solid real estate agent is 30 % fewer listings in the Phoenix area than there was a year ago.

27:32Correct. So, you know, if they've made great money the last three or four years, you can weather that storm for a year. Hopefully they save some of it. But you can't go out and weather that for three years. And that's when it would, again, that's where the credit issues, asset issues, start to affect the real economy. Would you want to be a mortgage broker right now where you just got done doing the biggest volume you've ever seen in refinancings of your lifetime within a two-year stretch? And now you might never see a refinancing again. And that's a natural corrective force. we figured out that back in 07 about 4 % of US adults were employed directly or indirectly associated with the residential real estate and by the time we got to the bottom in nine or oh nine or oh ten probably 60 % of those people had to seek employment somewhere else exactly so let's see so I just want to say to our audience and our listeners and our tribe send us your questions we'd love to tackle it and kind of our big question next quarter.