The Smead Book List - Fall 2024

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, CEO and Portfolio Manager here at Smead Capital Management. At our firm, we are readers and we believe in the power of books to help shaped informed investors. In this podcast, we speak to great authors about their writings. The late, great Charlie Munger prescribed using multiple mental models and analysis. We analyzed their work through the lens of business, markets, and people. Today's date is September 30, 2024. This is our quarterly book list where we talk about books, books, and more books. Hosting this with me is our Chief Investment Officer, my dad, Bill Smead.

0:57Ted, thanks for joining me. Great to be here. So let's start out talking about what we've recently read. Do you want to kick it off? Sure. as if I didn't need to inundate myself more. I was recommended Technological Revolutions and Financial Capital by Carlotta Perez, which is about a 20-year-old book that was written in response to the technology bubble of 99-2000. And what's so interesting, since this podcast is named after Charlie Munger, I went to the Berkshire Hathaway annual meeting in May, and they started with a bunch of vignettes honoring Charlie because he passed this last year. And the first vignette they started with was Charlie back in 99 at the annual meeting saying, you know, if you have a financial euphoria episode, it's like a chain letter or a Ponzi scheme.

1:49And if you throw a legitimate development into it, it's like mixing raisins with turds. And what you end up with is turds. Well, Carlotta Perez's thesis is effectively that you're going to end up with turds. When the technological revolution and the financial capital meet together, it ultimately turns into some kind of mania and you end up in that situation. But it's a very normal part of capitalism. And there's the cycles of capitalism. It is. That's why people doubting it should feel kind of foolish about doubting it because it's just as healthy a part. I mean, you have to have a recession once in a while to clean out bad economic behavior.

2:33You have to have inflation come along every once in a while so people can understand how damaging it is. But if you're the federal government and you've borrowed$12 trillion and monetized it, inflation can be your friend by helping you pay stuff back cheaper. So it's actually a terrific book, but she's a very technical, wonky economics writer. Yeah. Right. She would have taken the math oriented economics classes at our college. And and but it was you didn't take those classes. I tried to avoid some of them. Yeah. Econometrics. I took econometrics. I got six weeks into it. I got so bored. Yeah.

3:16I was going to say at the age of 66, you're not that toning at all. No, but I'm glad there's people that that like that stuff and do that work. That's the kind of information we like access to. And she does a great job. You wouldn't know that she didn't write this a year ago. Let's see. You just brought something to mind. I was in Southeast Asia recently visiting with some of our investors out there. And one of our investors, unbeknownst to them, while I was in Thailand, gave me a small thing of what would be like a Thai peanut brittle. And it had a lot less sugar. And, you know, I immediately thought of the Breaking Bad Charlie Munger scene where I turned, I actually turned to our investor and mentioned to him the scene.

4:03So I had Munger echoing through my mind when I got that gift. From now on, brittle will never just be brittle to me. It will be, you know, as he said in the Breaking Bad scene, he says, brittle, bitches. Yeah. Pardon my French for all our listeners. Yeah. The funny thing of it is the video, that was the other snippet besides the raisins and turds thing. Yeah. And it caused me to come back from that annual meeting. It's the 14th in-person annual meeting in the last 16 years that I've gone to. It caused me to, and your mother, to watch the Breaking Bad series from the beginning. And so as soon as you get to about the third episode, you realize that these drug dealer guys are calling each other bitches all the time.

4:46And that's what the humor of it was, was that Charlie ate peanut brittle all meeting long for six hours. So he was obviously addicted to that drug. Yeah. Let's see. The book I just recently got done reading, I have a couple here, Ben and Me. We'd done this book with Eric Weiner. I find it so interesting because, again, you go to Charlie Munger. Charlie considered Ben Franklin to be one of the greatest people in the history of the world. He was a patriot. He was an inventor. He was a pragmatist in every sense of it. I was reminded of the fact that the matching scheme that we now see in a lot of charitable endeavors and whatnot was created by Ben Franklin.

5:31He used a matching scheme to do funding back at hand time. So, again, back to the incentives. Incentives caused humans to do crazy things, as Munger would say. I thought a lot about Munger in that. But here's what was interesting is like, well, you can look at all these, you know, very interesting relationships to what he had towards also education. He created University of Pennsylvania, which was really a classical education from the beginning, which I'm, you know, we're big fans of. And especially with us being this liberal arts podcast, if you will. But while that's going on, it's interesting because Franklin's son was a loyalist to England.

6:08okay so here's ben franklin one of like the modern fathers of america and his son is a british loyalist and watching the strain of that relationship of his son being this british loyalist who ends up getting captured held as a prisoner he his son ends up getting extradited back to to england and franklin later is in england and franklin's grandson lived with him in the united States as an attache with his, you know, his parents back in England. And it was just an incomplete human mess in the end. So again, you know, you're watching this person that has just these incredible ideas and capacities, and yet the ability to be human and forgive isn't present.

6:58A penny saved is a penny earned. Yep. So again, it's like you're finding all these incredible curiosities tied to Ben Franklin, and yet you can't get over the fact that he's a fallible human. And he was very pragmatic, but if you look at his relationship with his estranged son in the end, it wasn't very pragmatic. And so it's like the idea, I was taken away from it, it's like, gosh, you could do incredible things, and you're still just an imperfect human with sin, And you're going to have all these incomplete messiness. Another book that hit that same theme that we recently did was The Incorruptibles by Dan Slater.

7:37Really the history of Russian Jews leaving the Pale Settlement from what's modern day Ukraine in the late 19th century and ending up in late 19th, early 20th century in New York. and we often think about, I mean, you hear these stories where if you've been robbed, it's usually someone in your family. In other words, proximity causes problems. And I thought a lot about that in Dan's book because Dan talked about in the pale of settlement, Russians were not only the prostitutes, I mean, Jews were not only the prostitutes, but they were also the pimps. So the legacy of bad, I'll call it family, thinking in the context of the Russian Jews, the family having these issues, they completely poured it right over to New York.

8:24So guess who's dominating the prostitution? And, you know, the, you know, effectively all the pimps were also Russian Jews. And so it's kind of like his book was a great study of saying in your community, if you have problems, you shouldn't be looking outward, you should be looking inward, because that's where the problems are. So I've thought a lot about this, you know, we live in here in Phoenix now. So I think about this in context of our own family. I also think of the context of our own community. In other words, what goes on in your community, the things you don't like are actually things you're involved in.

8:58The history of the tobacco industry was that prior to inventing the machines that rolled the cigarettes, there was a huge community of Jewish men that were rolling those cigarettes for years. I saw it. There's some kind of historical TV show where they kind of recreate what's going on. I can't remember what the name of it was, but they told that story because one of the brilliance of how profitable the tobacco industry has been is that those machines haven't changed much in the last 70 years. All you got to do is put some grease in them once in a while. And so it's incredibly inexpensive to take tobacco and put it in the form of cigarettes.

9:42But yeah, when in Dan's book to kind of clean up those, I'll call it familial messes. You have to deal with it in the family. In other words, the people that are going to rectify the situation were people inside that community. And you might not do that in the most legal bounds, but it might be right. It's one of the things that took away. Another book that I've got done, actually, our colleague, Will Keenan, had recommended this book to me, is called The Professor, The Banker, and The Suicide King. It's written by Michael Craig. Oddly enough, Michael Craig actually is located here in Mesa, Arizona.

10:16He wrote the book. He's played poker for years and been highly involved with poker. And he talks a lot about the mid-2000s Chris Moneymaker craze that took poker to a new height and put the World Series of Poker on TV. And so what his book is about is a guy named Andy Beal, who has a bank in Texas. And he shows up in 01 and starts playing big money poker out of nowhere. And this is right after the 9-11 attacks. And so here's the economy slowed, Vegas is dead, and he starts showing up to play these big poker games. And I mean, he's playing for some really large money. And he ends up running, and I won't give it too much away because I think there might be a chance that we end up having Michael come on to talk about the podcast.

11:03But he ends up playing poker against what is called the corporation. And the corporation was a pack of the best poker players in the world. And they called themselves a corporation. because they were pooling their money together because Beal was playing for such big money that they could go bankrupt. And so you think about like risk pooling in an insurance, you know, like a Lloyd's of London risk pooling. You think of who has an edge, what's their edge. And so just very fun book, very fun read. I thought a lot about risk taking in it. But I also thought about, you know, the old saying is you can't play on scared money.

11:36It's funny to watch the pros become the scared money. The best players in the world be the scared money. Correct. And what it makes me think of is the way the hedge fund algorithm guys moved closest to the electricity. The closer they were - Well, yeah, for latency. Yeah. The more benefit they would get by something had nothing to do with trading skill or understanding of the stock market. Yeah. So let's pivot to what we're currently reading. What do you have? Well, Hedy's Folly is kind of fun because my mom was a big old time movie person. And so Hedy was from Austria, was married in Austria and turned out was a very bright lady, although undereducated because she was a really a child and young teen actress.

12:32She was a spectacularly beautiful woman and started acting in plays. And then the movie makers eventually caught up with her. But she was also a very, very smart woman. And in the process, began to tinker around with inventing electronic ways to solve one of the key problems of the era, which was radio guided torpedoes. how to stop them and how to cause them to be unseen to do the good work that you want done. And so it's a very, very good book. Great subject. You just mentioned, for example, her first appearance, she sold$5 million worth of war bonds, which$5 million was just its equivalent of just like$50 or$100 million today.

13:30And it was just astounding. And so it's they called her the most beautiful woman in the world. But she was a super smart lady. And it's very entertaining because that that was my parent. My your grandfather served in the Navy during World War Two and helped keep the peace in Tokyo afterwards. I've always been fascinated by that time period. And this book just takes me right back in there. And, you know, so it's got multiple. Great history, great logic, great writing. This guy's a Pulitzer Prize winner, this Richard Rose. Gotcha. Well, on the Japanese or Tokyo side, I actually went on this trip out to Asia.

14:13I got to go there. And I landed, and the DNA Bay Stars were playing the Yamiuri Giants, which would be the Tokyo Giants. and I was too late to go probably scalp tickets. So I just sat there watching the baseball game in my room. And then I was getting ready for our meetings the next morning. I woke up because obviously the Dodgers are playing their Sunday day game. And so I'm watching Shohei. I think he hit number 46 while I was watching. And I thought any country in the world that wants to give me baseball Sunday and Monday morning, I like those people. That's a good place to go. It's a good place to go.

14:46Let's see. So my books, so I was given this, I actually want to give a shout out to a group by the name of Highmount Capital. Highmount is a venture capital firm that we got introduced to through a friend. And Highmount sent me a book called Living Life Backward by David Gibson. And it's really a book on Ecclesiastes. And talking about, it talks about life as though it's missed. And so he talks all about really death okay and he talks about death because most people try to just avoid the idea of it altogether and because of that are just not very realistic about life in words like if you avoid death you kind of like take out the well what does life usually bring right there's good seasons of life there's bad seasons of life and so he's really trying to shape this idea of of um what do you have to deal with no matter what and all the imperfections of life are actually the things that you know will come and should not be avoided, but really just taken as part of that whole experience.

15:57And so I'm about two-thirds of the way done. There's a lot of wisdom in it to where you're just getting drowned in wisdom. And you're like, all right, I got to process each chapter. So I was told a long time ago, and I think this is a brilliant thought. Live your life, you are writing an obituary. as you live your life you're writing an obituary you know how many people think about gee you know when I die and they put my obituary in the paper what's it gonna say well correct but even contextually like so I mean here we are on a podcast I like to think this is a great podcast I have fun doing this with you by the way in a hundred years this is this doesn't matter and again it doesn't mean it doesn't mean what we're doing in civilization isn't important.

16:47You know, it doesn't mean that what we're doing in our lives isn't important, but after one generation comes another and after another generation comes another. And the idea, I think the real danger, it's like, you know, to your discussion earlier, look, what's going on right now, Bill, is so much more important in the history world than anything. And then the next generation says that and the next generation says that. And having that perspective of the process that you're going through and being realistic about that process, which is, it was just funny to think about. So, you know, just giving a lot of picture from a, all right, if you're God looking down, you know, what do you think?

17:30Well, so living life backward, your mother and I have a strange goal. Our goal is that my great-grandfather and grandmother were married 69 years, 11 months, and 10 days. And they died within two hours of each other on that day. And they didn't make their 70th anniversary. Well, one of the reasons that I'm so into this is that I've seen many of the notices in the Portland Oregonian newspaper. Every year, the family reunion was celebrating the anniversary of Pap and Melvina. Shmead. So giving you a little, little genealogy here too. Yeah. So, so it was a big deal. I mean, the relatives came from all around, even from Kansas each year for that reunion.

18:20And, and it was, it was a big deal. It was the reunion, et cetera. And so we just passed our 43rd. So we've set that as a goal, right? So the goal is to get to, uh, we, she and I have to get to, uh, uh, 27 years. We've got to get to 93 years old. We're born the same year. And to make 70 years being married to complete what they came really close to competing. And I don't know about dying on the same day, but that's a whole separate subject. Yeah. See, the other book that I have here, this has been a book that we've both been in for a while now, is Bonhoeffer by Eric Metaxas. I think I brought this up last quarter, too.

19:01I mean, it's such an interesting book where, you know, I'll use Munger. Munger talked a lot about second level thinking. Okay. So you're in this book. Everyone's kind of watching the events unfold and the wisdom that Bonhoeffer is exhibiting relative to the people around him. It is very much second level thinking all the way to where we're now at the point in the book where Bonhoeffer knows that he has to go back to Germany and he's, it's like, he's going to die. He knows he's going to die. He knows he's going to die for what he's doing in Germany. Yeah. Um, uh, and, and what, you know, because of why he disagrees with the Nazism, but Nazism from the perspective of a biblical perspective and a, and a godly perspective, I would argue.

19:43So it's just interesting to think about, you know, as I'm, as we're doing Bonhoeffer and you're reading living life backward, you're like, okay, I'm going to die. And I'm at least Bonhoeffer had the poise to take that in a way that he was purposeful in death. And courage. Correct. Unbelievable courage. Yeah, unbelievable. The guy had unbelievable courage. Yeah. So the other book that I just cracked, I'm like a chapter into this. It's like a short history of the history of Hong Kong. It's Fortune's Bazaar by Va Dean England. And it was kind of fun because I was cracking it as I was, you know, in Asia at the time.

20:23And I just thought, you know, it's a newer book. It's just been released. But what more fun than as we're watching the whole, you know, what's going on with Xi Jinping? And, you know, is China bottom? Then is David Tepper's Buy Everything China, you know, have validity, you know, to kind of be in a short history like that. So let's pivot on to the ones that we've had recommended to us. Maybe you want to kick it off on that side, too. Well, I just literally got recommended this book, Bull, by Maggie Mehar. And I don't know very much about it yet. But I just downloaded it. And I'm sure it has something to do with the investing in common stocks, which is a favorite.

21:02And then a book I read a long time ago that had a huge impact on my life, I've decided to go back and reread. because it was recently given to me as a gift by a charitable organization up in Seattle that we support. Faith by Mike Martin, one of the great stories of conversion and really a missionary in a local place, right? He didn't go halfway around the world to be a missionary. He went to the middle of just north of Seattle and created a huge school. It started out being a school for wayward kids. And that's a school Cole grew up going to. And there were some wayward kids there when he was there too, but not the same way.

21:53And but anyway, just be reminded it's an incredible story of of what God can do if he gets a hold of somebody. Hey, I want to give a big shout out to everyone who's been working so hard on the show. You know, we recently hit the top 10 investing podcasts on Apple Podcasts and even number one in the business category in several countries. As you may know, this show is brought to you by Smead Capital Management. Smeet Capital Management understands how frustrating and illogical the stock market can be. If you are searching for funds with a proven track record, give the Smeet funds a look or better yet, reach out at SmeetCap.com.

22:31And don't forget to mention that you're a fan of the podcast. Past performance is not indicative of future results. Investing involves risks, including loss of principal. Please refer to the prospectus for important information about the investment company, including objectives, risks, charges, and expenses. Read and consider it carefully before investing. Smead Funds Distributed by UMB Distribution Services, LLC, not affiliated. So the other book I had recommended to me, and actually I got a copy of it, and I'll give a shout out to our partner that we worked with on our software suite, which is Ridgeline.

23:08If you haven't checked out Ridgeline, Google them, check them out. I'm sure people would love to talk to you there. But it's called Turn the Ship Around by L. David Marquette. But David is a retired Navy officer. And it's a book about leadership and dealing with many people. And I haven't cracked that yet, but he had spoken at their base camp conference. And so let's see here. I have a couple others. So as usual, knowing what season we were in, about to come to the book list, superfan Steve did email me. and he says the book he recommended was Move by Move by Maurice Ashley. And it's a story of a grand chess master.

23:54And so, again, thinking about logic strategy is what I was thinking about when he sent that in. Let's see. Another, oh, and by the way, if you want to find Superfan Steve out there on X, at Denver Labrador is his handle. So if you guys want to kind of self-identify with Superfan Steve, So I'd say another friend of ours, Chase Emerson, who's also on X, he's AZ Land Investor is his handle. I had asked him as a friend, you know, do you have any good books you recommend? He said, how we choose what we do. Yeah. He says, how we choose what we do by Richard Robb. And he said that Richard Robb is a he's a University of Chicago guy.

24:38He runs a hedge fund. And Rob argues that the book Chase was telling me that ultimately we do things for doing or doing things for itself rather than logical reasons. And it made me think like, oh, is it like a YOLO? You only live once, so might as well do a few dumb things. But again, it's a book that Chase recommended that you could check out. So a couple of questions that I want to throw out to us, because I know we're getting these anyway. And I know there's something you and I have been talking about. Can you give a sense to our listeners, Bill, how far away we are from where we were 13 years ago on China?

25:27Because it's like, I always tell people, listen, markets are adaptive, complex systems. They adapt over time, but not overnight. And so kind of explain the last 13 years. Everything kind of moves on a pendulum. And you start out unknown, unloved, unthought of. And then what happens is momentum takes you clear the other side of the pendulum. And so 13 years ago, China was the bomb. They were the most highly thought of major economic power in the world because of how fast they were growing, how much stress they were putting on inputs, how positively they were affecting neighboring countries and economies like Australia and the countries that produce natural resources.

26:29Brazil. Mondays, Brazil, Russia, India, China, the brick trade. And literally, that was the top of the world. I'm writing about that for a quarterly letter for our fund. And then as of two weeks ago, and I mentioned it to Cole. Now, Cole and I both have a lot of hesitation about whether a command communist system is really investable. I mean, if you own stock there, do you really own anything? Can't the government just say you don't own that? So we have a lot of reservations about that. Or how you can allocate capital based on that regime. And how you could allocate capital. Yeah. And that's a very fair point.

27:12But from a pendulum standpoint, people about a week ago were the least likely to think that that was a good idea because anything outside the United States is considered a bad idea from international investors as well as U.S. investors. Yeah, they all in unison agree. They all in unison agree. They all just want this S &P 500 drug, which is loaded with the most glamorous and successful companies, mostly tech and a bunch of what we call kind of high quality, wide moat growth companies. the, you know, the Costco's and that kind of people. And that's like the only drug that anybody wants. Whereas we've got a chart that shows in 2010 that the list of largest cap stocks in the world was dominated by people directly connected to the brick trade, including in Brazil, it was Petrobras, China Construction Bank, ICBC.

28:12Petrobras would go down as another company that can the government get out of their way and let them do what they want to do. So it's funny, and I don't know if I got to tell you this, but the last two times I've been to Hong Kong, which would really be, from a capital markets perspective, historically been the gateway to China. I sit down at lunches or meetings, and here I am like your classic suburban kid from West Coast America living in Phoenix now, and I sit down in meetings, and they look at me and they say, so when are the Hong Kong stocks going to bottom? them. Now, now that's how far the psychology is.

28:50They're asking people from far flung places in the world to understand what's going on there when the reality is what's our edge, you know, outside of what insiders teach us or what kind of businesses fall into our lap. We have no edge in there, but I say it because that's where the psychology is when they're looking everywhere else. And, um, now I'll add one more thing. And I shared this with our team coming back. So, So, you know, like we've talked about in the last, you know, letters, missives, quarterly booklets, household ownership of common stocks here in the United States is higher than it's ever been.