The Smead Book List - Spring 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. Today's date is April 3rd, 2023. This is our book list episode, where we'll be looking at what we're reading, what we've been seeing, what we've been hearing in books. And people often ask us, what are you reading? Can you send out a book list? And as low turnover investors, we're pretty lazy people. So rather than put out a list and do that work, we'd rather just talk about what we're hearing in ideas and books. Joining me for this episode is our chief investment officer, my dad, Bill Smead. Dad, thanks for joining.

1:30Welcome to everyone. Let's see. So I'm excited to talk about what we're reading. We've also just had some, you know, really fun books that we've got through. There will be some podcast episodes coming out on this. So let's start going over anything we just read and what are any big ideas you got out of the book. So I'll kick it to you first. Yeah. The Code by Margaret O'Mara. It's so good, But it's incredibly long, wonderful history of the entire tech complex and so rich in how it speaks to things that are going on now. You almost should only read that and then not read anything else for about two months just so that you can fully absorb how powerful that is.

2:13Well, I agree. And we're going to be having in April, we'll have, it's to Bill's point, it's so rich that when we went to, when we reached out to Margaret to record on her book, Bill and I quickly recognized that this is such a wonderful history. It's really, in some respects, it's a history of the second half of the 20th century of America. An anthology. in early 21st century to where we didn't think we could do it justice by squeezing it into an hour or an hour and 15 minutes for the podcast. And so graciously, Margaret joined us for over two hours of recording. And so that's going to be splitting that into two episodes.

2:47It'll be our two April episodes of the podcast. But let me follow up on the book because I think this is just awesome. She does such a good job of explaining things like the interaction of government with technology, which we all think, you know, when you run into these tech people, they act like, oh gosh, I'm a libertarian. Life's so good. I'm just super wealthy. Kind of, you know, kind of the Elon Musk, Peter Thiel schtick, if you will. And I'm not saying that's a bad way to go through life, but she does a great job of explaining in the book. And I think we really enjoyed how much government interaction there is to these core technologies.

3:22So for example, in our, in our current world, let's use a company like Palantir, which was obviously started by Peter Thiel. Well, Palantir's first customer was government. That was their only customer. In fact, government funded the business in effect. Yeah. And in truth, the pre a major venture capital world, the government fighting wars and going into space was the venture capital funding of technology. Correct. And much of that was bore out of really the problems of World War too, which is where the original microwave technologies and sonar technologies and radio technologies came out of. So, so I agree.

4:00Now the technology world treating it as though they don't need government is a myth. It's embarrassing in a way. So I, so the question, and I think this is something that Bill and I are really interested to find out is in the next era, because again, funding can dry up from time to time in the next era, will the government or maybe the lack of government be a more important factor in the technology investing and the infrastructure we build over the next 10 years. And I think Margaret's book just does such a great reminder of that. But as I say, the second thing too, is her book also does a really good job of explaining the dry spells.

4:37Yeah. And what you learn from going back over multi-decades is even though it's a growth industry. It's a very cyclical growth industry. And people in the boom times begin to think that the cycles have been violated. For example, one of the books we're currently reading is The Crowd Revolution, and it picks up more recently with what's gone on. And again, there's this sense of invincibility to AI and some of these. It's like they're trying to get back into the woogie position. For our listeners, it's going to be a real treat. It's a month long of treats. You're going to love her book. And I think she does such a great job of looking from an economic history, a political history, a kind of a development history of the West to kind of teach us who the people were for that.

5:29And so I can't speak more highly of her book as Bill does as well. What else have you recently read? Well, Perry Merrilline's Money and Empire. Which we had on the podcast here in the recent month. Yeah. And again, I can remember taking money and banking in college. And what's so fun about the current time and reading this book is how alive the economic concepts we were taught in the late 1970s are to today. The interaction between fiscal policy, monetary policy, too many people back then in the 70s, baby boomers, with too much money chasing too few goods, to today where it's millennials with too much money chasing too few goods.

6:17And you read his book, and by going back in history, you recognize, wait a second, we could put today's situation and think about the rhymes of the outcome. I agree. And I think, you know, after reading Perry's book, the other thing I think of is, you know, we've been in this dollar world, you know, really since Bretton Woods, and that's continued to evolve. Like, for example, you know, we talked about petrodollars back in the early 2000s was a phenomena where, you know, we'd send oil money abroad, it would get recycled back into our treasuries, we'd buy cheap Chinese goods, and that would get recycled back in our treasuries.

6:53And that was really a dollar system. So I think, and we brought this up with Perry, but one of the great debates right now is, are we still in a dollar system? Because, for example, we know that India is buying oil from Russia and there's no dollars being touched in that transaction. Okay. And I'll use, we talked about this in the podcast too, but Zoltan Pozar, who's very well known out there from Credit Suisse fame, he's arguing that we're in a post-dollar world. Okay. And he's using these examples to show we're in a post-dollar world. Yeah. From a historical standpoint, Perry does a good job of also pointing out what were the strengths and weaknesses of the gold standard.

7:35So here about 10 or 11 years ago, we were watching countries like Portugal, Italy, Greece, and Spain struggle with a terrible economy, but they were part of the euro. so even though their economy was lousy, their currency didn't weaken because of the lack of gold on deposit. They just got stuck with the currency value for the entire European group. And what that stopped was their exports from being incredibly cheap to buyers around the world, which automatically would have lifted them up out of their difficulties if their products that they sell to the world were in great demand because of how inexpensive they were.

8:17Well, yeah, and that's what what Kindleberger really wanted, as Perry laid out, was he wanted this. I mean, he wanted a fixed exchange rate to be able to transact. And ultimately, the dollar was the source of the ultimate exchange. But again, you know, Russian oil isn't being pegged to the dollar. It's, you know, rupees or rubles or whatever that is. So I pointed out because we know we're not in the dollar world we were just in. We're in a fractured dollar world. Now, is Zoltan right? And we're going to something else? And this is just the intermediate? Or Ray Dalio, right? Or Ray Dalio, right?

8:49Or is Perry Merling right? And we're going back to a dollar world, but we got to wait till these fractures. I think in our discussion, he pointed out that the European countries after World War II did not reenter a fixed exchange rate system until 1958. So this is not something to your point, Bill, that's going to be solved in the next year or two years. The question is, we look 10 or 15 years forward, will we end up back in the normal dollar world that we had, or will we wake up back in some other form of agreement among the trading partners of the world? And would the loss of that dollar world be inflationary or deflationary?

9:26Well, as well as does it cause more security or less security in the world? And that's what I think Dalio really is trying to push at. What else are you reading? Oh, I'm rereading The Purpose Driven Life by Rick Warren, which is a great thing to who remind me of every once in a while, as a human being, you kind of forget your purpose in the busyness of life. And that's a good one. Yeah, his thing in that book that I love is, he starts it out by saying, it's not about you, which by the way, congratulations, that's the best reminder we could ever be told is, it is not about us. The other book that I read and really enjoyed, and we did this on the podcast as well, was Shannon O 'Neill's book.

10:10Again, I think in, we're just talking about the dollar world. We think of this idea, it's like, it's petrodollars, it's China. You think these big thematic things. The globalization myth. The globalization, and the reality is it's not. You're distributing more products to your region, whether that be inside your country or to the countries close to you. This is something that I've thought a lot about and ask, like, you know, in our own business, how much business do we do in Canada? How much business do we do in Mexico? And the reality is we do very little or none. And so I've thought a lot about her paradigm she's bringing up to ask the question, are we missing easy things that, you know, even American businesses could be doing, which are right across our border?

10:50I just look at it as kind of, there's easy money, there's low hanging fruit, as long as the framework around it. So let's pivot, let's pivot to kind of, what we're currently reading, what are you currently diving into? Well, we're beginning The Blue Blood by Robert Pickering. And as someone that spent 42 years on June 2nd in the investment industry, it's a wonderful kind of history of this firm in Britain. Casanova. Casanova, that's very representative of what happened with the Kidder Peabody's and the Smith Barneys and earning money the old-fashioned way or EF Hutton talks and people listen. It harkens back to eras where those brands had power before the proliferation of inexpensive ways to trade.

11:43But it's just a great exercise in thinking about our industry in general. Agree. And also, to your point, it's got the old guard touches. I mean, there's some great stories in there where he talks about, you meet with this partner, you meet with that partner, that's how you get your job. I think the other thing too, and given you saw this, it touches of it in the 1980s, I've never seen this before, but some of the stories you read about the ability to mix alcohol and the investment business is pretty crazy. Well, blue blood is to the investment business what suits is to the legal profession. Yeah, exactly.

12:20So, and especially in, you know, in Britain, where even today, I mean, you know, having a drink after work is far more common than it is in America. Some of the stories in there are just incredible. We're actually going to, we're going to be doing a podcast with Robert Pickering. So I'm really excited to talk about that. Also for our US listeners that don't know who Casanova is, it does a great job explaining the consolidation that has happened in the international financial services space in London. That was an esteemed name, a very well-known name. I think the other thing, too, that we'll be able to delve into in that book, we'll be talking about, you know, as you put cultures together.

12:56I mean, we've talked a lot about consolidation in places like home building and oil companies and banking. And how do cultures come and put together and how does that work out? And so I think we'll have a fun discussion out of that, thinking about the cultural aspects of that. Then I'm reading The Cloud Revolution by Mark Mills, who Kohl's had a lot of exposure to through being on the board of COSM. Oh, Discovery Institute. Discovery Institute, which has their COSM conference. And we know him to be kind of a brilliant thinker. But the only thing that scares me about it is this book came out in late 21, which is a dead flat top tick to the cloud stocks and the excitement about tech.

13:41And in our view, we're kind of in a bit of a bear market rally in technology stocks right now, similar to what happened in 01 to the dot-com bubble breaking. So on the one hand, I'm learning a lot. Cole is saying, like Munger, we constantly want to be learning. People always say, why do you not like tech stocks? I don't dislike tech stocks. I just like making money on common stocks where I have some circle of competency. and the best thing about these two books, The Code and The Cloud Revolution, is it's gonna fast forward me up into my base of knowledge so that in six or seven years when the tech stocks bottom out, which is what our best guess is, then we'll be able to pick through the rubble and find some good morsels.

14:26Well, what I really like about Mills is he's a great framework writer. In other words, people ask us like, how do we think about the oil business? Well, Mark Mills' prior book was called The Bottomless Well. And what that did a great job is building a framework. And what I think we're going to really, what I think we're going to heighten by the time we finish reading the cloud revolution is something that Mark really helped me with in my thinking is the great fallacy is that if you're an energy bull or you're really excited about the prospects for oil and gas, you know, over time, you're kind of a luddite, right?

15:02You are the luddite. You will be overcome and usurped by the robot, et cetera. But that's actually not that true. That's not what Mills argues. That's not what Mills argues. But it's just like the person that says, oh, through technology, we are going to usurp the need for energy, which is also a fallacy because to be a technology bull, you actually have to be an energy bull. Because you use more energy. The more technology, the more energy that's used. And so early in the book, but what I think Mills does a great job is explaining the heights of where we're gonna go and therefore the framework around that that's gonna be needed and the foundation around that's gonna be needed.

15:40I mean, I think when Mark explains things, I usually think, oh, now I understand Elon Musk a little better because you can't be Elon Musk and say, we're gonna do all these great things without using huge amounts of energy. For example, rocket ships, they just use a ton of energy or the people wonder why he can build Teslas and yet fire natural gas plants in Texas because they're the same concept. Yeah, you're seeing a situation here where Silicon Valley Bank, Signature Bank, and First Republic are in either complete trouble or deep trouble. And we believe it is going to rearrange the deck chairs in the venture capital world and the private equity world.

16:26There has been so much momentum the last 10 years due to incredibly low interest rates in this ecosphere of people making investments that don't get priced in the newspaper each day. And it's been so comfortable. It's kind of like the ultimate David Svensson investment. He was doing it when virtually no one was doing it. And now everybody's doing it. And we now know that the financial institutions most closely aligned with it are in big trouble. Therefore, we want to learn because the vendors to these startups are cloud companies, et cetera. Yeah. The other book I'm currently reading is The Price of Time by Ed Chancellor.

17:07And what I love about Chancellor is from an economic history perspective, Chancellor does just a wonderful job. And by the way, in a very kind of Jim Grant kind of ilk, reminding you of we're human, we're going to do stupid things. Yes, money changes over time, but it always mean reverts in the long run. And to your point about what's gone on in banking here recently, that's what we're waking up to. We're finding out that the financial euphoria that was centered in the United States of America did affect everything all the way down to what supposedly boring banks were doing in their capital structure, and therefore we've run into these asset liability mismatches.

17:45And Chancellor, we're not taking any risk on Chancellor because he wrote a seminal piece back 10, 11 years ago. He's written a lot. He's written a lot. About housing that helped us immensely understand how undervalued housing was in the U.S. Yeah, I mean, his prior book was The Devil Takes the Hindmost, which is, again, a great book on understanding and studying euphorias. So let's pivot out to, if you had any people recommend books to you or anything like that? I have been too busy lately. Okay. Well, so I got a couple. So there's a book that I just came across. I just love the thesis of it from kind of the cover of it.

18:23It's Range by David Epstein. David Epstein's prior book was called The Sports Gene, where he kind of looks at like, there is more genetics in this than we think. And he points out some of the oddities of outstanding athletes, depending on the sport. This book, Range, is all about specialization not being good for learning, okay, which we like. I mean, I said that investing's the last great liberal art. If I can know something about the energy business and to our discussion a second ago, no, enough about technology. Congratulations, that is a liberal art we've just practiced there. So that's from what I've read over the views of the book that it really centers on that idea.

19:04And he tells stories around it where the further distance you have from the problem, the more likely you could find a solution because it's analogous. It's something that you haven't ran into, but you've seen something like it from another field. So that's a book I'm really excited to jump into. The other, our colleague, Seamus Sullivan, our senior analyst had read The Psychology of Money by Morgan Housel. So another book that - Great topic. Yeah, that I'd love to dive into. And it's various stories, how people think about money. And as he points out, they're not very sane about how they think about money.

19:38And I'm gonna read The Price of Time as well. Yeah. So let's see a couple of their books. And this is coming from our audience and our listeners. Let's see, Steve from Denver, who I know is a super fan, recommended the book Distant Force, which is a story, it's a book written about Henry Singleton and Teledyne. And if you guys have read The Outsiders by William Thorndike, The Outsiders was, you know, focused a part of it on Henry Singleton. And so I'm really interested to read that. That, just so you're all aware, it's not in print. if you want to get a copy, get ready to get your checkbook out.

20:19It's very expensive. So, you know, maybe I'm saying that you go find some copy that you fell across on a PDF somewhere on the internet. We didn't do that. We bought it. We paid the piper. But I'm really interested to read that. So I thank Steve for that recommendation. Let's see. I got a couple others coming from our audience. Let's see. Kent from South Bay Area sent a copy of a book called The Anxious Investor by Scott Nations in as well that came in. And then we have another Steve at like Steve, we must have millions of Steve fans out there. A local Steve from Phoenix sent in two books to us.

20:56The first was called Volt Rush by Henry Sanderson, kind of gets into the topic of, you know, the green future, electric vehicles, etc. And then the other book that he sent in was The Rise of the Rest by Steve Case, which we're familiar with. And, and I haven't read yet, but we're very familiar with some of the topics and, you know, kind of the J.D. Vance's of the world and that those theories. Steve Case made the most brilliant trade in history. He stuck a real live company, Time Warner, up underneath AOL so he could spend a couple of years selling at good prices. Yeah. So let's see. So I wanted to put this in.

21:28I know we haven't done this in our in our book list episode before, but it's kind of a mailbag question because I know we've been getting a lot of questions on this. And so I just kind of want to, you know, throw it out there and just kind of put it out there for a mailbag question. And the most common question we get right now, Bill, is, you know, with like to your point, with Silicon Valley Bank, with Signature Bank and all these banking upheavals, you know, the question we get is, well, what about the coming recession? OK. And so I'll throw that out first to you. Like, you know, what do you what would be your response to, you know, when is that coming recession?

22:03What is that coming recession and the fears that are being out there currently in an economic way? Yeah, thanks to Amity Schley's book, The Forgotten Man, back in 08, we kind of did a deep dive in what makes up the United States economy. And about 80 % of everything that happens in the United States economy happens every year regardless. So really, at the margin, there's about 20 % of the activity that's variable. So if the economy contracts 4 % for, say, 6 to 12 months, it's painful because you're losing about 20 % of that 20 % of activity. But as I like to say to people, people, if there's a 4 % recession, they'll sell their stocks.

22:43But if your spouse loved you 4 % less, would you get a divorce? And the answer is, when you're 64 years old like me, if she just loved you 4 % less next year, you'd be really happy. Well, yeah. So here's how I think about it. Because, again, I like to do the Munger inversion. Okay, so the fool the last two years has been the person worried about the coming recession. Okay, in other words, oh, right rises, they're going to really affect the consumer and the economy, and it's going to tip over. That's what the fool thought a year ago. By the way, the fool's been wrong. The fool thought that inflation was transitory.

23:20The fool was wrong. The fool didn't think the Fed had to be that aggressive. The fool was wrong. So what I find really interesting and something we've talked a lot about with our investors here is the person doing the best in the American economy right now is actually the lowest income, the lowest income quartile or quintile. So we have, if you look at the Federal Reserve Bank of Atlanta, they're making the best money year over year in wage increases. And by the way, they're making the best money in real wage gains. Yeah. Today, Disney, a corporation said their minimum they're going to pay people in Florida is 18 bucks an hour.

23:50Correct. So we're, so that's one part is the labor price of those people is going up and up and up. The second part is, if you look at from the end of 19 to today, as we sit here, the people who have had the largest gain in net worth are not rich people. So you think of the 2010s. I think of the 2010s as the Ray Dalio, Elizabeth Warren era, where the rich get richer and the poor don't go anywhere. And labor prices suck and so on and so forth. But what we have now is, well, the rich get poorer in real terms and the poor get richer in real terms. Cole calls it a rich session. It's a rich session.

24:27E-E-S-S-I-O-N. So it's a recession. So I pointed out because our recessions are bad recessions, right? You know, the recessions that really dig deep tend to be recessions that cause a big drop off in the labor numbers. Average to below average people. Correct. To where our safety nets then have to get unlocked and the government spending picks up and so on and so forth. But what is going on right now is, to your point about Disney raising labor prices, Who do they need to catch? There's no one to catch. Those people are doing really well. I mean, and by the way, no one, you know, alert to all my West Coast intellectuals like myself.

25:05No one's gonna catch us if we lose our job because we don't need catching. That's the irony of the situation. So, you know - Every business, every business service-related that we interact with in every place that we go has got signs up begging people to go to work. And they have trouble finding them. At wages, I can't imagine being the high school kid that works in the golf shop at my home course in a small town is getting paid, I think,$15 an hour. I did that same job for$1.65 in 1973, 74. That was a boomer moment if you're just paying attention there, guys. But the point about it is to work 20 hours a week and make$320 in high school, you're making over$1 ,200 a month.