The Smead Book List - Spring 2024

0:03You'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.

0:21Welcome 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 shape 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 analyze their work through the lens of business, markets, and people. Today's episode date is April 1st, 2024. This is our book list that we do every quarter. Sitting next to me and joining me is our chairman and chief medicine officer, dad, Bill Smead.

0:55Great to be here. So as usual, we're going to kind of kick this episode off by, you know, talking about what we've recently read. And I know that your first book that you're wanting to talk about is probably one of the screwiest individuals that walked the face of the earth today. Elon Musk. People have asked me, well, what did you think after you read the book? And my three thoughts are the guy is an incredible genius. He's verifiably insane, right? Verifiably insane. And he has demons. Literally. I mean, if you're ever going to analyze somebody and say, this guy's got some serious demons, and those were transferred to him by his dad.

1:38So it's kind of like you and me. Yeah, so which is obviously written by Walter Isaacson, who's kind of a famed tech writer. And then your other book that you read recently was about Longstreet, who was a fascinating character. He was a successful Confederate general. In fact, some think that the war would have gone a lot longer if Lee hadn't got used to his early successes and listened more to the way that Longstreet advised letting the Union attack and then counterattack because he had a smaller force. But then as soon as the war was over, he was close friends with General Grant, who became president of the United States, and quickly advised the people in Louisiana where he moved to treat African-American people the way they deserve to be treated and get away from the ridiculousness of slavery.

2:29Yeah, so my three that I have down here for books I just got to read, these all ended up being podcasts, but I want to talk about some of the things I drew out of them. The first that I have here is The Future of Business Journalism by Chris Rausch. I don't know if you heard me have this discussion, Bill, but one of the things that Chris said, you'll love this, by the way. So for those of you that are on the podcast that don't know this, we owned Tegna when it owned its newspaper business, which is part of the old Gannett business, which was the newspaper side of that business. And so we've thought a lot about the future newspapers.

3:04Charlie and Warren have talked about the civic needs that a society has tied to newspapers. So I was just very interested in the book because of that. And Chris said one of the most deeply profound things, not on the civic needs tied to newspapers, but he actually brought up stock quotes. And so here's what got me going. He pointed out in his book that when they took stock quotes out of the newspaper, It wasn't bad because the readers could obviously get that from the internet, right? So even back in the late 90s, you can go in and look up on Yahoo Finance, let's just say, what the aftermarket trading was on a stock, for example.

3:48So you already had almost better information than the newspaper. But he said it was so damaging when they took the stock quotes out of the newspaper, not because they couldn't get the information, but the readers of the newspaper had become so accustomed to getting their stock quotes from the newspaper that when they dropped the stock quotes, they dropped their subscriptions. They lost some love. Now, remember, I wrote sports for the Walla Walla Union Bulletin, Right. So so that same connection to local sports is what made that newspaper. And you're you're absolutely right. We're creatures of habit and you take our habit away from us in one way.

4:33You might just take the habit away from all of it. Yeah. And I think the other thing it teaches, though, is you can't assume you know why the customer likes you. OK, they're thinking, well, the customer likes us because we have better information. And that was not. It was because they aggregated the information in the way that the customer wanted. So it's one of those things where I thought, I was thinking like the alternative path after he said that, what would newspapers look like today if they hadn't dropped the stock quotes? Because he spends the rest of his work really talking about how business news isn't business news anymore.

5:07It's investor news. Well, it's entertainment first. About stocks. Entertainment about stocks. Sensationalizing stocks. So the next book I got, It was the Ruble by Ekaterina Pavlilova, which we just put out that podcast. And, you know, I think two big ideas I pulled out of that book, autocrats have always ran Russia, and that will never change in my lifetime. Putin's an autocrat, so we're the monarchs. But then secondly, and this is really important for us in the United States, is that you could always see when inflation was going to take off by the distrust in the populace. I know we've talked a lot about this idea of inflation when it becomes the zeitgeist, right?

5:46In other words, when the public says, I can't trust the government to manage the price of goods, then it becomes a systemic problem, which Russia's also always had. Yeah. What Cole's talking about in each era, there becomes a dominant theme that people latch on to. And they don't latch on to it until it's been the actual theme for quite a while first. So when I came into the investment business, I'd do a cold call. and if someone was willing to talk to me after that, I'd say, well, what have you been investing in? And they'd tell me, well, I own a couple of rentals. I own the building our business is in.

6:25I own a couple of oil stocks and a few gold stocks. If you have a good oil stock, you can call me. Well, what that person just effectively described was call me with something that fits the current zeitgeist. And the way that the zeitgeist changes every 10 years or so is fascinating. As we go look through my time in the business, it went inflation zeitgeist to Japan zeitgeist 10 years later to the dot-com zeitgeist to the brick trade zeitgeist to the FAANG slash Magnificent Seven zeitgeist that we're at the tail end of now. So let me ask you this since I brought the topic up. What would be your clue?

7:07So like, let's say again, using Russia and E. Katrina's book, What would be your clue to believe that the public doesn't trust, you know, the U.S. government, whether it be through, you know, the government or the Federal Reserve's ability? Like, what would be your cue? Like, what do you look at as like the tip off that the public doesn't trust them anymore? Well, that's an interesting question. The public doesn't trust them. I look more at the reversion of the mean that we're going through in commodities being so incredibly undervalued in relation to other assets in society. And I look at the ESG slash environmental movements, just massive religion associated with that and agreement.

7:53There was almost uniform agreement in the body politic on that subject. and that being unwound and the misallocation of resources that has happened based on that is what makes the zeitgeist develop. I'm gonna be a lot more efficient. It's a 10-year treasury at 6%. That's how you know that people will have baked in long-term inflation expectations. So let's see, my other book, Seven Crashes by Harold James. Harold is, this is kind of fun. I feel like we're really blessed. Harold is in the Woodrow Wilson School at Princeton one of the finest economic historians tied to European history, particularly in the world.

8:33And his book, the thing I just keep coming back to, he called COVID a war. Someone finally called it a war, used the appropriate economic model to think about it. So I think Harold is wonderful. This show is brought to you by Smead Capital Management. We hope you're enjoying the podcast. You know, we work hard putting together this show, but we work even harder for our investors at Smead Capital Management. At Smead, we believe in disciplined investing, which is why the Smead funds have a proven track record of long-term outperformance. If you're an investor who fears stock market failure and want to invest in wonderful companies to build wealth, we invite you to visit SmeadCap.com.

9:10Past performance is not indicative of future results. Investing involves risk, including loss of principle. 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. to meet funds distributed by UMB Distribution Services, LLC, not affiliated. So let's pivot to what you're currently reading. Yeah, so I'm reading The Fourth Turning Is Here by Neil Howe, and Cole's familiar with the original book, William... Strass. Strass, and he wrote the book originally, and I must admit that Gundlach made a reference to it.

9:48He's talked about it over the years a couple times, yeah. But I am very much a believer in there's a certain rhythm to history and they're making the case that there's a rhythm. And I always feel kind of like an old fogey when I talk a lot about the things you got to be nervous about in the market. Sure. Like massive euphoric froth. But even the baby boomers don't care about that, Bill. Yeah. You know, it's so funny. people, we confuse people because we never get very far away from our investment discipline and we stay pretty fully invested all the time. But if you listen to me, you think I'm some kind of a doomsday guy.

10:27And I'm not at all. I'm an optimist by nature. But I am very concerned about what the next five to 10 years holds as this plays out. What else you got? I'm reading a book called The Oracle by Jonathan Cahn. And he is a kind of a brilliant guy with a very strong Old Testament background. And he's always kind of getting you to think about what really matters your soul in relation to your work and your business and that kind of stuff. And then I'm going back and rereading the Berkshire Hathaway letter to shareholders book. Not that I wished any ill will, but since Charlie passed, I think we're probably getting just about to the end of that line with Warren writing that letter and doing the thing.

11:21We're about to make the changeover of the leadership of Berkshire Hathaway. So to summarize your three books, I would say that people are going to find God Old Testament style. They just might. So I only have two. So really fun book that I'm in the middle of. I'm about 70, 80 % of the way done with it. It's Milton Friedman by Jennifer Burns. Jennifer is at the Stanford Institute, which obviously was created many, many moons ago. And it's kind of the conservative think tank at Stanford to this day. I'd also, we'd just done Frederick Hayek's book, not recently. It's almost kind of an amalgamation of what I'll call liberal thought, right?

11:57When a liberal being, you know, things that are eternally true, you know? So for example, and Bill and I were talking about this earlier today, okay? And I think this is something, you know, to quote Keynes, when the facts change, I change my mind. What do you do, sir? As Keynes said. And so they pointed out that coming out of the Chicago school, that there is no natural monopoly. Okay. Now, for listeners, if you hear me say that, I'll give you an analogous conversation to this that you should understand that people starving in the world is not natural either. Okay. So when someone says, well, how did that come to be true?

12:35How did someone starve? The answer is it's man-made. It's man-made. So I say that because there's no such thing as a natural monopoly. It's in our world's case, most often government-made. And so Bill and I were having this discussion earlier, thinking about what is a natural monopoly? How has a monopoly come up? And what are the things around that? So I say that because there's a direct tension between that idea versus like we were talking about competition. Because if you're a Friedmanite, you believe that competition in a market economy is always present. Let the free market sort the pieces.

13:10Let the free market. It's very, very Friedmanite. It's a non-planning and Keynes was more of a planner by nature, which is where a lot of Keynesian, you know, that tends to sit on the left end of the spectrum today because obviously, you know, that was more of a planned economy coming out of the Roosevelt era. Well-meaning policies. Yeah, well-meaning policies. It's just bad dictators. So the other book that I'm just cracking into is kind of a fun, much more earlier on in this, but I would also give a shout out to a friend of mine, Matt McElwain, who's at Madrona Venture Partners. He had said, hey, there's this guy moving to Arizona from Seattle.

13:45And so he said he's writing this book. And the book is called The Conservative Environmentalist by Benji Backer. And Benji just actually moved from Seattle here to Phoenix. His book's coming out soon and I just cracked into it. And it is, I'll call it a pragmatist take. So if let's say you look at this world and say, it's a beautiful world, let's do as much work as we can to continue to make it beautiful. How do you do that pragmatically in the world and talk about climate and energy and all kinds of stuff. So again, I'm really looking forward to that. You mean actually make good decisions on those subjects?

14:17Well, but again, you got to ask the decision, you got to ask the question of what's good. So let's then pivot to any books that people have recommended to you. I got a couple - Well, first, I got a question for you. Do I have time to read Friedman's book before you do it? Not unless you got 480 pages of reading ready. Because I have to fly, so I might be able to do that. And T. Rowe Price is definitely one I'd like to read. As somebody that started a mutual fund company from scratch. Yeah, it's a wonderful book. And because the other book that you introduced me to, Bill, was The Money Masters.

14:51Yeah. And T. Rose in that book. And so this is kind of a follow on on that book by Cornelius Bond. And then let's see - Stock symbol, T-R-O-W, famous in our annals. So let's see, I have a couple of book recommendations that have come in from people we know and then people that we don't know. So from what I'll call the X or the Twitter universe, we had a couple of recommendations. Dominion by Tom Holland was one of the books recommended. Warren Gold by Quasi Quartang. And then the other book was The Market Mind Hypothesis. And then not to forget, every quarter we shout out to Superfan Steve. And Superfan Steve threw three titles out to me a few weeks ago.

15:34The End of the World is Just the Beginning by Peter Zehan. Common Stocks and Common Sense by Edgar Wachenheim, which that kind of reminded me of - That's an older book, isn't it? Phil Fisher wrote Common Sense and Uncommon Profits. Yeah. Or maybe it was, yeah. Anyway, so that was a Phil Fisher title that remind me to your point of it. And then Any Happy Returns by Peter Oppenheimer. So we've been doing this and I think it's a good way of thinking about this. I wanna kind of throw out a question to us because I just think about, one of the questions someone would ask right now is, well, Bill, coal, inflation's kind of come down, right?

16:10If you look at the PCE and the headline and all that kind of stuff, we're kind of in a, call it a two and a half to 3 % world, roughly speaking, depending on how you look at that, is what a lot of the CPI data would argue. So the question to us is, why do we think inflation and interest rates will instead be higher in the era ahead? And we'll start with you. Yeah. Well, this goes back to whether we like it or not, the primary inflation gauge from a psychological standpoint for Americans is when they go fill their tank with gas. So So it's the only scorekeeping mechanism they really have. So therefore, if they go and they paid$3 a month and a half ago, and they go there and they pay$3.60, then they start to get worried.

17:02Now, I love this because they haven't been checking their restaurant bill. Their restaurant bill is just getting clobbered on their restaurant bill. And food prices are going up. They see that at the grocery store. But usually, it's only one member of the family that buys groceries. And it might not be the one that worries about economics. So that's what we think that the lead dog is the price at the pump. And if anything happens to cause it to start going up again, people are going to get back into the zeitgeist. Yeah. And I think that's the right way to look at it. I actually think about it differently.

17:37So I've been talking about this with Bill and with my colleagues. So, and again, I'm just, I'm plagiarizing. It's what I do best. I'm plagiarizing other people's thoughts. So I'm going to give credit to a couple of gentlemen, Mickey Levy being one of them. And Mickey's provided us some great thoughts on the world we live in over the years. Mickey had showed us a statistic recently. And the statistic he showed us was software as a percentage of fixed business investment. And he pointed out that since 08-09, software as a percentage of fixed business investment has gone from like 18 % change to 37%.

18:13So it's doubled post 08-09. Wow. So the reason why he was explaining this to us is because he said, think of a traditional business 40, 50 years ago. Business wants to grow. They go out and borrow money from the bank. They buy the land. They build the building. And then when the credit cycle turns sour, they can't do that. So they can't make a new investment into the economy. So it kind of, you fluctuated on the credit cycle with business investment. Right. But he said, now that we have such a large percentage of business investment compared to the past in software, there's more of the business investment that's not tied to the credit cycle.

18:48Okay. And so Mickey had told us that recently. And then both Mickey and Larry Summers had spoke at the Arizona Fund Manager Association, which Bill originally got us involved with and our firm's a partner with. And Larry replied back to that statement from Mickey and said, and because of that, it's likely we will have a higher natural interest rate in the future because ultimately the economy isn't driven by the credit cycle like in the past. So I was thinking about this and I thought, gosh, this makes so much sense. So it makes so much sense because everyone went out and said, hey, let's go out and have these businesses be really asset light.

19:31And as the software number shows. They did. We did. I mean, so I use the investment management business. We're a software heavy company. And because of the software, we don't have to have a bunch of people with spreadsheets and doing stuff that the humans can do, you know, the computers can do better and the humans can do greater things because of the computers and the software. But I say that because it's like Munger says, invert, always invert. If we turn our society over to be an asset light society, what it means is capital is not as valuable, which means it becomes more dear because of the fact that it takes very little to create incremental change in revenue, which means the owners of capital will demand higher rates in the future, regardless of interest rates.

20:16Well, and then secondly, what has always been the American advantage, right? The American advantage is we have this huge landmass with massive natural resources. And the first thing I think of, though, is the next recession, deep recession or depression is going to be something that goes haywire in the software area. In other words, that's the center of the prosperous universe. And what happens is in the business cycles, that prosperous universe ends up being the problem. It's your point. If it gets to be a majority of business investment, if you do have a downturn in the economy, it will affect software sales.

20:58Auto manufacturing was a boom from the end of World War II until we got into the 70s. I want to give a big shout out to everyone who's listening to this show. You know, we recently hit the top 10 in 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. Smead understands how frustrating and illogical the stock market can be. If you are searching for funds with a proven track record, give the Smead funds a look. Or better yet, reach out at SmeadCap.com. And don't forget to mention you're a fan of the podcast.

21:32Past performance is not indicative of future results. Investing involves risk, including loss of principle. 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. Let's talk about a couple more things off of this question, okay? This is an over-under. Are you buying or are you selling? The federal government will eventually get their budget in line and not be spending in massive deficits like we are today.

22:07Are you buying or selling that? I'm selling that. Okay. We're both selling it. Now, let me ask you this then. If that's true, do you think whoever the next Federal Reserve chair would be, because obviously it's pretty much expected J-PAL will not be in that seat. How likely are you buying or selling the argument that the next chair, it'll be easy for them to hold rates tight and drive us into a tough economy? Or would you buy or sell that argument? Well, here's what I like, Cole. At the height of the brick trade, say 2010, 2011, there were seven older men who were educated in Ivy League colleges in the United States running the entire economy of China.

22:50And American investors were completely confident that those seven men would always make the right decision to smooth out the business cycles in China. Yeah. So now where we're at is after this inflation episode, we think the seven men and women that are the Federal Reserve Board governors who are educated in the same Ivy League institutions are going to make all the right decisions to get us out of this inflation episode. and I think that they're gonna have as much success as the seven Ivy League educated people did running China. And therefore I'm whatever side of your bet that explains I am.

23:32So you're selling that. I'm selling that. So, cause I also think about it is, and this is a great line. I know this was said, I'm not to the point in the book that it's probably reset in this Milton Friedman book, but Ronald Reagan sat down with Paul Volcker. Okay, I guess Paul Volcker was the sitting Fed chair. And he was tall. And he was big. He was a dominating person in a room with a cigar, might I add. And so the story goes, Reagan sits down with him. And obviously Milton Friedman was in the Reagan era, a big player. And so Reagan says to Paul Volcker, well, you know, there's some people in my administration that think we shouldn't have someone like you in your role.

24:10Because Milton Friedman, like Rand Paul and Ron Paul later, said we should abolish the Fed. And so Reagan was kind of teasing that idea. and Volcker said, well, Mr. President, we're the only one fighting inflation here. And they were saying that the government was not doing anything to help the inflation. They were only making it worse. Like we talked with Amity Schlaes, the whole guns and butter, it was butter. It was just butter. The single thing that Reagan did that was associated with backing what he was doing was he stood up to the air traffic controllers and the power that labor unions had in the 70s was allowing trade labor people to get wage increases that were keeping them up with inflation.

24:55It was one of the few places. And so when he fired the air traffic controllers and replaced them, that was a huge psychological marker and backed Volcker. And that in fact was the point that you should have started buying bonds right at that moment. Okay. So let's see. So, you know, we talked about it when it becomes psychologically vested, right, in the society. We talked about how we can sustain a higher natural rate purely just because businesses are made to do that. Okay. We talked about how the government spending and the Fed probably won't be as strong as they supposedly need to be. Okay.

25:32But let's talk about one other thing. So I just so everyone on the podcast knows, I was born in 1983. I think I've lived an idyllic life. I'm sure Bill would love to tell you how I've lived an idyllic life. And I say idyllic as an American growing up in one of the most prosperous peace times of the last thousand years, let's just call it, okay? With that as like a reference for me, how do you see the world that we're in today to say the next 40 years versus the world that I've lived in the last 40 years? And when I say that, I mean, does conflict look like it's more on our doorstep? I would say so.