The Smead Book List - Summer 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.

0:52Our aim for this podcast is to help listeners test Munger's theory in business, markets, and people. Today's date is July 3rd, 2023. Investors and people we run into you often ask us, you know, what books are we reading? What's on our book list? Um, this is our quarterly episode for us to talk about books, books, and as we always say, more books. Um, joining me to talk about our reading list and our book list is our chairman and chief and officer, Bill Smead. Dad, thanks for joining me. Glad to be here. Um, let's see. So we're going to start like we usually do. Let's kind of knock out what we've recently read and kind of talk about, you know, takeaways from books.

1:29So, um, do you want to kick us off? Yeah, I had the wonderful accidental book sent to me by the Fred Hutchinson Cancer Research Center, a book called Living Medicine by Dr. Fred Applebaum. And it started out with scenes from Hiroshima and Nagasaki where the first atom bombs were dropped and began to explain how radiation affected people depending on how close they were to the center of the explosion. And that was the beginnings of science associated with bone marrow transplants and cell therapy and the creation of the Fred Hutchinson Cancer Research Center through the life of a doctor by the name of Don Thomas and numerous doctors in this book that won the Nobel Prize for medicine.

2:29next on your list uh well we read the richest man ever lived by uh by greg stein mats which we both read and we'll have a podcast coming out here in july with greg just just loved it just uh a an incredible multidisciplinary look at politics religion and the invention of merchant banking and investment banking and private equity investments in the 1500s. Yeah, what I think was most interesting in the book is how all, you know, we live in this multi-factor world. You know, I think everyone in the investing world kind of wants to bake it down to, you know, here's the two things you got to do or here's the five things you got to do.

3:16And what Fugger's book does really well is explains, well, you have to correctly finance a business and make good decisions in the business. you have to deal with politics. You have to deal with religious zealots from time to time as well. You deal with geographical differences. For example, he came from Germany. What were Germany's benefits and what were their problems that went with it too? So I say that because all those factors together is what drives the investment process because ultimately the future is unknown. And what I like about, you know, Greg pointed this out, in his book is that very few people know who Fugger was outside of Germany.

3:55So I think it's really interesting that he had to deal with all these different entanglements all the way out to, as an example, he talked about his interactions with Martin Luther in the book. Yeah, it baffled me for a number of years. I was, as a young man and junior high school and high school, I was fascinated by World War I and World War II. And in all the books I read about World War I, they all explain that the war started when a guy named Ferdinand in Yugoslavia was assassinated. I thought, what has that got to do with Germany and England and France and these people separating their armies with two miles of barbed wire and slaughtering each other for years?

4:42And ironically, Greg's book on Fugger explained how these royal monarchies and religious powerhouse people interacted with each other and how intertwined all that was in broader Europe. Yeah. Well, and to your point, I mean, like I've been to Vienna before, which was the seat of really the Habsburg dynasty. And he does a great job of explaining how the Habsburgs went from being really a two bit player. I'll call it a ducal kingdom, not a true kingship, if you will, at one point to within really Maximilian's generation becoming the dominant intramarried monarchy, to your point. and um you know i i think uh you know if you think about maximilian he goes from being in like a like a dutch jail if i remember correctly to the dominant force in europe and it you know he marries uh he marries his uh his son off to the king of spain and it's also funny to think about someone marrying into your family and you're rooting against them and billy joel saying about all this by telling us that Vienna waits for us.

5:58Yeah. So, um, so I agree that it's, it's a very multi multidisciplinary and, uh, kind of a way of thinking. And, um, obviously we did Greg's prior, you know, his, his, his, uh, newer book, uh, American Rascal in our first season of the podcast, which he's just a great author. And so I think, um, we'll have to go to his publisher and just pray for another book, uh, sooner rather than later. Um, what, what else have you recently read? Well, we read Easy Money by Dora Goldberg, which was just a part of U.S. history that I never even considered, never even thought about. And what do you mean by that?

6:35In other words, like unpack that. Well, you know, when you grow up in my lifetime, I was born in 1958. I mean, you've always handled paper dollars and there hasn't been any question whether people are going to accept that from you. And you never took a moment to think about why. And all the whys are answered in easy money. It's because you can pay your taxes with that money. And that took all the other currencies, whether it be agricultural things that people traded with or ownership of slaves that people traded with or whatever they had used otherwise to pay back money they owed to other people.

7:26The paper currency system has pretty much worked in almost around the world now ever since it was heavily adopted. And to your point, I mean, ultimately it was a barter system prior. You know, if you didn't have coins, you bartered. You bartered your goods that you sold. And so the tobacco cropper in Virginia would pay the government in lieu of cash with tobacco. And it would be held at a storehouse. And I think George does a good job of that. I also, to your point, I mean, I walked away thinking, why did we not have a revolution in like 1676? Why was it 100 years later? because it seems like the Puritans, though Bible-believing people, despised the king for a few generations prior to us doing what we did in the Revolutionary War.

8:15They took the risk. They took the risk to going to this new land and put up with really very little support from the government associated with that. It's not like they sent British troops over to protect them against the risks they were being faced with. And and then but they wanted to impose, you know, that economic control over them without really giving them any benefit of it. Well, yeah. I mean, no one's ever said we use dollar bills today because we didn't have a mint, which is true. I mean, that's why we have dollar bills. Obviously, the bill was the legal context to say, you know, you'll be you'll be do something at a later date.

9:00And that's what the Puritans effectively created was a bill system. But it was considered legal tender. You could pay your taxes into Bill's point just a second ago. And so I never thought that it was a creative alternative to not having the ability to coin. And obviously, you think forward now, you go to the UK, do big bills, are they coins? And the answer is no, because it was an inferior system from the beginning. During all this crypto mania of the last six, seven years, we've been asked a lot about, you know, what do we think about crypto? And what I say is the only potential positive outcome of crypto would be if it would become an alternative currency.

9:46And the reason I say that is a paper dollar has been eaten away by inflation in the last 225 years. A paper dollar is worth about a penny and a half, whereas a dollar's worth of gold is worth about$1.50, inflation adjusted. So paper currency does have its flaws. And if it becomes a currency, but that's not an investment, the same$1 worth of good quality common stocks in those 225 years would be just an incredible amount of money versus the penny and a half that the paper dollar is worth. So the truth of it is trying to mix a system really set up to try to turn something into a currency, into an investment, was literally a train wreck waiting to happen.

10:46Yeah, but George's book doesn't really talk about the inflation effects or anything like that. That's not really his focus. His focus is purely like, why did we get out to this? And I think his core thesis, which is really simple thesis, is if you can't pay for your taxes in that, it will not be accepted as the currency, which is interesting because these alternative currency people, these crypto people, they think they're onto something new. And what he's pointing out is if the government doesn't accept it, it will not be legal tender. In 1636, at the height of the tulip mania, you could trade a fine bulb for a house, a carriage, and two fine horses.

11:25And that's about what crypto did. Yeah. And of course— But it's still not a currency. It's just a speculative asset. It's just a tulip bulb. Yeah. It's a beanie baby. Well, yeah. And by the way, as I usually tell younger people, if I'm going to gamble, I'd much rather play behind the pass line on the craps table than go play with crypto. Because at least they'll give you a free drink. What else have you been reading? That is quite a thought, Cole. We're reading The Purpose Driven Life in our work, and I read it a number of years ago, and it's just a really good idea to reassess your own existence, your own relationship with God through the lens of, you know, what is your purpose?

12:17I think one of the biggest challenges of this era in the United States is I read about people living lives, and what I think about is when I was a kid, there were two kinds of people basically in the United States. There were people that were religious and had a biblical foundation to what they were doing, And then there were people like my father who lived his life knowing he kind of owed something to the prior generations to give forward, pay it forward to future generations. But that would be like a legacy. Exactly. So you either had a religious fundamental to what you were doing or you were trying to build a legacy.

13:01You were writing a... You're writing your epitaph. You're writing your epitaph in the process of living your life. Well, now we have lots of people in our country and other countries that aren't working off the purposes of the Bible, but then they're not concerned at all with being grateful to the people that came before them by repeating the process. And I find that it's spooky, I'd say. Well, so yeah, because in the first chapter of the book, his main thesis is, it's not about you. Yeah. which I mean, let's call a spade a spade. If I died tomorrow, within five years, society will be fine. Within probably three weeks, society will be fine.

13:47Within a day, society will be fine. The idea that we're so important to the human race is just, it's sad and disgusting to think that we're that big of a deal. And you think about like, we're active on social media with the podcast and whatnot, but you think about people sharing their opinions out on social media. and again it's not about you no one actually cares if you died it wouldn't matter um so the question is well who would care um those are probably far better things to be involved in um and by the way to your point earlier if your creator cares who you are that's probably a better relationship to seek out and um and to your point it's very counter-cultural i mean that is just crazy to say that you know it's not about you you don't really matter um no one you know you grew up as a kid, you're like, oh, you're special.

14:34You know, your parents love you. You're important to us. Well, you're important to the people that are close to you. Yeah. But does society really care? Yeah. As a 65-year-old man who has far less of his life left to live, it just blows your mind how fast time goes by in your life. And it accelerates. And my theory is that, you know, your 80th year is one 80th of your life and your fifth year was one fifth. And so a fifth takes a lot longer to happen than an 80th. And it's a relative thing. And because of that, it just helps you frame how temporal so many things that people think are important are compared to what actually is important.

15:20Yeah. Like a good legacy if it doesn't have to do religion. Like a job well done if it's God you're trying to please. Yeah, I agree. Let's see. So some books I just got done reading. I just got done reading Volt Rush by Henry Sanderson, which we just recorded a podcast that will be coming out with Henry. Henry came from like a commodities reporter background with the FT. and what he did a lot of his work on was understanding the physical shortcomings of mining you know you have to actually go to these places far flung to get things like cobalt and lithium etc and then also the human implications um these are in many cases third world countries these are places that you know we sit here in the west and think oh gosh you know we get to pick our energy policy and aren't we great awesome cool people but in these countries just to have like you know, uh, power readily available to power your home with electricity and things of that nature, you know, readily available resources to run your life, your business, et cetera.

16:24Those are, those are normal goods. Those are preferred goods, but that's not what they get there. And so I think, um, he does a really good job of explaining as we go into this quote unquote transition that everyone is fervently believing in. There are natural human implications that are just falling far short of what people think. Um, and then also because of that, there's human rights implications to what a lot of we think. Um, and therefore, can we do this at scale? Like we think we're going to, you know, can we get to the Paris Accords? Like we think we're going to, um, I, and he does a lot of the human story of that.

16:55And I, it's a very fun read that was recommended by one of our listeners. Um, uh, let's see the other book kind of on, it's not far off drawer, but, uh, it comes at a different angle. It's called cloud money by Brett Scott. Um, Um, Brett is, I'll call it, he's just kind of a general currency, uh, interested person. He's a former derivatives trader in London. Um, you know, as he would say himself, and, and we recorded a podcast with him too. He, he said he's got some Marxist tendencies and, you know, as, as many of you probably listen to the podcast, you know, Bill and I fall into your like classic evangelical right-wing Christian crowd.

17:30Um, and it was funny cause here we are the right leaning, here he is left leaning. And there's certain things we agree on. Things we agree on is he's just advocating that we can't go to an all-digital payments world. Why? Because he pointed out he went to a festival. They said they're only going to take digital payments, Apple Pay and things of those nature. What happens? Well, there's no cell phone service. So you're at a festival, you want to get a beer, and you can't. So he talked about some of the physical shortcomings of this age we want to move into. and I find that interesting because ultimately he has this Marxist tendencies, he doesn't look at it to be a good thing to have it all end up on a server database counting all of our money.

18:14He thinks there's security issues with that too. Embedded chip maybe in our shoulder? I just say that because he comes at what Dror talked about. Dror was giving the historical implications. Brett is asking very practical societal implications. Is cash that bad? God and so very interesting way to go when you go from drawer out to his book you're coming at two different mental models then I think it's interesting that again like I said a Marxist and a right-wing conservative have certain things they find common ground on and also he pointed out that there's a lot of crypto folks out there that obviously I think are scheming people but that that find his work interesting as well let's see the other book that I just read and we've also have a podcast coming out on is The War That Made the Roman Empire by Barry Strauss.

19:03Barry is, he's a professor at Ithaca, in Ithaca at Cornell University. He is one of the foremost Greek and Roman historians. He was a blessing to visit with. My bias is I did a lot of my history major in ancient Greek history and Alexander the Great and the Hellenistic kingdoms. And so I was interested it from, you know, kind of like indulging my own history sense. And the book is built on the battle of Actium, where Octavian, Cleopatra and Mark Antony meet. And it really sets the stage of the future leadership of the Roman Empire. When you think of Caesar's, I think of like gluttony and, you know, overindulgence and orgies and, you know, kind of Nero-esque things.

19:47And Octavian, what we now know as Augustus Caesar, was actually far more of a tactician, was studying his enemies a lot better than people think. And a very fun read if you do enjoy history. It kind of fits into a classics world that most people don't go back that far, but that's timeless history and was a lot of fun. So that'll be a great podcast for people to listen to. Let's pivot to what we're currently reading? I could use a few recommendations. I'm, I'm a little light in the book list. So if you have something you want us to read, uh, I sure appreciate that being sent to us. Yeah. And one, and in fairness to Bill, we, we just did get a lot of reading done.

20:28Um, the, the, as I was reading those books, I'm actually, to your point, I'm actually kind of in between right now. Um, I did a drive in, uh, late May, uh, from Phoenix, Arizona up to Lake Tahoe and my son was going to sit in the back and be on headphones. So I thought, well, how can I get some learning done? And so I ended up audio booking, which just so everyone knows on the podcast, Bill and I don't audio book. I'm not a fan of audio books, but when you're stuck in a car for hours of driving, why not learn something and listen to music? And so I bought the smartest guys in the room by Bethany McNeil and Peter Elkin, um, which is the story of Enron.

21:07And it's funny to think about the story removed now. I've read that book. Yeah. It's, it's, you know, we're removed now to think about what practically went on. And, you know, we always talk about Charlie Munger as we open up the podcast episode, and the incentive structures. And, and we have a, you know, we have a family friend, a longtime friend of my father's who was an Accenture partner turned Accenture, you know, shareholder, but was at Arthur Anderson consulting. And one of the things that they make the case at Arthur Anderson was that the traditional audit side and the traditional tax, the accounting side of the house, created a lot of the relationships of the consulting side.

21:50But the consulting side, as we know from Accenture being a public company today, was so much more vastly profitable. And what ended up happening was they wanted to split the two businesses into two separate pieces. And the audit partners came in and said, no, we don't want to do this because they knew it was a cash cow for any existing partner. And a judge ruled that they had to split the businesses in two, which eventually begat what we know as Accenture today. Well, he pointed out that once that was lost, a lot of the profitability of Anderson, Arthur Anderson disappeared with that too. And so think of you made a lot of money in a business, you have that profitability is superior, it can create perverse incentive structures, because you want to get that profitability back.

22:37So as an example, you lose that, what's your incentive to be a scrutinist or not try to find just a lot more work? And that was one of the dangerous things that cropped out of the book that I really, well, I've learned so far. Well, I remember that situation so well. You'll be shocked to hear that in in 2000, 2001, a mania developed among the whole idea of energy trading, right? These utility companies, stodgy utility companies, were putting capital towards having a large, effectively commodity trading unit. Yeah, like a prop trading desk. Yeah, and it got widespread, and it got to be a mania.

23:21And what happened was it literally ended up destroying the balance sheet of numerous highly thought of electric utility companies and putting the whole system in disarray and exacerbated the economic problems that came with the crushing of the dot-com bubble. So that's a real good warning for today where we're ending this, that we've abruptly ended the era of free money and all of the stupidity that has happened in a wide variety of asset classes because of free money. And now they're bringing in this AI excitement as a way to try to perpetuate a mania that needs somewhere to die. So let's jump across to books you've had recommended or things that are kind of on your reading list going forward here.

24:17Well, I've got the price of time. It looks so thick. I'm a little intimidated. I don't think I can date this book. I might have to marry it. We so much admire Ed Chancellor. He did some research when he was at Grantham Mayo in 2012 that made us a lot of money. His research showed that as of 2012, homes in China were the most expensive they'd ever been. And in the United States, they were about as cheap as they were as they had ever been in 2012 as an outcropping of the disaster created by overbuilding in 03, 04, 05, torching the financial system in the United States with bad mortgages and financial institutions with bad debts.

25:08The outcropping of that was spread. So from a hedge fund standpoint, you wanted to be short Chinese condos and you wanted to be long residences in the United States. So we got involved in owning residences. Yeah. So for Chancellor, because I think you've also read Devil Takes the Hindmost by Chancellor too, haven't you? His prior book? I don't know if I have. I think you have. I know I have. And he does a great job of kind of giving the history of euphoria at parts of that book and Very good storytelling from some original sources out of that, like Japan, for example. And the other thing on the price of time, from what I know of the book, even though I haven't dove into it yet, either like we're big information theory folks.

25:56If someone says, what is the value of your time? The value of your time is the amount of money someone will pay to save theirs. And hence, you know, Bill's time is worth more than mine. So therefore, he will pay me a certain amount of time. Or if you think about this from a Smead Capital Management perspective, why do people pay us a fee? Because we save them time in picking stocks for them in lieu of them doing it themselves, plus or minus the risks and the potential they're having success. That's our value. We provide that value. It's the time saved. and so time is a critical element in money and hence any time you can go into a discussion of thinking about you know the prices of things and the time involved that you're always going to have a fun exercise um doesn't gilder say something about that well yeah he he says um he says money is time in other words it's the only way money is the only way to account for our time it also exposes why when time is short at the end of life we waste so much money on medicine or medical procedures because time is short.

27:01It's worth a lot then. Um, and so there's a very good practical implication. So that will be a fun read. Um, let's see some other books that I'm looking forward to. Um, I am a Hemingway fan. I have visited Hemingway's house in Key West before, and I'm just kind of like, whenever I want to clear my mind a little bit, and yeah, as we point out, we don't have much on our book list as we speak that we're reading. Um, I want to read The Sun Also Rises by Ernest Hemingway. I've, I've read For Whom the Bell Tolls, which is a story about the Spanish civil war. Um, I've also read to have or have not, which is, um, a guy running people back and forth between Cuba and Key West.

27:37Um, uh, and the story of kind of like the incompleteness of life, I would argue. Um, so that's kind of my, my space, my mind clearing book, uh, and kind of my fun book. Um, a couple other reads, uh, I got, I got out there is cage Kings by Michael Thompson tells the story of how did UFC get to where it was? It was like a back water sport. It was a nothingness. It had no media popularity. Um, why would someone, you know, go to Japan to fight a fight where it's like a blood sport and it's kind of socially unacceptable. Now, every weekend, practically, you can watch a UFC fight on ESPN plus, how did we go from one point to the other?

28:14So I'm interested to read that. Um, the other book that I, I have out there on my list to read, this is this book. It's either, I think it's about to come out, Gallop Toward the Sun by Peter Stark. We had done Astoria with Peter Stark, which is a very fun read, one of our first podcast episodes. It's looking at, you know, kind of the manifest destiny and, you know, really the struggle between the federal government and the tribal nations. And I'm very interested to read that book and get into that. And then the other book that I've been recommended and have on my list is Taming the Street by Diana Henriquez.

28:52And it's really, about FDR's regulation of Wall Street and investment markets coming out of, you know, going into the Great Depression. And so that'll be a fun book to read of in light of as we look at the regional lending problem, you know, bank capital rules, are those going to increase? Is Elizabeth Warren going to get her say in everything tied to regulation? And so it'll be kind of a fun way to look back at history and ask those questions. So we did this last time, and I want to do this again, I want to ask a question in our book list that we're commonly getting. We had debated what we were going to use for this question.

29:32We'd actually thought about, should we talk about oil? But I think the question, it's a bigger framework question. So I'll ask it to you, Bill, and then we can discuss it. So inflation is coming down from where it was, say, a year ago. Why do you or why do the investors of Smead Capital Management think inflation will stay sticky versus go back to its 2 % level? Terrific question. You have to go back to the way things played out in the 1970s. Somebody that we, some great research we got lately, there's been two commodity super cycles, one starting in 1971 in the U.S. centered, One in 1999 that was centered around the Chinese economic miracle, basically, this formally totalitarian communist country suddenly starts a GDP growth juggernaut.