The Smead Book List - Summer 2024

23:18And that's where a nation sets economic development policy that might favor one industry over another. It feels even evil to say that, like I'm cutting against the free market and it goes against all my Milton Friedman that I've ever read. But what I've learned in reality, going back to the founding of our country, industrial policy has always been there and it's always been necessary for us to compete. And so something that I am reading just finished that was helpful in these debates was actually on the subject of manufacturing by Alexander Hamilton. And to be able to quote Hamilton as supporting industrial policy for manufacturing, you know, really helped, especially with some very conservative legislators who wanted to hear, well, why should we?

23:56Why should the government be picking winners and losers? And we're not. We're just we're basically saying we have to set a policy that levels the playing field. One of the reasons why we've fallen behind on if you went back to the 80s, Cole, I'm sure your dad especially would know this. Memory chips used to be all America, right? Then they moved over to Japan. They moved over to Southeast Asia. We're never going to get that back. But they were using industrial policy. I mean, the state and the nation favored those industries and allowed them to develop. Because I was going to say, Korea copied what Japan had done prior.

24:24And that's that, you know, they said, what did Japan do post World War Two? And therefore, how should we, to your point, generate our industrial policy? Yeah. And manufacturing is something that can't be done by AI, at least not yet that I've seen. So I believe that this big push, and it really started with President Donald Trump through Joe Biden with the Chips and Science Act. Which is big here. It's a big deal here. It's a big deal. Arizona has been the top recipient of grants from that program so far. And we'll have a meeting with Secretary Raimondo's office next week about that to make sure we're successful.

24:53I think that Alexander Hamilton recognized that if America in our isolated world does not do things to push manufacturing to be here and to be local, we will become vassals, just like we were with the UK back in the day, pre-revolutionary war, but economic vassals. And so he really cautions against that. So I think there's a lot of wisdom in that. And then the other one I would add, again, you can tell the two things I do right now are like work and be a dad. And it's my why. I love being a dad. How much do you work? Yeah, a ton. You sound like you're in the investment business. Yeah, no, no. I love the balance.

25:27But I'm reading, and this came about really funny. Cole, I don't know if your kids play a game called Among Us. Yeah. Yeah, Among Us. But they played in like a tag version. So I always want to know what's going on with my kids. I want to be as involved as possible. It's like, tell me about the game. And he was explaining it to me. I was like, oh, this is just like Mafia, which is what we played church games when I was a kid. And so it's like never heard of Mafia. So we had this whole conversation about it. And it kind of sparked my interest. So I got a book called Game Theory Genius by J.W. Heist.

25:53And it actually is really fascinating because he talks about all kinds of board games and reality TV and why game theory matters. But what I learned is the history of those games, the mafia, goes back to a social experiment that came out of Russia. The original game was called Werewolf. And it was about, you know, same idea. You have a werewolf who's going around killing people and the villagers have to catch the werewolf before the werewolf kills them. Typically there might be two werewolves. But the idea is it's an uninformed majority versus an informed minority. And almost 90 % of the time, the informed minority wins.

26:28And it teaches a lot about our culture that, you know, you can put out misinformation with confidence and you can win over the crowd. Or they become so obsessed with self-preservation that they side to. And I think there's a lot of lessons there. So fascinating read. I've really enjoyed it. Well, by the way, that was Danny's plug to say, read your book so you're in the informed minority. so therefore you don't die in the game. Very, very true. Yeah, great strategy, but great strategy for life too because you can find confirmation bias information wherever you want it, but be informed and yeah, it's good.

26:59By the way, before I mention what I am reading right now, the one thing I forgot to come back to on Nikki Hayes' book, she gets to Kahneman Tversky at the end of the book, okay? And I asked her the question, this is in the podcast, you got to check it out because it's fun to ask this question. I said, we know a lot, you're just making me think of this, we know a lot about like recency bias and anchoring bias. And Conor and Tversky talk about system one, which is our heuristic quick things we do that we're naturally biased by, which creates relationships, finds a spouse, things like that. But then system two is like, well, should I do that based on the circumstances?

27:30Am I being thoughtful enough? And what are my biases? And I asked her the question, well, we know all this, and we've studied this, and we know this from behavioral finance. And so I asked her the question, will it change anything? And she's like, no, it won't change anything. I was like, okay, good. But this is such a good future. We lose our advantage. Yeah. So let's see. So I got three. And I know Seamus isn't one of these. First off, we're in the middle. Again, I mentioned this. I'm in this super Jewish season of studying and learning. We're reading Bonhoeffer by Eric Metaxas. Wonderful book.

28:02Wonderful story. Just the life someone lives when they're passionately called to do something and they're willing to ultimately die for it is always interesting in my mind. And we're right at the point in the book where it's obvious that things are bad. And to your point, the people that are in the informed minority know how bad it is, but everyone else in society doesn't recognize the paradigm shift taking place. So, for example, the church is being really pushed to the side at the time, the German church. And there's this debate of does the rest of the global German church secede or not? or do they write a confession?

28:43And so just very interesting as we continue to go through that. I think the other thing that you take away from the book is things are slow, then all of a sudden, right? It's like change is slow, then all of a sudden. It kind of quickly peaks. The other two books I have is Ben and Me, this new book by Eric Weiner. The book is really kind of like stylizing your thinking in your life based on how Ben Franklin thought. And we talk about Munger a lot. And Munger was a big Ben Franklin person. You know, Munger was like an architect beyond being this incredible investor. Franklin was an inventor. And so I looked and said, you know what?

29:20In honor of Charlie, I need to read a Ben Franklin book. This is a new one to come out. And so, again, kind of a stylized guide into how Ben Franklin lived. The other book came out of an experience I had. Actually, our common friend, this would be like the name-dropping podcast episode, Jack Selby, which if you guys on the podcast aren't familiar with Jack, Jack was part of the PayPal mafia. He has the largest venture capital fund here in the state of Arizona. He lives here. Anyway, so he had invited me out to an event at the Museum of the Bible and had never been, thought, oh, this would be really great.

29:52I had my wife come with me. And Steve Green of Hobby Lobby fame spoke and handed out copies of his book, this beautiful book. And so I cracked that open. It's interesting to think about this. And I also think about like your kids and my kids' education at the charter school they go to. We're in a day and age where like in the stylized 1950 dream world, everyone in America had a Bible in their home. That is one of the things of the 1950s. Versus today, a child like hitting 18 is the least likely person in U.S. history to ever even have read a Bible. So Steve's book is really the story of the Bible through five stories of people in the Bible.

30:34And so it's a way of like, you know, kind of creating almost, you know, a smaller picture of the Bible for someone who's never read it. I thought it was interesting, too, because going to the Museum of the Bible, let's say someone walked in there never, ever reading a Bible. It's a vast history resource. So, for example, if you're, you know, if you're bookish and you really like to nerd out over books, yes, Gutenberg was not the first person to ever create a printing press. He was just the first person to mass produce books in the Western world. And obviously the Gutenberg Bible is the most famous that.

31:06Well, prior to the Gutenberg Bible, we went from what they called the papyrus or scrolls to the codex, which was like the first book format we ever had. And so they have a copy of one of the original codexes there. And it's like a history nerd. You just have to totally go crazy. No, I agree. I'm just getting excited even listening to you talk about this, about these types of conversations. The Bible is a tremendously rich history book. And it goes to show. So Thomas Jefferson, not a Christian, very much none of that. By the way, the Thomas Jefferson Bible is where you take out the parts that you don't like.

31:44Which, by the way, as Americans, we do a lot of that. So we're very Thomas Jeffersonian. Yeah, go to the Library of Congress. You can see what Thomas Jefferson did. So even if you don't want to read about miracles or the supernatural, he cuts all that stuff out of the Bible. And he's still found to be this amazing book. Resource, yeah. And by the way, if you go look at Shakespeare or Dickens, if you don't understand the Bible, you can't understand a lot of art and literature, ultimately, I would argue. So great, if you ever get the chance to go there in D.C., it's totally cool, really funded by the Green family, so I want to give them a lot of credit for that.

32:12And I want to, Cap, one thing you said on the 1950s, because I said it too, Peggy Noonan, who's one of my favorite writers. Who writes for the Wall Street Journal. Yeah, writes for the Wall Street Journal. She has this column that she does every so often, but more or less, the gist is this. One thing that is good about the 50s, that era, was that culture was safe. You know, the phenomenon of bad parents, you know, bad dads who walk out on their families, that's not new. That's been around for a long time. But it used to be if you were a kid who landed with a bad situation at home, culture would catch you.

32:41And it was like this safety net. You had a community. You had churches, grandparents, all of that. That's not there anymore. Yeah, culture's not safe anymore. You know, the community's not safe anymore. The internet has made it very dangerous, right? So that's one good thing we can say about the 50s. You know, culture was a safer place. Totally. You made me think of the movie Sandlot, right, as a picture of like 1950s. In fact, I was rewatching with my kids because like I don't think they'd ever seen it. And the kids pulling into his house in California and what is moving their stuff? It's an orange U-Haul truck, which obviously is based here in Phoenix.

33:14So I was like, oh, we own we own the stock in full disclosure. So I was just like gigging out in 1950s Sandlot. Great company. Great stock. Yes. I have the kids watch that all the time, too. just old movies like that. Well, let's pivot now to like the books we've had recommended to us or something, a book that someone's mentioned to you, you bought, you just haven't got to yet. Danny, do you want to kick us off? Oh man, that's a lot of pressure. There's all the time. I mean, I, you know, I listen to you guys. I, you know, I get sucked in even on social media to someone's about to make a book recommendation.

33:43It's like a movie trailer for me. We'll be like, you got to get this book. This book will change your life. And sometimes we'll turn around and be like Viktor Frankl's Man's Search for Me. I'm like, I read that in seventh grade. I got it, you know. But something that I've been doing a lot of work with pharmaceuticals in healthcare. And so The Emperor of All Maladies is a book about the history of cancer. And it is a huge, very large book. And I've been putting it off. But everyone says, and it's by, gosh, Siddhartha Mukherjee. And it is fascinating. I've read a couple summaries about it that will take you through where cancer was first identified, like really to its origins.

34:21to all the ways in which we've innovated great, amazing treatments for it. And again, it's a testament to a conversation we had offline earlier that people are the world's greatest resource, that they're going to invent, they're going to innovate, they're going to beat these problems that we've encountered, like cancer, like any kind of resource issues. So that's one I would love to get through and get to, because I think it will make me a lot more educated on this terrible disease. Yeah. Seamus, what do you have? I have a really interesting, it's called COD. I think it's, somebody told me it's a sick, like a kind of bubble type book.

34:55So COD was used for everything for a long period of time. And that's pretty much what it's about. I haven't gotten really into it that much. Okay. Yeah. So I got a couple on my list. And these are ones that have come up for some random reasons. And a couple, like, just, you know, you kind of, when you're making a podcast, you find a publisher that, you know, kind of knocks off a lot of good history writing. and suddenly you're like, well, what other books do they do? And so something is from the same publisher. So Enemies of All by Richard Blakemore, okay? This is a pirate history. I don't know why ever since I was a kid, the idea of pirates and treasure has just always been something fun.

35:36I love pirate Legos when I was a kid in full disclosure. I do enjoy going to the Caribbean occasionally for vacation and doing a little history on the side. And so I'm really looking forward to reading that book. I'd never heard. I also think of Mike Leach of Washington State and then Mississippi State. University of Mississippi State. Anyway, Mike Leach was a big Pirate fan. And so therefore, I kind of want to go through that to honor him. Atlas of Finance is another book. It's written by multiple authors, but it's kind of a history of economics by not only geography, but also different, you know, as we get out to cryptocurrency and things like that.

36:12So kind of an anthology of finance history. Danny's going to like this one. I just was throwing this. I think I want to say Richard Grant is a New York Times writer, I believe. But it's called Race to the Bottom. It's a book about Arizona. And what I read on some of the kind of the initial reviews of it is it's kind of like, yeah, Arizona is a crazy place. But it's a pretty good picture of where we're all going. Okay. And so he does everything. From what I read about the book, he goes to the border. You know, he talks about water. And he's living in Tucson, I believe. So that's going to come out here in the fall.

36:44I'm very much looking forward to that book. I'd love to have him on. It'd be really fun to have him in studio for that episode as well, if we could. I'm going to have to read that as well. I'm very familiar with the phrase. And I always love it when East Coast writers decide to tackle Arizona with their amazing predictions. Yeah, but it came off as like, from what I could see about the book, it came off, it reads like, this place is weird, but yet it makes sense. It was my initial takeaway from what I could see from the book. The other one is by Megan Gorman. It's called All the President's Money, where I think she's giving the history of presidents and their wealth they have accrued after office and how that's changed over time is what I'm assuming.

37:26I think she's a financial advisor by background. So I think that'll be kind of interesting to think about. I mean, again, it's like one of those ethical things where in 1950s America, did the president accrue a lot of wealth? And the answer is, well, no. So, and now obviously being president, you go write a book after and you go on a book tour and you can make quite a bit of money. 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.

38:02If you're an investor who fears stock market failure like I do and want to invest in wonderful companies to build wealth, we invite you to visit SmeadCap.com. Past performance is not indicative of future results. Investing involves risks, including loss of principle. Please refer to the perspectives 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 I have some books that came out in the last quarter from what I'll call the Smeed Cap tribe that we got in recommendations.

38:40One was Nobody Will Shoot You If You Make Them Laugh by Simon Murray. Simon Murray worked for some powerful companies in the East, including Jardine Matheson as a commissioned salesperson there. I ended up working for Hutchinson-Wampoa, I think, for Lika Xing's family and created the cell phone brand Orange. And so it's kind of his life story. The other book recommended was The Art of Military Innovation, Lessons from the Israeli Defense Forces by Edward Lutwak. I didn't get a chance to get any information, but that was another book thrown out to us. And then the last was The Coaching Habit by Michael Stanier was another book we had recommended.

39:20You don't know this, Danny, but we have a super fan of the podcast. We have a couple, but there's one that we typically mention. His name is Superfan Steve. And so I checked with superfan Steve on what he's been up to. He's got three for us. The World for Sale by Javier Blas, who writes for Bloomberg, and it's kind of a known entity out there. The second book he recommended is actually another Brian Burrow book, The Big Rich, which is a story, I think, of four Texas families and kind of their wealth over time in the oil business. And then the third is also an oil title, Private Empire, ExxonMobil, and American Power by Steve Cole.

39:56was the third book he recommended. So Danny, since we have you here, you're captive to us. And I'm biased, but I want to ask you this. And I know some of this you get all the time, but the first question I think you get all the time. The second question, I don't think you do as much. So you're watching this podcast. You know we're sitting here in Arizona. You know that Seamus is a Diamondbacks fan. You know that we gig out over this place as people that came from, both Seamus and I coming from elsewhere on the West Coast. You obviously came from Florida originally. There's people that didn't come from here, which is pretty common.

40:30How do you answer the water question? And as you mentioned, the New York Times wrote, the Rio Verde is going to be a nightmare. And what they didn't say is there were very particular things around that. So how do you answer the water question first here? And then the second question I wanted to throw you, what are the big advantages for a firm like us being in Arizona, whether we're talking like the investment management business or just say finance in general? You know, what do you think the distinct advantages that industries like that have here in Arizona versus maybe other places in the country that like the Wall Street Journal has been writing about, like Florida and Dallas, let's just say.

41:08Yeah, yeah. Well, I love to answer both these questions, and I do quite a bit. Let me start with water. This is probably one of the things we have to talk about the most, and it's due to when the new governor, Governor Katie Hobbs, came in, they released a report that suggested we had a 4 % shortage in some outlying unincorporated areas of Maricopa County in our 100-year assurancy in order to build residential housing. So what that means is, Cole, Seamus, you guys want to build a house, you want to build a community. You have to prove you have a 100-year water supply. By the way, we're the only state in the country that does that.

41:40No other state does that. You know, Texas doesn't cross over 20 years. California, for all of their nonsense and terrible policies, no offense, Seamus, they don't do that. They're a terrible water planning state. So we're a good, well-planned-forced state. Oh, but real quick, what Danny didn't mention earlier, and we have to mention full disclosure, is one of the most popular sports here in Arizona is California bashing, and we're very good at it. So I apologize. Well, as you'll see in my part two answer, I've picked up Texas bashing as well. So I've lived in both California and Texas, as well, obviously Arizona and Florida, too.

42:12So, you know, a lot of the states we're going to talk about, I've lived in and can tell you, I think, what are the advantages and disadvantages. But the simple truth is we have water here. When you hear about a water, any kind of water shortage, because the East Coast ivory tower people who've probably never left New York City or Manhattan love to believe that Arizona is some dry desert that shouldn't exist. We're an affront to all the very liberal ideology that we should allow nature to run and growth should stop. And that's true. That's the way they write. They have no idea what they're talking about.

42:43If they did, they would see that much like Israel, since you're all into all things Israel in history of Jewish culture right now, we are a very well planned for, yes, we're a desert, but we also have demographics. We have three major sources of water. We get surface. We have aquifer. And we have the Colorado River. And so when one goes down, you got to look to what the rest are doing. But we have enough water. There is plenty of water to go around. And one thing that should be addressed, too, when you hear about that shortage, we're talking about 4%. It's insane to think over the next 100 years we will not innovate, particularly with ag, which, by the way, is about 76 % of our water use in Arizona is actually ag.

43:23So if you don't think they're not going to use Israeli drip technology, Endrip, a good Arizona company now, to improve their efficiencies, you're wrong. There'll be a lot more savings. The ag industry will get better. We'll continue to do management. So water is not a real issue here. But, you know, one thing I'll say, Cole, anytime we see a story like that, we either respond to it or I clip it. Because one day I can't wait. I cannot wait to show you from the history of like 1950 to where we are now, the amount of stories that have been written out of the East Coast that we're going to be a dried up, rust belt desert.

43:54You know, we won't exist. We've been predicted not to exist, I think, 10 different times by the East Coast media. And I love it because we're thriving. We're growing. They're not growing. Yeah, what Danny's saying is we got receipts, I think is what we're saying. And I'll add one more thing. So Danny and I live in, in fact, where Seamus lives too. So where we live in Phoenix, if you go back, there's great, cool satellite maps from the mid-20th century that you can go back and look. And I love them because I can go pinpoint where my house was, and there were no houses there. It was all citrus groves.

44:27I was going to say, yeah, it was orange groves, yeah. And so the weird part is going from that citrus to the houses we have today, we use far less water. And so that conversion, like you pointed out, as we go from 76 % of the water being that to, say, maybe 60 % or 55%, what that does is allows for human flourishing and a far greater degree in living versus production of agriculture. And that's entirely right. We're the youngest state in the great 48, right? So we're going to continue to grow mature as a major metropolitan area. I know where we're sitting right now, there's about to be a very tall tower built.

44:58And the more vertical we grow, the more efficient water use gets as well. So there'll be less of this sprawl and a little bit more urban growth, too. And you can debate good or bad around that, but it will result in more efficient use of water. Okay, so obviously a lot more people are coming here. So how do you attack like the, you know, a lot of people are going to Florida, a lot of people going to Dallas for finance or the investment management industry. What is particular about Arizona that would make a firm like us or more firms like us, whether it be hedge funds, venture capital firms, long onlys, mutual fund companies that would want to draw here relative to those other places or from where they're at now?

45:35Yeah, and I would say one of the biggest draws for a Florida or a Texas is 0 % state income tax. So when you see the growth that they've seen there for people who decide to move there, that's a big part of that. You'd have to ask Citadel and some of those other funds, how much money are you saving? And it's not anything to blink at. But the truth is, again, in Arizona, the chamber ran a very strong anti-tax-raise campaign years ago to stop us from moving into the highest top 10 for a state income tax in the country. And we instead ended up capped at 2.5 % flat tax. Amen, brother. Yeah, right? So it's great.

46:08It's a great place to come. You know that's locked in. And by the way, we also passed an initiative through the chamber last year that would require 60 % of the entire state to vote to raise taxes. So it's nearly impossible to raise taxes. So you have regulatory certainty. So move here. You know things. Even if you get a Democrat governor or Republican governor and there's a shift, that's not changing. You're not going to see your taxes go up. You're set here. I know housing affordability has been a little bit more of a topic. I think we're about to see a building boom, much like they saw in Texas right now, where a lot of people are underwater because they overbuilt.

46:37We're going to see some of that here in Arizona, which is going to help bring our prices down. But most important, you want to be at the ground floor of where growth is happening. And we are the global, global hub for the semiconductor industry right now. As the rest of the world heats up and the conflict in Southeast Asia gets worse, the fact that TSMC has invested$40 billion, which is the largest foreign direct investment in United States history here in Arizona, tells you there's a lot of money coming. There's a lot of manufacturing coming. There's a lot of commitment to make sure it succeeds.

47:04And we're going to need private equity. We're going to need finance to help fund models and help come up with new products to innovate our way through the challenging finance environment we see right now with higher interest rates. Yeah, I think one of the interesting, so you mentioned Sandra, the Arizona Commerce Authority hosted a CEO's forum for the Final Four here. I've never seen such like active marketing for commerce and business and investment in my life. But there was a panel that was done, and I think Steve Sangy, the founder of Microchip, was there on the panel. And his panel in general, what they highlighted is as they were recruiting people here, no one's from here.

47:44So therefore, the binding was everyone wants to get to know everyone because they don't have that connection. They don't have those roots and they want to build those roots. And so you end up getting this really communal experience. And I think – I could talk to my kids. I mean I brought it up to you. I think when we first moved here, we go to – I'm Catholic. We go to a private Catholic school. And typically we have three now, but we had two when we first moved here. And they're young. And you go to a new school and they have their groups already kind of set up, right? And it's always hard to go into them.

48:11And we came here and everybody was, there were no clicks. Like everybody was very open. They brought them in and were super friendly. So to your point, it really is. And people talk to you here. They go, what do you do? Like right off the bat. They want to know what you do. The God here, if there's an idol in Phoenix or Arizona, it is business. Yeah. It's commerce. That's the idol. But I mean, this is such a good point. So you're right. I think it's now like 74 % of Arizona is from somewhere else. So people have chosen to live here. And what that has really done is preserved a meritocracy, where it doesn't matter who your parents are.

48:43It doesn't matter where you went to school. That's what we've experienced. And I got to tell you, that's not the case in Texas. That's not the case in the South. That's not the case in a lot of places. But here, it really doesn't matter. They want to know what you're doing. If you're talented and you work hard, you can find your home. You can find a niche of people. You can find a community here. We're very opening. Cole, you know this. If you want a meeting with a governor, you want to meet with anyone, there's not like, well, you got to do this or you got to do that. Or you got to be part of this club.

49:07It doesn't work that way in Arizona, and that's great. And you're right. I mean, gosh, even on the parochial schools, I can tell you because my son is friends with a ton of kids now who go to St. Francis, and there's such an amazing community. It's not closed off. I love it. I love that about Arizona. I love we're an opportunity for all meritocracy state. I'll add to that. It's like I was just saying this before, and they'll go unnamed, but a couple days ago, a common friend of Danny and mine said, hey, I want to have you to lunch. and he had me to lunch to introduce me to one of the local billionaires.

49:38That just doesn't happen in any other city where you can build relationships and get to know people on a very personable level like that. That was, I'm trying to think, our colleague, Emily, had the same experience. She was down the road eating dinner one evening and one of the local billionaires rolled up with the guy that runs his family office and she got to know him and I think she pitched the podcast to them. And so it's like, this is such a cool town. It is, it is, yeah. So do you want to flip the other question, Danny? Yeah, yeah. No, this is something for you masters of finance. To quote Tom Wolf, the masters of the universe that I get to spend a little bit of time with today.

50:15You guys talk about low stock returns a lot. I follow you on Twitter. Or X, everyone should because you're always giving out good, I think, stable advice. But one thing that I hear a lot from a lot of my members and some of the C-suite guys is, when you're talking about low stock returns of the SP500, which has traditionally been the safest place to put your money, with interest rates going up, a lot of people are looking at just standard bank and money market accounts now. Can you explain this more and how you see this? Well, your question itself, so how often in, say, your adult life, have you been able to go out and fetch 5 % risk-free?

50:54It was very recent. Very recent. I mean, I think the last time you had short-term rates anywhere near these levels would have been like the late 1990s. Or I remember in 05, the Fed had tightened rates on the short end of the curve to get back to 5%. So it's like you're talking about in looking back from a 40-year stretch, you've had it maybe for three to four years of 40 years, maybe 10 % of the time. Okay, so we don't think a lot about the competition for money, but that competition's out there. So, for example, if you just sat there rolling T-bills last year, you made 5%. Now, is that as good as, say, the equity markets have made?

51:32The answer is no. At some point, could it be, though? One of the things we've been talking more about is this is not the Fed's problem. And I think we talked about this on the last time we did the book list. Bill and I talked about inflation. The government's spending money like a drunken sailor on leave. 7 % of GDP. It's never happened before with less than 7 % unemployment, and we have almost sub-4. So the government's spending way too much. I would ultimately argue, I'll go back to Harold James' book, and I'm trying to remember his book title, but he argued that COVID was a war. We went out and did war spending.

52:09We used defense acts to get our masks and our vaccines and all this kind of stuff. But it was a war, and all the policies that continue to come out are war-like in spending size and scale and things of that nature. And by the way, this is nonpartisan. You know, it was started by Trump. It's now being done by Biden. Trump will probably come back and do that because it's very popular to spend. So I point all that out because that's where the inflation problem's coming from. And the real danger could be to see the 10-year Treasury wake up at 6%. Now, why do I say that's a real danger? Because obviously having a fixed rate security like that, that's riskless over 10 years, that's dangerous.

52:45But that would actually also affect the economy. Think of businesses rolling debts, mortgage pricing, auto loans, et cetera. So I think that's when it could spill over into the real economy. But what we think a lot of this has to do is really wealthy people getting hurt or large institutional investors getting hurt. We actually have a slide that I want to throw up because this is how we kind of think about the history of this. Yeah, so this is looking at the household equity ownership here on the left screen. And if you look at this data, it's a wonderful data set. So this is St. Louis Fed, what they call the FRED data is how they refer to this.

53:18And it's looking back at equity ownership since 52 is the blue line in the chart. And what you'll see is there's really kind of two major hires prior to this era, which was 1969 and 1999. So whenever I look at this chart, I always do think of the Eagles who said in Hotel California, we haven't had that spirit here since 1969. 69. So I always like studying the prior two instances of this because we got higher in 21 than we were in 99 and we're roughly where we were at 99 today. And in 69, the S &P made like 5.87 % compounded during the decade of the 70s. So in the 10 years forward, it made what was considered a low return, but a pretty good return.

54:00Here's the catch. We started the decade with 6 % CPI. We ended with 13 % CPI. So someone says on a compounded basis, what did investors likely lose? four to 5 % real. Okay, that was the numbers. How do I anecdotally prove that? My dad got in the investment business in 1980. You couldn't sell a stock to someone. By the way, bonds had done terrible the entire time, like stocks. So nobody wanted to buy a bond either, a long-term bond. What did people want to do? They sat in the money market fund collecting 13%, okay? And so that's what was done at the time. Coca-Cola, my dad would tell you, it was at six times earnings, paying a 5 % dividend.

54:34Nobody wanted to touch it, okay? So that was after a year of what I'll call stock market failure. If you go back to that slide for a quick second, you'll see that the orange line coincides with the 10-year forward S &P 500 returns. But if you look at the right Y axis, you'll find that they're negatively inverted. In other words, there's a negative return at the high points of it in certain eras. At the low points of that data, you got double digit returns to the S &P 500. So just to clarify, I'm not saying that all stocks will do poorly. So to your point, Danny, if one of the chamber members are watching this, they're publicly traded.

55:08Like, coal said, we're going to do terrible. That's not what Smead Capital is saying. We're saying the composition of the S &P, how it's built, and the companies that comprise it today are likely to do poorly. If you're 0.01 % of the S &P, you might not have that problem. Now, I point that out because in 99, it was negative 1 % that you lost from that highest point ever. As of 2021, the end of the year 2021, the 10 years forward, I fully expect to be negative returns because it was the highest ever. And if we did negative one in 99. So people always ask us, like, where do you think we're at? It's six month leg data.

55:41I think we're pretty close to the 21 high. If you had to catch up to what the markets have done and what stock ownership has done, especially with stock based comp being used as prevalently as it is. And so we're somewhere in the zero or maybe negative returns. And here's the funny part. When I tell people that they look back at me like I'm anti capitalism, like I'm un-American because this is like American exceptionalism that I'm mocking in a way. And here's the weird part. You know, that's illogical to me. And humans often do illogical things because they do human things, not logical things.

56:15And I say that because to assume that we espouse certain ideals as Americans that are unique to us, that is patently false. Now, to your point, have we respected things like property rights in a way that is unique to the world? Yes. So I think that has benefited us directly. but the idea that like a stock buyback can't be done by a European, for example, because they're Belgian, that's just bizarre. But I'll use a term that came up in Nikki Hayes' book, one of my favorite terms, gestalt, right? The idea that the sum is greater than the whole, I think that's what we're seeing. I think that's what causes confidence in these eras of stock market returns.

56:53I'll add one other thing and we don't normally talk about this because again, I hate to kind of like go, I think that data is so good, you could set your clock to it. It doesn't tell you what stock to own. It doesn't tell you what businesses are gonna do individually, but it tells you broad. It's kind of like your odds making, right? You're set in the book, if you will. So what am I telling people? Don't be broadly diversified. Take unique risks to try to go make your money. That's what I'm trying to say. Now I'm biased in saying that, but that being said, that's been a pretty good guide for history.

57:22Let me throw out some other crazy things I don't hear people say. So one of the more abusive practices, and again, I might frustrate some chamber members with this because you're the CEO, this is a good chunk of your comp. But stock-based comp is really an American thing. It is an American practice. And a tech thing. Correct, well, tech, but American thing. Because like the tech compensation consultant then turns to the rest of American industry and says, hey, I had ideas with these people. Look what they did. Let me sell you what I sell. Like Charlie Munger said, I think five years ago, he said prostitution would be a step up for compensation consultants, okay?

57:56Okay, so an adjustment we make when we think about this is the idea of free cash flow. So by definition, historically speaking, free cash flow is your cash flow from operations minus any capex is a pretty basic definition. The catch is that now that we pay stock-based compensation where I'm gonna give you stock, but I take it out of my net income, how you would make that adjustment is people typically add stock-based compensation back for free cash flow, which means it's like selling secondary stock to your employees in lieu of cash. Now, as an owner, if I give, you know, let's say I'm the sole owner of Smead Capital Management and I give 1 % to Seamus and 1 % to Danny, I take that out of my net income.

58:37Was that really free cash flow to me? The answer is no, because now they own, they collect a future liability on all future income streams. So it's not only free, but also the reality of the situation is it's a future liability forever. And they use buyback, share buybacks to offset that, which is the actual, right? So I say that because if you make those adjustments, I just want to read some things on this to kind of give people a sense of where we're at. So we showed that chart. I think returns are going to be poor. Now let's think about some of the numbers. Okay. Let's say I go look at Mr. Softee, or as other people call him, Microsoft, and say, okay, what if I make an adjustment like that on their free cash flow to say let's back out the stock-based compensation and ask what's the actual owner earnings, assuming that that stock-based compensation is not free.

59:26Well, here's the numbers. If I back that out, if I go look at the trailing, if I back that out of Microsoft, Microsoft is trading for 66 times trailing free cash flow when you back out the stock-based compensation. Now, why don't you hear that from a Wall Street analyst? Nobody does the work. Well, they don't consider it a cost. And Buffett used to joke around with stock options, if it's not a cost or it's not an expense, what is it? Yeah, it's ridiculous. And it is a true economic expense. Now, if I use it on a forward, let's say I put what the street thinks they're going to make and I take last year's stock-based comp, it's still trading at 55 times free cash flow.

1:00:00So it's like, ah, I love our industry. Things change and then we get back to this timeless idea of like, what do you trade relative to your free cash and what's the definition of free cash? That's a timeless principle. Let me list out the others because I put these together. If I use Amazon and I back out stock-based compensation for trailing free cash. They only made$8 billion of free cash last year, which would mean it's trading currently on 250 times trailing. And if I go on a forward, which again, the danger in the forward is I don't know what stock comp is gonna be here. I'm just using last year as an example.

1:00:33I think it'll be higher because stocks have gone up. But if I use last year's stock-based comp, it's 60 times forward free cashflow. Google is 50 times trailing free cashflow, 38 times forward. So back to the idea of cost of money. Let's say, Danny, we wake up in an era where the cost of money is aggressively fighting. Ultimately, government paper causes a lot more competition for capital, and people are unwilling to take more risk because the government paper provides such a good return. Even though the government paper is coming from us spending like drunken sailors and running us bigger budget deficits that cause inflation, but yet you're not taking any risk and affects risk-free assets differently than risk assets.

1:01:14Do I think those kind of multiples historically hold with the biggest and brightest American companies? The answer is no, it didn't work for the nifty 50 either. And those were the best and brightest U.S. companies in 1972 or the conglomerates that built up in the late 1960s. And so I think that's the real danger is not only the competition for money, but it's not happening now because while markets go up, people can say, well, I have big capital gains. Why would I sell? When markets do poorly, those capital gains go away. And therefore, the friction to make a change and go to a risk-free rate that competes becomes different.

1:01:48And the cost to keep those employees, if your stock is going down, becomes all of a sudden. Becomes different, right? And so back to our AI conversation. Think about it like this. If AI proliferates while this goes on, they're going to try to cut costs because that stock-based compensation is real cost, but they won't do it until later. Hey, I want to give a big shout-out to everyone who's been working so hard on this 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 Smeet Capital Management.

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1:02:58Now, could you get into a world where they make more free cash compared to those multiples I'm talking about and the stocks still go down? Yeah, because if the multiples go down, they could go 50 % higher in free cash and you still could lose a lot of money as an investor. I think the idea that American exceptionalism should get freakishly big premiums, that's the part that I have tough. Because ultimately in the long run, it's the returns on capital of the business that matter. And we use free cash flow as our definition of returns on a business. And a lot of the Wall Street analysts don't use those definitions today.

1:03:30So like I could go look and say the Fred data looks bizarre. The free cash flow multiples look bizarre. The cost of the risk-free rate looks too easy. And everyone is owning this passive index, thinking it's going to be peachy keen. And like Nikki Hayes talked about with bloodletting in her book, it was easy. It was acceptable. You couldn't get wrong doing it. Well, that's how I feel about passive investing. It reminds me of bloodletting, which is – I mean, we're such learned people, gentlemen. No, I'm listening to you and I'm thinking, as someone who manages such a large portfolio and you work with ideally a lot of our members, retirement plans, and even the potentially government ones, how do you really compete?

1:04:17It's almost like you're up against people promising the world still. And the numbers at the moment back that up. And you're trying to – at what point are you like, these guys are chicken little? You know, the sky's always falling with Smead Capital. They're downers. We want optimistic investors. I would argue, Cole, based on what you just said, you kind of have a blend of optimism and pessimism. Well, yeah, but to your point, how can you get a bad economy when the government's spending this much? So I joke, and I don't know if I've said this on the podcast, but I treat a bad economy, it's like a unicorn.

1:04:47Sure, we know it's possible. We just can't seem to find one. Okay? And so look at the jobs market. If you look at Federal Reserve Bank of Atlanta, 5 % wage growth year over year for every income group. Our biggest problem is we don't have enough people in the labor market. That's right. You know, our unemployment rate just hit 3.4, which is the record now for the state of Arizona. It's never been lower than it has right now in history. And this is where people are coming. So we're trying to bring in people as quickly as we can. So I look at it like this. To kind of put your point, people confuse the economy with the stock market often.

1:05:21In Buffett's Sun Valley talk in 1999, he talked about his 17-year cycle theory, 64 to 81, 81 to 98, and 98 on. And he said that from 64 to 81, he said the economy grew a lot. Obviously, inflation was very strong. Government spending was really strong. Stocks did poorly. Huh, that's strange. How did the economy do so well, and yet stocks didn't do well? And the answer is because everything else was sucking up the money. The real economy was sucking up the money. Government paper was sucking up the money. Inflationary pressures were sucking up the money. That's the kind of environment we're in. So I think this is a great economy.

1:05:59The largest consumer in this economy is a millennial that was born from 1980 to 2000 who has kids like we all do, and they're out consuming a lot of their income that's super good for the economy. The danger is translating that directly to function with the stock market. I'll add one more thing. and you guys all know this, but just to make sure, I'm like the long run eternal optimist as we are as a firm and my dad as well. Like we're just long run optimists. Like the future is always going to be brighter. Humans are going to create great solutions, but the value of assets and companies will change with ebbs and peaks and troughs of enthusiasm in investing.

1:06:44And so here we have the whole meme stock thing going on again. It wasn't good in 21. I don't think it's going to work out now. And it's like, it's funny. I mean, I don't know about you, Seamus, but like in our industry, because how old are you? You're 40. 44. I'm 40. I feel like an old fuddy-duddy half the time where it's like, oh yeah, young kids, you know. It's definitely, to your point, I mean, we came into this business, we've seen nothing but this, right? I mean, for the most part, like 2007, 2008 is when I came into the business. we've seen nothing but largest money, tech, and markets go nowhere but up, and ETFs buy mindlessly what they tell them to buy.

1:07:22It's not a utility. Markets are not a utility. They're not guaranteeing you anything. Who said everyone's got to win? That's right. No, 100%. But let me ask you this, you know, on the meme stock, do you think that, again, social media has played a huge part of this, right? Now everyone's an expert investor. Now everyone gets on and posts their ginormous returns. and have, you know, I think that's so obscene. When I see people posting their personal account returns, it's the height of arrogance. Let me ask you this, though. At what point do you say this is going to be here for a while? And do we have to kind of counter it with real information, you know, for the for the markets?

1:07:56Or do do people in your profession start entering the social media game? You know, you've got great studios. You've got great podcasts. How do you push back on that information? Well, I mean, the book that I think a lot about is, I mean, you know this, Danny, the politicians will always close the barn doors after the animals are already out. That's the history. So we did Taming the Street. Wonderful book on the, you know, really the creation of the SEC. I'll talk my book, William O. Douglas, who is of Whitman College fame, ended up becoming, you know, longtime Supreme Court justice, was at the SEC prior.

1:08:31And he's really a patron saint in the SEC. So that came out of the Pecora hearings that happened after the 29 crash and the self-dealing. and then Joe Kennedy was the first SEC chair. And so I point that out because what will happen is once people have lost money stupidly, then we'll come in and say, gosh, you know what? We shouldn't allow this. This isn't good for society. You'll hear the ghost of Charlie Munger saying, no, we're ruining society by doing this. To go one step further, am I surprised that the meme stop thing is going on while gambling in sports is proliferated? And we have athletes ruining their lives and their careers over gambling.

1:09:09So we're worse off. We're going to have to ask societal questions after things have gone really bad. And therefore, we're going to overregulate at some point. I mean, I think the only thing I really hope out of this, and again, this is a real estate town by history. Think of the illiquidity of real estate in a lot of places right now. This is something like our friend Andrew Cheney and I've talked about and other people in real estate here in town I've talked about with is I think the one interesting part is there might be times where even at lower valuations, the equity markets could be the liberators of problems of the economy.

1:09:43So for example, I could see an era where we're taking private real estate assets that are having trouble getting a bid, putting them together with other assets, and then doing share for real estate swaps. Because at least the great part about the market is they provide a public price of whatever they want, and therefore it's what the market bears. And so I think it doesn't mean all is going to be terrible, but we have some real problems we've got to address in how these markets behave. Do I think that enough has been done to understand what these people are doing? I mean, no, I think it's crazy that, that like an investment advisor has to go out and in a regulated way, provide surety around what they're saying.

1:10:21And like the Tom, Dick or Harry doesn't have to, you know, do anything. Roaring Kitty or whatever the hell his name is. Yeah. And by the way, kudos to him. He made a lot of money. I tip my cap. I, you know, I love getting trolled by the meme stock people after I say like, this is degenerate gambling. It is. And I have like three or four people like pop it up and you're like, oh, am my house going to get egged? You know, something like that. So let's see. First off, this has been tons of fun. Seamus, thanks for joining me. Thank you. And thank you for bringing the Dimebacks swag. I'm a big Dimebacks fan.

1:10:50So as Seamus knows, we have some pretty good seats that we get to enjoy from time to time. Danny, we're going to have to do this again. I don't know how often. With your travel schedule, we might have to do like a call in with Danny and like your number one book pitch. in six months or something like that. I love it. I love getting book ideas from you. And last thing I would say, anyone thinking about moving to Dallas, they should check out the news stories from this week about Texas losing out on a treaty with Mexico for water. So that's a real water problem. That's my last plug against Texas.

1:11:18Yeah, we're talking to his book. Jeez, everyone does it here. Well, Danny and Seamus, thank you for joining me to share with podcast listeners what is on the Smeed book list. For our listeners, if you have a great book that you'd like to recommend, email podcast at smeadcap.com. That's podcast at smeadcap.com. You can also reach out to us on X. Our handle is at SmeadCap. Danny, what's your handle? Oh, at DBSide, D-B-S-E-I-D-E-N. So, yeah. Yeah, you can look up Danny on X as well. We'll give you a shout out next quarter when we do this again. If you've got book recommendations you'd like to send us there.

1:11:49Thank you for joining us for the Smead Book List on A Book With Legs podcast. We look forward to the next episode. Thank you for listening to A Book With Legs, a podcast brought to you by Smead Capital Management. The material provided in this podcast is for informational use only and should not be construed as investment advice. You can learn more about Smeet Capital Management and its products at SmeetCap.com or by calling your financial advisor.