The Smead Book List - Winter 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, 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 writing. 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 date is January 1st, 2024, the release date of this episode. This is the late Charlie Munger's 100th birthday today. We would love to honor him with this episode, and we're going to discuss Charlie's brilliance on top of the books that we are interested in as we normally do each quarter.

1:01Joining me for our quarterly book list is our Chief Investment Officer, Bill Smead. Dad, thanks for joining me. Glad to be here. So like I said earlier, we'll talk about Charlie later in the episode. To start this off as we normally do, investors and people we run into and meet with ask us about the books we're reading. This is our quarterly episode to talk about books, books, and more books. So we'll start out by talking about what we've recently read. And Bill, do you want to kick us off? Sure. We read General Petraeus and Anthony Roberts' book, Conflict, which was fantastic. Let's go into Conflict first.

1:34So talk about what you liked out of conflict. Well, I love history, and I'm very familiar with a lot of the history that he put together there. Because when I was in seventh and eighth grade, I had this obsession with reading every World War I and World War II book in the junior high school library that I went to. And then on top of that, my dad had served in World War II. and then I grew up in all of the difficulty associated with the Vietnam War and much of what he talks about in here goes right to the heart of what was right about World War I and World War II and what was wrong with the Vietnam War.

2:16Yeah, I also read Conflict and we'll have General Petraeus on the podcast here after the first of the year. I think that the thing I took away from his book is, you know, he's really dealing in very complex problems. In other words, you know, as he talks about clear, hold, build were, you know, three ways of thinking about what they were doing in any conflict. You know, how you have to do that in each of these scenes or theaters are vastly different. And the religions and the people and the ethnicities and every part about these are just are so different that I think a lot of it more about in context, the investment business where we live in this complex system.

2:53We're trying to find security prices in a world that is vastly changing, much like the theaters of war. And trying to make decisions in that is never easy. And I think while he analyzes it, he also is very respectful of the fact that we're looking at this after the fact and analyzing it. And he's obviously, as we talked about with him, he's a big historian himself. And he's done a lot of work at the staff college, the war college here in the U.S. in analyzing wars. But again, I mean, you know, to think about Vietnam, everyone can tell you what went wrong with Vietnam. Think about what went right with something that he talked a lot about.

3:30And then also, you know, using our discussion, you know, on Afghanistan, he points out good points of Afghanistan, which. Yeah. In the investing process and in stock selection, was it the most perfectly aligned ones that worked? and the answer is that it doesn't have a tendency if the obvious stuff was the ones that work the best everyone would be a successful common stock investor yeah just well just like everyone looks at the world as like a value versus growth world and i think that's pretty foolish because it's more complex than that value might win and you might pick bad stocks and that's the plain simple math of a complex world yeah so um what else have you recently read bill well i i read the book was sent to me by the Fred Hutchinson Cancer Research Center called Living Medicine by Fred Applebaum, which was about using bone marrow transfer to treat some of the most horrid cancers.

4:27And it was just a that it was like a 60 year development that really started with analyzing the effects of radiation from dropping the bomb in World War Two. Yeah, let's see. So books that I've recently read, and we just had published this recently, but I want to talk about it, because I just think it's an incredible book. Vikash Yadav, he had done Liberalism's Last Man, all about Frederick Hayek. And much of the work has to do with his writing from The Road to Serfdom, which he published in the middle of the 20th century. Really, I would say Hayek's core thesis was that ultimately the individual liberty to decide is right.

5:07In other words, what I decide to do today for me personally in a democratic society is the utmost importance. and therefore what typically happens is people go out and do this in business and economics. They decide, hey, I want to go out and create a business. And it's kind of a good picture of what that liberty does in economics. We got something I would highly recommend for all of our listeners in that discussion. There is what seems like a paradox in Hayek's thinking that Vikash and I discussed. And it's just a very complex issue to discuss. But so we discussed about the idea of children being born or the idea of abortion.

5:47And I would highly recommend our listeners to go back and listen to the section because I asked him, you know, how would Hayek look at childbearing? And he would say he said, I think, in the podcast to paraphrase him, he said that a woman should never be coerced by anyone, including the government, to have a child. And so I kind of pushed him further on that. And I said, but what would Hayek say is the benefit to children? And Hayek argues in his book that more people on this earth are more benefits because obviously all these great human liberties, each exercised in places like commerce, create incredible solutions for our life.

6:24And so, you know, Vikash agreed that Hayek would say no one should be coerced into having a child. And yet, at the same time, Hayek would let the mother know, you know, hey, but if you have that child, we're all going to be better off, which is a very paradoxical way of thinking about the benefits of children while having free choice in society. Let's see, the other two books that I have here on my list, I just got done reading The Myth of American Inequality by Senator Phil Graham. I think it's really easy to, I think, mock and ridicule our society for its problems because they're so obvious.

7:00I think the thing I took away from Graham's book is, you know, in the past, it's been discussed that, in effect, you know, we've gone wrong because we pay too much government largesse to people, which I believe is true, just so we're all on the same page. At the same time, the reality is we have such an incredible society that people that produce a lot of economic success can pay for the shortcomings of what goes on in society, which I think is a really interesting way of thinking about the incredible nature of America. I think the only thing that Senator Phil Graham is completely right on is obviously being discussed in the post-pandemic world is the idea if we give too much people incentive to not work, what kind of outcomes does that produce?

7:42And he talked about, you know, kind of the power of work and people having something to prosper with. The other book that I think is, you know, incredible book also in the context of what's going on in Israel today, The Money Kings by Daniel Shulman. Mr. Shulman also wrote another book, which was wonderful, called The Sons of Wichita. But The Money Kings is all about the Jewish investment banks. And something he pointed out in his book that I'd never heard of before, he mentioned that the idea of Zionism has been more fluid than people have thought. You know, we think of Zionism in the context of Israel today, but Jews in the early 20th century that were Zionists actually looked and said, well, America is our new Jerusalem, which was a context and idea that I hadn't heard before, but just incredible vast history of the, especially philanthropy in the, in the New York Jewish community and the families that were involved with the investment banks was a lot of fun.

8:37So let's pivot to what we're currently reading. What do you currently have on your list, Bill? Well, I'm going through Bob Goff's book, Live in Grace, Walk in Love. This guy is inspirational. He's a comedian, and he has such a wonderful off-the-wall way of looking at how we should interact with each other and how we should treat our relationship with God that it's very fun. I'm reading Walter Isaacson's book, Elon Musk, I can't put it down. It's fascinating because, of course, it covers a period of history from, say, 2000 to today. But Isaacson does a really good job of teaching you how volatile and vulgar of a guy this guy can be while Musk being a genius in many ways and with loads and loads of complication attached to it.

9:41And then I'm reading the book about General Longstreet, who was a very successful Confederate general. And actually, they could have done a little better if they'd have used his tactics more, who then, after the war, sided with General Grant and attempted to make the South into a place that wasn't the bigoted, repressive place that it had been prior to the Civil War and how difficult that was in a South dominated by white supremacists. So the book I'm currently in, I only got one, which is The Book at War by Andrew Pettigree. And what he does is he uses books or what I'll call information to argue, you know, some of the reasons of war, but then also talks about the influence of books in war.

10:32So just as a picture of this. It's really interesting. There was a run on maps beginning in World War II, but it also happened at times in World War I because there was just only so many ways you could go out and get information on what you needed to go do and the geography of that. And it was not uncommon for a ranking officer to send someone off to a local bookstore to get a map of a locality. And so I think the power of information really shows up in his book. and it's been a very fun read. It's a very fast read. Even though it's 400 pages, you'll read it much quicker than you think. The other subject I want to jump into is any books we've had recommended to us recently.

11:12I had actually just gone through, I went to a Barnes & Noble here in the Phoenix area and had gone through with a couple of my kids out buying them books. And I pulled down, there were like four books I want to say. I got four here on my list. Monopolize by David Dayen is a book I picked up that I'd like to get through. The Future of Business Journalism by Chris Rausch. Interesting subject. Just reading through the initial comments on it, it looks like he's advocating that without journalism, we will not be better off as a society. The third one is The Philosopher Palo Alto by John Tinnell. And the fourth one I have is kind of an economic history book, which is Seven Crashes by Harold James.

11:53Bill, you didn't have any. You got a lot more books you're working on right now than me. Yeah. You got your fill. I've got enough on my plate without fantasizing about the next ones. Okay, so let's pivot to Charles T. Munger. As I mentioned earlier, this episode is being released on what would have been Charlie's 100th birthday. And so we thought we wanted to pull some of our favorite quotes and ideas from Charlie. And we thought it'd just be a great way to honor him and talk about some of his ideas and some of his history. I'll start us off and I'll pull this. This comes from Poor Charlie's Almanac in 05.

12:30It says in the book, In my whole life I have known no wise people who didn't read all the time. You'd be amazed at how much Warren reads and how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out. For all of our listeners, if you're wondering, where did the name A Book With Legs come from, the idea come from? It came from Charlie. This is his quote in Poor Charlie's Almanac. I've heard him give interviews where he says his family members describe him as a book with legs, you know, that he was so immersed in the book he was in that he wouldn't even, you know, put it down while walking around the house.

13:04And I think that's a really good picture of, you know, why we do this podcast, why do we love reading. I think he's been a masterful teacher of the power of information. And like I mentioned, the book at war that I'm reading right now, I believe books are a demonstrable advantage in this world, where we have instant information, but yet we might not have wisdom. And I think that's what books really help us do is test out theories in the same sense that Charlie would. And so I wanted to use that quote first so people can get some context behind, what's the name of the podcast? Why is it, is it about legs?

13:39No, the answer is about books. So, but what's yours? Yeah, first of my three that we're gonna share is he said in November of 2021, this is the biggest financial euphoria episode of my career because of the totality of it and as a harvard trained lawyer charlie chose his words very carefully and and so i find this the most fascinating because to me this said that that a 75 year time period that this was the biggest euphoria episode he'd seen and totality meant to me it's like combining the tulip mania of 1636 where you could exchange a fine bulb for a house a carriage and two fine horses which in today's dollars would be what coal seven eight hundred thousand dollars to 85 years later the british government monetizing a bunch of federal debt and a guy named john law thinking how can i get some of that for myself and forming a bunch of quasi growth stocks based on going down to the south seas to places like remarkable indonesia to get people rich which of course both of those inside joke if you don't know it you're fine well there was commercials remarkable indonesia and and so the idea was they were going to go down and dig up wonderful resources in the south seas and get rich.

15:05And the truth of it is, it was just a growth stock fantasy. So back to Charlie, saying totality is what you had to hang your hat on, because that was the word that needed unpacking in that quote. And he was giving away what he thought. And people didn't really understand it because they didn't understand his deep sarcasm and his choice of words. So speaking of his deep sarcasm and choice of words, that is exactly what my next one will be. I heard him say this. I can't remember if he said it at the Daily Journal more recently, but this was also back in the 2014 shareholder letter. I'm going to read later in the letter.

15:42quote if you've attended our annual meetings you know Charlie has a wide-ranging brilliance a prodigious memory and some firm opinions not exactly wishy-washy myself and we sometimes don't agree in 56 years however we've never had an argument when we differ Charlie usually ends the conversation by saying quote Warren think it over and you'll agree with me because you're smart and I'm right end quote and I love that because you know I kind of consider Charlie my patron saint and I think Bill's heard me say that same thing quoting Charlie in our discussions. What do you got next, Bill? Was Charlie only married once, Cole?

16:19Twice. Twice, yeah. That's how you end up with two marriages. Or in Charlie's case, it was a dead child. One of my favorites, second one, is envy is a really stupid sin because it's the only one you could never possibly have fun at and that was from July of 06. I've seen it a number of times since then. And his idea is that why would you envy when it just can't come to you? There's nothing good to come out of it. And really, most investing in the last 10 or 12 years has revolved around envying the people that created various amazing technologies. It makes you take a step back. Yeah, to follow on your idea of envy, I actually pulled, you know, I think the best book on Charlie is Janet Lowe's book Damn Right, which was published quite some time ago.

17:13But it tells a great story of him and kind of a sense of him. And on the Envy, there's actually a really great quote on page 77. I'm going to quote just a few sentences here. Both Graham, who died in 1976, and Munger shared a wry and occasionally silly sense of humor and a deep interest in literature, science, and the teaching of the great thinkers. Both like to quote the classics. One of Munger's favorite ideas is from Aristotle, quote, the best way to avoid envy is to deserve the success you get, end quote, which obviously in a Charlie sense means if you're envying, you don't deserve it, which is a funny way of thinking about envy.

17:49So my next quote that I pulled out is from the Daily Journal 23 meeting. It's like fresh on my mind because it was just, it was one of these great total mongerism principles so becky quick is asking charlie a question i'm going to read the question here from the becky quick said somebody else wrote in and i don't have the email in front of me at the moment but he wrote in quoting you where he said the three things that ruin people are ladies liquor and leverage so why would you use leverage when you know that's one of the three things that can destroy somebody okay so he goes into discussing, you know, when they use leverage, he actually talks about when they used arbitrage in his answer.

18:33And he and they ask him about Activision Blizzard. And so Becky kind of comes back, you know, to this idea of leverage. And she keeps pushing, she says, So is leverage the least evil of the three L's? And Charlie prides back and says, I think most people should avoid it. But maybe not everybody needs to play by those rules. I have a friend who says, the young man knows the rules and the old man knows the exceptions, which I think is an incredible way because, you know, you hear these stories, you know, I think of younger people, you hear these stories, you know, here's how to be a successful investor and here's what you have to do and so on and so forth.

19:08But if everybody knows those rules, is there any value in those rules? And what I love about Munger's quote is he points out that, you know, is leverage good in a business? No, it's generally bad, but there are exceptions when, And, you know, leverage can be incredible. I think of today where you could have debt that's so cheap to pay that it's actually an asset, for example. In other words, that's an exception to the rule over time, but it's true today. And I think a lot about, you know, Charlie, you know, introducing that idea that, you know, there are these rules in finance or in investing or practically for your life.

19:42At the same time, there are exceptions to those rules and you only learn those exceptions through time and investing. What's your next one, Bill? My third one is, Charlie said, quote, there's no better teacher than history in determining the future, unquote. Boy, this is so powerful for right now. I went to college in the late 70s and started the investment business in 1980. And most investment people look for perfect analogies. But history doesn't work like that. History never repeats itself exactly, but it rhymes. And Charlie was basically saying with this quote, you have to understand the rhymes.

20:26For example, today we're having a big pullback from this big inflation episode we had, and people think that we've got it licked. And we took a look back at the 1970s and found that decade is known for its inflation. But within that decade, there were two major pullbacks in inflation on the way to 14 percent inflation. So people that think we've got it licked right now don't know history, certainly as it pertains to too many people with too much money chasing too few goods. Yeah. One other thing I mentioned, damn right, as a book that our readers should go out and read to kind of contextualize Charlie.

21:09and it's funny because it ties up with you know the idea of musk which charlie actually did comment on in the 23 daily journal meeting as well where he asked i think he said something to paraphrase him he said something he's like the rest of us he's smart some of the time okay is how he talked about musk because the question came up in the 23 daily journal meeting was charlie do you agree with musk that there's not enough people in the world was the question becky quick had asked and And in Damn Right, if you read what Munger said and or did at the time, you could be very confused compared to his 2023 answer.

21:44So for example, in Damn Right, it talks a lot about how Charlie was a huge advocate for Planned Parenthood, which regardless of whether that's a good or bad thing in the listener's eyes, Planned Parenthood does naturally reduce the number of children that are born just by nature. There's just nothing necessarily debatable about that. But interestingly, there's a point that Janet Lowe makes, and I'm going to quote here just to make sure I don't misquote her. In 1990, Munger fired off a stinging letter to Fortune claiming that a review of Paul and Ann Ehrlich's book, The Population Explosion, had missed the point.

22:17The book reviewer said Munger argues that human welfare will continue to prove as a result of desirable population growth accompanied by even faster technological development. Alas, it is not so simple in a finite world system subject to the laws of physics, two variables population per capita wealth can't both be maximized forever munger said it was nonsensical to expect as the reviewer has suggested that some technology not unknown will step forward to solve all the problems of pollution erosion and so forth and he says quote no one contemplating the prospective environmental burden described by the airlift can be confident that such a benign demographic transition will occur whether the population growth driven conditions won't gap won't be ghastly in 100 years less for one thing the technological development that is necessary to permit a peacetime population increase will also make weapons both more effective and more generally available in a more crowded world, end quote.

23:05And so that was like Munger's view at the time, the idea that Munger was more optimistic about technology meeting the needs versus, you know, obviously population growth. But, you know, listening back to the Daily Journal meeting in 2023, he says, you know, the risk is that we don't have enough people, which Paul Ehrlich would argue that we've had too many people for decades and that it's going to cause a starvation of resources and humanity and life. And so it's like beyond the grave, if I could pull out the Ouija board to make fun of what Buffett said over the years, I'd love to pull out the Ouija board and ask Charlie, Charlie, do you look at your earlier views in your life of limiting population and the technological progress?

23:49Would you change those at all now that you think we don't have enough people like Elon Musk? And like you pointed out, for all of Elon Musk's shortcomings, I think it's the one thing he's got really right. And, you know, they mock Musk for this because they say, well, is that why you have so many children, Elon? And Elon goes, well, I'm certainly doing my part. And I would say Charlie did his part, too. So it's just really interesting to think about that aspect of Charlie where it's like Charlie was critical, but he was very optimistic about the future. And I think what you'll find time and time again is people like Charlie that were very optimistic.

24:20I think it's hard for them to ultimately end up with the goal and idea that we have too many people. Because otherwise, in your life and 100 years, you're going to see all these creative things created by people that you couldn't have believed in. Yeah, and when you spend most of your time around intellectually brilliant people, which Charlie did for the most part, it's easy to get off track. Because the idea is you hate to see people born into poverty. I think that's where he got that limitation from. Correct. But like we talked about with Senator Phil Graham, 93 % of the people that are born into what we consider poverty, the lowest income quintile in America, make more money than their parents.

24:59Right. So the idea that like this game is somehow stuck. Yeah. That's a very finite view. And again, to your point, there's a lot of smart people out there. Yeah. But it's like Charlie says, you're smart and I'm right. So I just, you know, again, I, if someone says like, you know, here at our firm or, you know, Bill and I as individuals, our goal is to not be smart. Our goal, like Charlie says, is to be right. Now, one other thing I have to mention, I don't hear people often talk about this, but the other thing I want to mention from the book, Damn Right, is in the appendix A of the book, there is the actual Wheeler-Munger partnership track record from 1969 to 1975.

25:39And we were just talking about the three L's that Becky Quick had brought up. Even in the 60s and 70s, Munger assumed he knew the exceptions because, you know, the old rule would be don't use leverage. And if you look at the Wheeler-Munger partnership that he had with Al Wheeler, there definitely was leverage. OK, and something else that I'll leave for readers to kind of think about, but I know we've talked a lot about internally, is let me read 1972 on. So the last, in effect, four years, the partnership. In 1972, the partnership made 8.3%. The Dow Jones is what it shows here on the table, made 18.2.

26:151973, the partnership lost 31.9%. Dow Jones lost 13.1%. 1974, the partnership lost 31.5%. The Dow Jones lost 23.1%. And in 1975, the partnership made 73%. And the Dow Jones made 44.4%. Okay, so in modern finance, and I know Buffett and Munger have obviously made a lot of fun of this over the years, but in modern finance, people would say, well, that's very volatile. Now, the question is, can you be an outstanding investor, an outstanding thinker as an investor, and someone who's more often than not right in investing, if you're not willing to accept the kind of punishment that Charlie was willing to accept?

27:00Because I think what we've decided, and we believe to be true, is the idea that you can skip that is it's foolish because we've yet to find an investor who's been able to sidestep the bad times that go with the outstanding asymmetric outcomes. It's the ticket you have to punch. With us, it's especially noticeable entry year. Most people don't even want to have to sit through a lot of entry year volatility. But again, if you go back and look, the two best things that have happened to us in the last 16 years are getting trounced in 08 and having bargains everywhere at the end of it and getting pummeled by the COVID shutdowns in 2020 and have opportunities exposed to us that we never imagined.