The Smead Book List - Winter 2024

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.

0:21Welcome to A Book With Legs podcast. I'm Cole Smead, CEO and Portfolio Manager here at Smead Capital Management. At our firm, we are readers and we believe in the power of books to help shape and form investors. In this podcast, we speak to great authors about their writings. the late, great Charlie Munger, prescribed using multiple mental models and analysis. We analyze their work through the lens of business, markets, and people. Today's date is December 30th, 2024. It's our fourth quarter book list where we talk about books, books, and more books. Hosting this with me is our Chief Investor Officer and Chairman, Bill Smead.

0:58Dad, thanks for joining me. Glad to be here. So let's start out as we normally do. what have you been reading lately? Well, I've been reading a totally fascinating book called Bubble in the Sun by Christopher Knowlton. I don't know if... Oh, this is what you read? I'm almost finished with it. Well, yeah. And read Technology Revolutions and Financial Capital by Carlotta Perez. And what's that about? Well, it's a whole theme that we're working on. And the evidence to us in our work is that this is the fourth major financial euphoria episode of the last 100 years. So our reading seems to be taking us to trying to learn about the other ones so that we can handle this one better than we might have handled it if we weren't very familiar with the way these things play out.

1:52And so, and of course, we did Brett Gardner's book on Buffett's early investments, which is spectacular. I keep complimenting everybody to read that. He did an incredible job of research to do that book, which makes it even more impressive. And it connected up with a bunch of things that I knew about from reading books about Buffett in years past. Wait, and really quickly on that, because I agree with you. So I just think of all the work he did to compile that. Now, if you're watching this podcast and thinking like, why in the heck do these guys do this? I mean we can attain that information for$35 I'm in the arbitrage there think Brett spent tons of time and the fact that we all as humans can take and capture his information and and and the value of that at$35 is absolutely fantastic and by the way what a great system we live in capitalism's amazing I hope I hope Brett makes you know a million dollars off that that'd be wonderful but i just say it because i was sitting there thinking what time would this have taken me to compile that data and go back and it's like because you could kind of you can see traces of that in certain places but to be able to get it in one place is incredible so some of it you know i'd gotten out of books about buffett uh i'd gotten some of it uh from books about ben graham we just ran into a Ben Grayism this last couple of days that I hadn't thought about for a while which was in the short run the market's a voting machine in the long run it's a weighing machine and it's good to get reminded of things like that and so Gardner's book did a fantastic job to put the meat on the bones that you needed to really step back and think like Buffett did in about a 12 to 13 year stretch.

3:47Yeah. The other part of the book that was interesting was his success was not foreknown. In other words, it's not like people sat down in 1960 when they met Buffett and were like, oh my God, you're going to be the greatest investor of all time. They later recognized that when his cumulative advantage had been built to where it was obviously he had done something discernibly different. But at that time, we have this chronological snobbery. We look back at the past like well duh I mean you met Warren Buffett but when you met Warren Buffett in 1960 you didn't know that and like like he said during the book one of the guys kind of mocked you know oh this is the guy from Graham's firm you know kind of like oh why are you giving me this really stupid person again and just think that person was saying that about Buffett and so I think you know you don't recognize genius until it's after after it's happened well and here's the other irony I I get a real irony thing out of this.

4:46First of all, everybody knew he was a smart kid. Yeah. Right. So he's very smart. Academically. Aptitude wise. Academically. He was a really smart kid. His dad was an admired man. He was a congressman. They lived in Washington, D.C. for a while. Yeah. And Omaha is kind of the New York City of the Midwest. It's got a lot of connection to the East Coast. But then also, in the books about Buffett explains it, He was going to the horse track and - Axar Ben. And what he did was he created a tip sheet. So he figured out how to make money from the racetrack without actually having to be right, but he did have a tip sheet.

5:27So people would buy his tip sheet. Yeah, his advice. That means he was handicapping the horse races in his teens and selling the tip sheet. And what that shows is an incredible urge to like taking risk, right? In the stock picking world, if you don't like taking risk, don't come here. You have to like it. You have to like it. And you have to love the urge to put yourself out there and look completely stupid in the effort to make multiples of your money over a long period of time. And that's Gardner's book did a great job of showing how that developed from the tip sheet to the education to working for Newman and then into the early ideas that he made money on.

6:17Yeah. Let's see the other the other book that that we read recently there. Yeah. Wilbur Ross Risk and Returns. That is such a great book. I've I've now told the story about the Dakota apartments probably 40 times already to people. Yeah. Wilbur Ross lived in the same Dakota apartment in New York that John Lennon lived in. And the story about David Geffen, the music exec, one of the most admired people in the entertainment industry, figuring out that they had to put a memorial in Central Park that they call Strawberry Fields so that the 2 ,000 people that were coming to their apartment complex every day to honor John Lennon would move to the park so that they could come in and out of their apartment complex.

7:05That's just as good as it gets. Well, yeah, and I think the other thing, what was fun about reading Wilbur's book, I think it gives, he did a very good job of really previewing the coming Trump administration, which is something that's one of the questions we'll talk about later that I know someone had brought to us for this discussion today. But I think the other thing, too, is in this era where everyone's like, you know, Bob, you just got to buy a quality business and you just kind of sit on it and the game's easy and that's all we ever have to do. Well, guess what? Wilbur Ross made his money in cyclical industries and bankruptcy court.

7:40In a garbage pile. The opposite end of the spectrum. And by the way, did it in businesses that people thought would – I mean the coal business is one of the places he made money. So I point that out because it was just refreshing to be reminded that it wasn't always like this, for better or for worse. And obviously, you know, I use even Mr. Ross, like would someone have sat down with Wilbur when he was 20 years old and been like, yeah, this kid is going to be worth a lot of money someday and have a lot of success and be known. That was not foreknown in his life either. And also, your business career is a marathon, not a sprint.

8:18So there were lots of interludes in there. But Cole's right. But he chose to be extremely effective in an arena that most people of his educational background and social status did not want to get heavily involved in. Therefore, he got higher returns out of that because of the lack of competition. Because what's the key to success, Cole? It's weak competition. It's weak competition. Um, yeah. And I, I, uh, and obviously like now that, you know, Palm beach is like, it's where you go if you want to do politics these days. Right. Um, so I say that because obviously Wilbur, Wilbur lives in Palm beach.

8:58He's in the center of that. I, I will say, uh, uh, Wilbur has a strong shoe game. Uh, those Palm beach, uh, leather loafers he wears, I I'm quite a fan of, so I, I haven't bought them yet, but I'm, I'm itching. Um, let's see. So a couple of books I've just done, um, can't deny it by Doug Terrison, the former oil analyst at Morgan Stanley. He is writing this kind of looking back at his personal career. He is a Louisiana boy who worked on shrimp boats and ended up on oil rig and just incredible history. He talks about the super majors merging in the late 90s. He talks about the idea of what he called pledgers.

9:33In other words, you're pledging that you're going to set return minimums in your oil business, which obviously didn't happen. Most of the industry was unwilling to do that. Now, Now, here's what was interesting. I'm like reading the book going, thinking like, I don't know Doug. I wonder what he's going to say at the end for today. And I'm not going to give it away to our listeners because you should read the book. And I'm sure we'll end up having a conversation with Doug. But Doug thinks just like we do. Well, it's funny you mention that because in talking to people, I try to explain why Philip Morris was the best performing stock of the last 50 or 60 years on the New York Stock Exchange.

10:16And it's because they sold way less of the same thing at dramatically, dramatically higher prices because of the moral shame that they put on everybody associated. And it's an addictive legal drug. Cigarettes are an addictive legal drug. And inexpensive energy is an addictive legal drug. The world functions on fossil fuel energy because it is the least expensive form of energy. Yeah. The other book I just got done with this week, actually, The Power and the Glory by Adrian Tenniswood. We've talked a lot about how insane the second home, luxury home community kind of thing on second, third, and fourth homes is.

11:11Well, his whole book is about the wealthy people in the English countryside from about 1870 to 1914 up to World War I, which I would argue was the end of the Gilded Age, was the beginning of the end of the monarchies of Europe, et cetera. And what I appreciate about wealthy people of the past is they have the same problems they have today. They have mistresses and infidelity and money problems and children who aren't. calling myself not including we don't have that but but i say it because um i asked him i said adrian uh i i i when i was i was uh because we just got done doing a podcast with him i said adrian you know in my reading right now it was i kind of felt like i got a little stayed like i kind of got stuck in a rut and i said your book was great because it was so eclectic it was like a social history and i said but just the gossip alone was just kind of intriguing to hear what's going on and adrian goes i i i love the gossip well so it makes you want to watch maggie smith some more you know because well he commented on downton abbey because parts of that you know haven't but but here's what i will say um you know never forget those houses were never owned by those families forever yeah okay and i i think the most damaging thing is the idea of permanence in this life oh it's it's always going to be that way um you know you know i think for example one of the Rothschilds actually created Palm Beach back to kind of connecting up with Wilbur.

12:39But again, there's no permanence to this. And I also think if you read that book, you'll recognize that you can be wealthy and you can be miserable at the same time. A couple other books, Start Thinking Rich by Brad Klontz. I'm not a big fan of self-help books. Brad does a good job explaining what kind of good mindset someone that has, builds wealth does, which would be like delayed gratification, for example. We talked about that. But something else you should read is book four, or something I think is really valuable for people is retirement is overrated. It's not good. We weren't made for it.

13:17And in many cases, people do a lot of either financial damage or personal damage to themselves, because ultimately we're here to work. I'll use the biblical example. God worked six days and rested a seventh. That was 85 % of the time. Go do the math on your life. That's a pretty good way to to think about it. A couple others, White Shoe by John Aller, all about the big, what are now today the big firms, people like Paul Kravitz at that time. It does a great job of talking about how lawyers before conflicts were around could have way greater roles. For example, Sam and Chase of Chase Bank fame was a lawyer, Ohio Senator, Governor.

14:00He was also the Treasury secretary under Lincoln. Lawyers played much bigger roles in a prior world because they had no conflicts ultimately. And as conflicts arose, they had to disperse the legal work to more places. But John's got a great history of Sullivan, Cromwell, all the big white shoe firms. And then the other one that I want to mention is All the President's Money by Megan Gorman. We had Megan on the podcast. She was great. Did you know Thomas Jefferson died poor? Well, a lot of people died poor back then. Well, no, he just like, I mean, he was wealthy for much of his life, but he was always scared of the problems he had with money.

14:43And that was not unique to him. And so I think it's always helpful to look at the whole human. And it just reminds us that like, you know, What it takes to be president is you got to have a zeal for wanting to do that. You're going to have an ego as big as the earth. You got to believe that you could be ultimately the leader of the free world. And what drives you to do that might have nothing to do with financial wisdom. It might have nothing to do with the personal wealth you've built up. So the idea that financial success and being president are integrally tied is not historic. It is not normal.

15:18And she does a great job of telling of how that manifests itself in various different presidents over time. Yeah. It's when you think of Jefferson, we idealize the good things that the best presidents did. Well, romanticize it. They romanticize it. And it was a rough and tumble world then. And, you know, people forget this. These last two elections, people forget for the first 70-year history of the United States of America, You had to be a landowner to vote. So when I hear people peeing and moaning about the electoral college system, I mean, they just sat down. They said, well, wait a second.

15:59We don't want the two most populous states in the union to elect the president every time. So they put that into place. And it's still working now. It's still working. and it's still represented by land because obviously if you're Montana your land per person is insane compared to other states yeah and therefore your land actually decides part of your power yeah so exactly so it just it's it's a it's an interesting thing to romanticize I mean think of President Carter one of the most decent people that's ever been president United States a very admirable guy and also an incredibly smart guy. I mean, nuclear physics background and military background, et cetera, et cetera.

16:45He successfully got elected president, did not get reelected. But yet we remember the Roosevelt got us through the Depression. Well, if you talk to my dad, he'll tell you he thought he was terrible. But he got us through the Depression. And so everybody thinks, oh, Franklin D. Roosevelt. He was the bomb. Let's see. So let's pivot to what we're reading. You mentioned Bubble and the Sun. Could you kind of teach us about the book and what the background is? This is fantastic. Christopher Knowlton has written this book. And what it does, it takes you through the 20s as the land was developed into hotels and places where people could go in Florida.

17:38It reminds me of the way it is today and yesterday here in Phoenix. My first trip to Phoenix was a Drexel Burnham incentive trip at the Arizona Biltmore, about a mile and a quarter away from here. and I played golf. It was 75 degrees. I got done golfing. I went to Cole's mom was sitting by the pool. I said, honey, this is robbing from nature. So what these land developers did is they went down Meisner, Fisher, these guys, and they set up so people could go rob from nature by going where it was warm in the wintertime from the East Coast. Well, my first incentive trip in Florida was at the Breakers Hotel in Palm Beach, one of the first hotels developed in this book, and sat and watched the Geraldine Ferraro, George Bush, senior vice presidential debate with I.W.

18:32Burnham, the founder of the company I was working for. Tubby. Tubby Burnham, who had started the company in 1935 in the middle of the Depression. And then one of our, not too long later, the Boca Hotel and Club, we had an incentive trip down there also. And so reading this book and finding out who built these hotels, who developed this, how it got to be a mania. It got to be a total mania. These people were buying raw land and selling lots, just like hotcakes and so forth. and how important that actually was to developing the circumstances of the depression, because 15 % of the American population was speculating in Florida land.

19:19And in the common stock market, only 1.2 million out of 118 million people were owning common stocks at that time. So they make it sound like, Cole and I have talked a lot lately about how dangerous the current situation is because the wealthiest people all own common stocks up to their eyeballs right now. And the largest wealth concentrations of wealth are in the stock market. Exactly. So if we get into difficult markets for an extended period of time, it will probably have a very big dampening effect on the overall economy because they are my age group is spending like drunken sailors on leave, especially.

20:06We talked about it in light of comparing, if someone says, okay, what was the most like the 29 bubble? Well, if you look back 100 years, Japan was actually a lot like the 29 bubble. It was a euphoria in both land and stocks in a country versus we've had euphorias in stocks. Obviously like 99 was euphoria in stocks, But we did our land bubble, you know, ultimately about seven years later. Yeah. We did our land bubble about seven years later. We peaked it at least, I should say. And so we at least, you know, we're a little more discerning in our bubbles. But we talked about it in light of what was so damaging about 08, 09 is that the average person was tied up in the euphoria in real estate.

20:59Yeah. Which is why it was so devastating economically, why it was so devastating to banks and credit, et cetera. Now, if you look at today, we think there's a euphoria in the stock market, as we talked about. But if you look at the percentage of homes that are owned outright, it's never been higher. Never been higher. If you look at the equity in homes at large, it's never been higher. If you look at the average income of a first-time homebuyer, it's never been higher. You look at all the things that you would normally get bothered by, and they're great. Now, to Bill's point, that doesn't mean you can't have problems.

21:27the question is what's the gravity to your problems? Cole and I have a good friend who for a while was a mortgage broker for JP Morgan Chase. And I used to check in with him during that silliness to find out what was going. He had a$25 ,000 income single adult woman who was trying to buy an$850 ,000 horse ranch in Issaquah. Okay. So it's like none of the numbers worked out. And then the other thing that was humorous at that time is a Cole school, a Christian school. They had a radio station. I used to listen to the radio station and they were running an ad where the mortgage company says, the future belongs to you.

22:12In other words, if you borrow this money, the future belongs to you. And we used to laugh about it at the time because it's exactly the opposite. The future belongs to the people that don't borrow that money right now because it ended up a hellhole. Hi, I'm Cole Smead, CEO and portfolio manager here at Smead Capital Management and host of this podcast. If you enjoy this podcast, I'd like to invite you to check out SmeadCap.com. At our firm, we are stock market investors. We advise investors who fear stock market failure with a discipline that has proven success over long periods of time. Learn more about our funds at SmeadCap.com.

22:49Past performance is not indicative of future results. Investing involves risks, including loss of principle. Please refer to the prospectus for important information about the investment company, including objectives, risks, charges, and expenses. Read and consider it carefully before investing. Speed funds distributed by UMB Distribution Services, LLC, not affiliated. The book I'm reading right now is called Capitalism Without Capital by Jonathan Haskell and Stan Westlake. It was published, this is about a six-year-old book. The reason why I want to read it is because, you know, the idea of I'll call it asset light.

23:25I'm not saying it was new in 2018, but it's not as over informed as it is now. And they argue through the book how much the economy has changed, how much business has changed, etc. Now, I would argue on some levels that ultimately what we've done is we're in Adam Smith specialization. So what do you do? The consultant from Bain or whoever comes in and says, here's a deal. You got a good business, but here's the most capital intensive parts of it. Let's outsource that to someone else. And by outsourcing those functions to someone else, they can be more efficient, thus driving better returns in that business that's less meaningful from a return perspective than the thing you get to focus on.

24:08So I'll use our business, right? There's a lot of things we outsource because can we drive great scale and gains and benefits from that? The answer is no. And so we are accruing higher margins in what we do by focusing on the most valuable things to our business. Now, that sounds great. Everyone's doing that. The question is, can you give that a note? What's the limits then? Well, use our home builders. They're offing the development of the lots to someone else. Correct. That makes a lot of sense because that's where all the capital is tied up. And the worst cyclicality in the industry is attached to the money they used to borrow to own raw land and to turn it into buildable lots.

24:51And they made their money selling the lots at a premium by putting a house on it. Now they make all their money by putting a house. Yeah, here's the issue I have with the argument is I think people have got up, trapped up in the idea of, okay, why do you want a business that needs less capital? Because historically those produce higher returns, okay? Well, the weird part to today is you can go look at businesses that don't need a lot of capital and they're not producing any returns. And their returns on capital low. And there's companies that are more capital intensive. That are producing better returns.

25:24That are producing better returns and nobody wants them. Correct. So it's – Because there's no stock picking left. I mean, but virtually – Yeah, but the business returns haven't anything to stock with. My point is just that it's one thing to say, hey, we could be early on in an era where secularly businesses are going to transition to being more asset light. To your point, that's gone on in the home builders. I mean if home building is doing it, who doesn't know it in the economy? But therefore, what kind of return streams, once the chips have all settled, are you getting? And it is actually not giving as much advantage to the asset light businesses that are either being created today or are in place as much as you'd expect.

26:06Scarcity creates value. Scarcity creates value. Let's pivot to books that you haven't started reading yet. Yeah, I just got recommended this coming apart by Charles Murray that it's the state of white America from 1960 to 2010. And I just I read the first little bit of it just to know that I'm going to like it. And so I've been thinking about this a lot lately. You know, when you get to be 66, I'll be 67 years old. There's such a tendency in April in April. But it's there's such a tendency for guys like me to kind of like, well, things were better back then. You know, the good old days kind of.

26:50By the way, when Bill says tendency, they do it. Except I'm not a guilty guy because the beauty of it is I remember exactly the kind of things that totally irritated my dad. Yeah. Okay, so the perfect example of that was one of the big post, what was the big rock concert out in the field in New York? Woodstock. Woodstock. In the aftermath of Woodstock, there were a number of these concerts that occurred around the country, including one in my little hometown of Washougal, near the Washougal River, the Sky River Rock Festival. And a lot of the major bands came. And my dad was so upset. And the reason he was upset was he thought, and by the way, he was correct, he would have made a lot of money being long this trade, that that was going to introduce a lot of drugs to our little communities that had never been there before.

27:49And to this day, the community's been suffering. So what he saw was a very damaging decay factor that was developing in our society. And so I'm reading this, and, you know, I grew up as a Sunday school kid, red or yellow, black and white. They are precious in his sight. Jesus loves the little children of the world, okay? That's my mentality. We're all, you know, but watching what goes on in our society right now between look at the TikTok debate just today. They're working on TikTok, trying to get China out of TikTok. Why? Because kids are absorbing a massive quantity of this stuff. And I'm not very sure that it's good for them.

28:39I'm not sure that you shouldn't stop kids from having access to a lot of this media until they're, say, 16 or 18 years old. Because I just don't think young minds are able to keep up with how sophisticated and manipulative a lot of these media devices are. Let's see. So the book that I'm about to start is called The Hopeful History of Uranium by Lucy Jane Santos. It's a brand new book that she just published. I'm digging into it because if someone says, Cole, what's the history of uranium? I would say I know that the Hanford nuclear waste site is in eastern Washington. I can tell you about Oppenheimer, but I can't really tell you the history of uranium.

29:27So I'm really looking forward to that. A Whitman grad was very involved in why that's there. Yeah. So let's see. So some other book recommendations we had. I checked in with superfan Steve. if you're out on X he is at Steve is at I want to say it's no no no Steve is like at Labrador something anyway for some reason I don't have it here in my notes he talked about the Caesar's Palace coup by Mark Frumas and Sajid Indap he said that Munger had mentioned this in the 22 meeting and it's I think it's what happened with Caesar Caesars, the debt used to take over Caesars, et cetera. So that's something I want to throw out to our listeners.

30:14Chase Emerson, a friend of our firm, at AZ Land Investor on X, he mentioned Common Stocks and Common Sense by Edward Wachenheim III, which a lot of people are aware of that book. The other one he's reading is Four Loves by C.S. Lewis. We're big C.S. Lewis fans. So always interested in anything C.S. Lewis writes. Let's see, the other recommendation we had on from someone anonymous on X came to us. It's called The Demon of Unrest by Eric Larson. It's a book of the early stages of the Civil War that was recommended to us. And so I want to throw that out there and thank them for sharing that title with us.