The actor, Tom Cruise, is as enigmatic as the U.S. stock market. He has made many terrific movies over the years and today’s stock market reminds us of his classic sports movie, Jerry Maguire. Jerry was a top sports agent for a large agency and then suddenly, out of nowhere, was dumped out on the street with one client and a top college recruit to work with.

In 1720, the South Sea Bubble arose from what seemed to be good intentions. The South Sea Company was given an exclusive monopoly on the Spanish Americas in exchange for assuming a large part of England’s debt. The debt holders received preferred shares in the South Sea Company that paid 6% interest.

As contrarian investors and students of group-think crowd psychology, we look for investment opportunities in the way news is framed. There is an old Mark Twain saying, “Lies, damned lies and statistics.” We believe investors are getting mislead by statistics surrounding the U.S. economy and we will seek to dispel erroneous assumptions in search of long-term gains in the stock market.

We have written profusely about the investment myopia of today which has focused on “growth at any price companies” without regard to profits or free cash-flow. We do this because we know success in investing requires a healthy degree of discomfort for it to be profitable, and we know how much comfort today’s investor has found by owning what has worked.

The recent action in the stock market seems to be governed by crowd psychology and reminds us of a theory we created in college called the “coat theory.” Back in the 1970s, the fraternities and sororities at my alma mater hosted several mixers so the students could get to know each other better.

The U.S. government must determine how to deal with the negative consequences of some of the last decade’s most successful internet-based businesses. Alphabet, Facebook and Amazon grew up as strangers and have developed monopolies in search, social media and in e-commerce.

For Templeton and Price to execute a “new era” approach today, we believe they would likely advocate avoiding the S&P 500 Index, mutual funds and ETFs, emphasizing growth stock investing and they would be very careful with ownership of anything related to technology. Price recognized that growth eras don’t continue forever and Templeton went wherever he thought he could make great money buying companies at depressed prices with positive economics. We believe our eight criteria for common stock ownership will shepherd us through this “new era.”

At Smead Capital Management, we want to avoid excitement and expense in the marketplace. When a sector of the stock market gets white hot, there are usually a few stocks which dominate the market activity and see explosive price appreciation. We like to think that one of them becomes the thermometer of the market, in effect showing the temperature of the stock market.

It is no secret that the U.S. stock market has been completely addicted to discounting the future success of the most popular technology stocks. Momentum-based growth investing has had many bouts of success in the past, but this is the first episode in an era where indexed mutual funds and exchange traded funds (ETFs) were the largest aggregate owners of the largest capitalization companies.

We make every effort to understand the way that investors go to extremes over what we call the “well-known fact” in the stock market. A “well-known fact” is a body of economic information which is known to virtually everyone in the marketplace and has been acted on by anyone with capital.

Today’s popular stocks have literally overwhelmed the stock market in the last four years and six months. To understand today’s financial euphoria, we will analyze three terrific movies made by the actor, Jim Carrey. In Liar Liar, The Truman Show and in Bruce Almighty, we learn morals which we believe should guide us in the long-duration investment process.

In the 1960’s, the slogan “Make Love, Not War” became a rally cry for anti-war protestors, but also typified their free love expression. They used the slogan to explain the harshness of the situation in Vietnam and to be countercultural to the capitalist and traditional way of life they saw in American society.

The stock market has put on quite a show over the last decade. Including dividends, domestic stocks have nearly quadrupled since the bottom in March 2009. Most of the crowd missed the best parts of the broader show, but that hasn’t stopped the excitement being built around the encore.

The patriarch of value investing, Ben Graham, once said, “In the short run the market is a voting machine, but in the long run it is a weighing machine.” His statement is just as profound as the day it was first spoken. However, it is timelessly mystifying to most investors.

We believe the math of common stock investing is pretty simple. When you buy a stock without leverage, you can only lose your original investment. Your gains can be unlimited over the longest term (long duration). Most of the benefit (90%) of diversification is reached by owning a twelve-to-eighteen stock portfolio...

Massive investor popularity can produce some pretty strange circumstances in the U.S. stock market. Mark Twain said, “History doesn’t repeat itself, but it rhymes!” Today’s strange occurrence has been called a “zero cost of capital” and it rhymes with what happened in 1999-2000.

What will the next ten years look like in the U.S. stock market? As we often do, we refer you to one of our favorite songs, “I Can Only Imagine,” and a book by George Friedman, The Next 100 Years. We believe the best performing securities of the next ten years will be very different from the securities and the sectors which currently capture the “popular imagination” of investors.

Much like the 1975 Billboard top ten hit song, Feelings, Warren Buffett and Charlie Munger laid out their feelings on a variety of issues in Omaha at the Berkshire Hathaway (BRKB) Annual Meeting. We believe even the greatest investors of all time are being influenced by a mirage.

Elon Musk is possibly the most interesting man in the world, in our opinion. His nobility comes from his past as a founder of PayPal, but his popularity only grows in this era as he seeks to tackle big projects that include the car business, space, mass transit and other subjects.

We are reminded of Ben Graham’s Mr. Market analogy. In his analogy, the stock market is like having a business partner (Mr. Market) who offers to either buy or sell his half of the business to you, based on how the business is doing.

David was the King of Israel and the writer of many of the Psalms. He spent his formative years as a shepherd and framed his life’s work around the key concepts from his profession. Herds were the primary form of wealth back then, while common stocks are a primary form today.

Healthcare companies overcome great risks to succeed, but can gain incredibly profitable businesses in the process.

I came across a book titled The Matter of the Heart by Tom Morris that is a great history of the medical accomplishments and advances for the human heart. Mr. Morris details eleven operations and their evolutionary success over the course of the book.

Money flowed into passive investment vehicles at an ever-increasing rate in 2017. It was a record year for these products designed to replicate a stock market index and agnostically own a basket of securities without discretion.

A few weeks ago, I caught myself pulled in by an old James Bond classic, The World is Not Enough, starring Pierce Brosnan. In the movie, an oil heiress, Elektra King, is kidnapped. While in captivity, she becomes a victim to Stockholm Syndrome and plots with her captor to destroy an oil pipeline running to the Bosphorus Sea. There is a scene in the movie that encapsulates where we are in today’s stock market environment.

In the 2017 Berkshire Hathaway Annual Letter, Warren Buffett told us what he is doing, and, in as quiet a voice as he could use, what he says to do. Our readers will not be surprised at our summation of Buffett’s letter, but here we go anyway.

In the movie, Minority Report, Tom Cruise plays a policeman in a world where crimes are predicted ahead of time. Cruise’s character gets accused of a future murder and he is forced to work incredibly hard to acquit himself of the anticipated crime.

Warren Buffett, Jeff Bezos and Jamie Dimon recently announced that their three companies will form a non-profit entity to attempt to drive down healthcare costs for them and possibly other companies. In the process of making the announcement, Buffett called the healthcare sector of the U.S. a “hungry tapeworm” in the economy.

Is the underperformance by most large-cap value investing strategies in this lengthy bull market the “darkest hour” for value investors? This is the longest underperformance stretch of four relatively poor stretches for value in the last 80 years.

Long term success in common stock ownership is much more about patience and discipline than it is about mathematics. There is no better arena for discussing this truism than in how investors measure risk. It is the opinion of our firm that measuring a portfolio’s variability to an index is ridiculous, because it is impossible to beat the index without variability.

As we enter 2018, numerous uncertainties are dominating the minds of American citizens and investors. We are happy to weigh in on what we consider to be both un-useful and useful uncertainties as they pertain to long duration ownership of common stocks.

It is hard to think about 1981, my first full year in the investment business. Three-month Treasury bills were paying 18%, longer-term Treasury bonds yielded 15% to maturity and cheap stocks got 20% cheaper. In the summer of 1981, we saw a stock market decline from an already depressed market trading at eight-times after-tax profits down closer to six times.

Over the weekend I stopped to watch the last part of a James Stewart Western called, The Far Country. It was the story of two cattle drivers who took their cattle all the way to the Yukon to get a piece of the late 1890’s Klondike gold rush.

A massive amount of stock market capitalization is tied up in companies based on both their potential market share and hypothetical future profits. The popular arguments in their favor come from looking at a company’s total addressable market (TAM). Sky high price-to-earnings ratios and massive capitalizations are common in companies with a large TAM as we finish up 2017.

As famed market strategist Richard Bernstein has pointed out, investors should pattern common stock selection after the investment style of the Mafia. What causes the Mafia to get such good returns? How do they spot opportunities? Why should we as investors in publicly-traded common stocks emulate their behavior near the end of 2017?

All major financial euphoria episodes hold aspects in common. Among our favorite books on investing is John Kenneth Galbraith’s A Short History of Financial Euphoria. More than any other economist, we admire his understanding of the connection between the securities markets and the economy.

The first time I read Forbes magazine was in 1980 as a brokerage trainee in New York City. I was fascinated by the company stories and the way the top investment disciplines were analyzed. In the 100th Anniversary Issue—published in September 2017—over 100 successful business and investment people wrote a short essay.

Many well-regarded experts have weighed in on the length and the pricing of common stocks eight and one half years into this bull market. They range from the dire warnings of perma-bears like Marc Faber to more reserved warnings from Howard Marks and Robert Shiller.

In the Bible, Jesus arrives to help his friend Lazarus a few days after he had already died. His friends Mary and Martha were very disappointed because they thought all hope was lost. As the story goes, Jesus raised Lazarus from the dead.

Value investing is very similar to farming. A farmer needs fertile ground, well-planted seeds, unshakable patience, loads of sunshine, watering and weeding, as well as a great deal of courage and faith to succeed in the long run. Today, we believe that investors need to reexamine the benefits of a value investing approach toward the end of an era which has rewarded growth stock investing.

What should long-duration common stock owners like us do with the news of the horrific flood in Texas, the Category 5 hurricane in the Caribbean, the heightened tensions created by North Korea’s Dictator, Kim Jong-un, and the 8.1 magnitude earthquake in Southern Mexico? What is wise behavior in a more volatile stock market environment created by outside events?

As value managers, we are often asked if a company whose stock price is down substantially is a value trap. This is especially true when we are auditioning new holdings. We like to buy a company with a long history of success when it falls deeply out of favor for one reason or another.

We’ve heard Warren Buffett continue to repeat an important phrase, “what the wise man does in the beginning, the fool does in the end.” This begs the question, when does a foregone conclusion become what we call “a well-known fact”?

The stock market is discounting an accelerating rate of technological change in our society. A mad dash by investors is anticipating a world organized like “The Jetsons” cartoon from my childhood. We thought it would be useful to look back at other points in time where great technological change was anticipated and see how that worked out for S&P 500 Index investors.

A Forbes article of July 1974 profiled John Templeton and highlighted some of the wisdom he implemented in his investment process. The article touched on his discipline of consistently praying to God “for wisdom and clear thinking” at the start of each directors meeting for the Templeton Growth Fund.

As we look out into the second half of 2017, it is important to understand that we believe the U.S. stock market has tried to “kill” investor enthusiasm. We would argue this enhances the position of the value-oriented and long-duration equity manager in a way that that doesn’t kill us and makes us “stronger.”

Walmart (WMT) recently made it clear to vendors that they should “get off” Amazon’s Cloud. This was one of two announcements which speak to the competitive landscape of business in the U.S. The other announcement came earlier when Amazon (AMZN) disclosed an agreement to buy Whole Foods (WFM) for $42 per share in cash.

During the most-recent Berkshire Hathaway Shareholder Meeting, Warren Buffett and Charlie Munger reiterated a point during the question and answer portion that has stuck with us. We feel compelled to share what we learned.

At the end of my freshman year in college (1977), my brother-in-law’s twin brother called me to ask if I wanted to go to the sixth game of the NBA Finals in Portland. I was a huge Trailblazer fan and was thrilled to sit in the top row of Memorial Coliseum, which held 12,665 fans. Not only was it an unbelievable experience for a lifelong fan (the Blazer’s won), but it was even more powerful because professional basketball was “the only game in town.” No other major professional sport (football, basketball, baseball) existed in Portland in 1977 and there is only one in town today.

We thought it would be very helpful to review Warren Buffett’s argument in 19991, the last time there was very high expectations attached to technology stocks and to the overall level of common stock prices. We will reference Buffett’s quotes by the year he said them. The sections labeled 2017 offer our current observations on the markets and thoughts from respected experts.