0:02 spk_0

Welcome to Stocks and Translation. We are back broadcasting from our beautiful Yahoo Finance studios. I’m Jared Blicky, your host, and back with me is the voice of the people, Sydney Freed. Kindly like, subscribe, and comment on stocks and translation on Spotify, Apple Music, Amazon, or.And today we are welcoming Cole Smead. He is the CEO and portfolio manager at Smead Capital Management with a background in economics and history. Cole brings a uni a unique perspective to investing, emphasizing discipline and long-term value.And guess what? Today we’re gonna be talking about investing value style. Think Warren Buffett, but with a modern twist, and our phrase of the day ties into it capital discipline. CEOs like to say they have it, but only the best actually follow through. And after decades of easy money, discipline might be the new alpha. And this episode brought to you by the number 952 billion. That’s what Uncle Sam is estimated to pay out in interest this year.loan on debt, all $33 trillion of it. Cool. So let’s get into the recent market action. We’re going to dig into some of the phrase of the day, value investing in a bit. But what do you think of all the volatility so far this year and what, how are you making sense of it for clients?

1:14 spk_1

Yes, it’s a great question. Thanks for having me today. Um, you know, the stock market was not made for everyone, which is really weird to say because you think in this era that we’re in that, you know, everyone should participate in the stock market.A lot of people have made a lot of money.s, everybody’s in, correct, correct. But the only problem is like we all have that uncle who at one point in his life took that risk and got involved in the stock market and had no success and has swore off it ever since into real estate and gold. We all have those uncles. And I say that because that there are people that are like that out there that they just can’t deal with to your point, the volatility of, say, the S&P 500 or the volatility of single stocks, let alone.And, and there’s a certain temperament, there’s a certain kind of person. Someone said, who’s good at investing? I, I would say we’re going to look at 20% or less of the population that are good long term successful investors, which I know immediately like, well, that’s very few people. And the answer is that’s kind of the point. It has to be scarcer, otherwise it can’t be.Profitable. But to Buffett’s point, like he’s talked about over the years, there is a great tailwind to owning corporate equities in America, and the S&P is one way to do that. That’s over like 20 year periods and 30 year periods. And I think people forget that over 10 year periods, the stock market can actually lose money, um, which is a bizarre thing to say like it did in the 2000s. Yeah,

2:23 spk_0

theglobal financial crisis, I think the rolling returns went negative for the first time in decades. Definitely can happen.And maybe we’ll get into uh some Mark Twain here because he wasn’t a very good investor either, uh, lost a fortune in railroad stocks. But first, let’s get to our phrase of the day. This is capital discipline. It is the practice of carefully managing a company’s spending and investment decisions, focusing on long-term profitability and stability instead of quick growth. So what is this, what is capitalDiscipline mean to you as an investor and maybe more importantly, how do you how do you screen for it?

2:56 spk_1

Yeah, it’s a really good question. So I always think about things like it’s a small business. So like back to your average person, think about it like you’re running a private business. So, you know, since we’re, we’re located, you know, downtown here, and let’s say we’re Broadway Company. OK, we’re the board of Broadway Company. I’m your chairman. Thank you for nominating me today. I really appreciate it.Um, and we’re sitting down looking at our business, OK? Um, in our own business, what you’d always want to do is look and say, what can we profitably do inside of our business to grow our business, but we don’t want to just grow it for profitability. You’re saying that we grew our revenue. We want to grow it for the sake of getting a higher return on the capital that we currently have in the business, OK? So I mean, just, let me just throw out some numbers here. Let’s say for every $3 in our business, we make $1 today.And you come in and say, hey, I actually have something that we only need to add $1 of capital to the business, but I can, we can make another $1 above and beyond our current dollar. So that means we’d be making $2 with $4 of capital. Well, that’s like a 100% marginal return on the capital we employ.That’s what a business should be thinking about is how to do things internally. The second thing could be if you’re publicly traded in Broadway Company’s case, we are, we could actually go out and buy back our own stock, OK? And the only other thing you’d want to do as a business is if you had a competitor that you maybe could buy it creatively, you could do that. And then your last option would be using dividends because you’re just really giving, you know, the shareholders of Broadway company back their money. That’s how we think about like a capital allocation framework. You start with the things that you know the most about.Um, that you could get the highest returns on, and then you go down to the things that you know less about. So your competitor might be something you know less about. Also, you know, the, you know, giving dividends back, it doesn’t require a whole lot of intelligence. You’re just literally handing cash back to people. Yeah, and, and most people aren’t very good at that back to like, because most people aren’t investors, you’ll tend to run into CEOs where they’re good operators. They might know their business really well, but when it comes to like, hey, them being a good investors, good capital allocators, you have to kind of be a good investor to do that. So, um, Buffett back in the 60s, funny enough.Actually wrote letters to company executives and gave them a framework like that to help them understand how he, you know, you know, wanted them to allocate capital. Um, if you take that back to today, I’ll use a very apropos situation right now. Like we own energy stocks. They’re very cheap. So what do we want them doing a lot of buying back their own stock or buying their competitors because the prices are so low right now. That’s good capital allocation in our mind. And so when I get on calls with the executives, I’m playing like the great cheerleader to the board. You know, here’sSomething you should do. You’re so awesome. You’re amazing. The future is all yours. And that’s what we can do as minority investors is kind of prod and cheer them along to, to make good capital allocation.

5:27 spk_2

So to makeit actionable for people, what are like two or three things that we can identify this kind of company by? Do you mention dividends if a company provides a dividend, that’s a good thing. What are a couple other things people can look out for? Yeah,

5:40 spk_1

so I would say dividends are always the last option. So, um, and, and you guys have seen this, so.I, I often tell people, if you find a company with a really high dividend, OK, never forget that dividends are actually liabilities once they’re stated if it’s a regular dividend.So we’re the board of Broadway come and say we’re going to pay, you know, of our $2 we make each year, we’re going to pay half of it out in dividends. So that’s $1. But once we tell our shareholders that, guess what? It’s an obligation. It’s an obligation. And so we now set up a liability in our capital structure that though it is not held on the balance sheet year to year, it’s effectively an obligation to your point to the equity owners of the company. Now the question is, do we want that?What you’ll tend to find is high dividend stocks tend to have their dividends get cut because it is an obligation. The times their stocks get cheap, they realize that cash could be used for something better like buybacks or buying a pier or reinvesting their own business. And so I just say that because I always think of special, so I’ll give you a stock example. We own U-Haul. U-Haul does special dividends. That’s their kind of shtick. It’s a family run business, so they’re kind of like the private

6:39 spk_0

board.Special. They just announced it and so it’s not, it’s not a liability

6:42 spk_1

a recurring dividend, yeah, so you just get it for that time. They could come back the next year. They often do, you know, specials year after year after year, but it doesn’t put the board like we are of the company in a position of guaranteeing the equity owners are going to get that cash. So that way if the stock gets killed or something like that, we could turn and say, hey, Broadway Co. is cheap and so maybe we should be buying back stock and not do our special this year.

7:02 spk_0

You mentioned some company, uh, you mentioned a couple of companies you like and U-haul among them, uh, also energy companies. Tell us a few of these plays that you like and whyplease.

7:12 spk_1

Yeah, it’s a great question. Um, so let’s just start with this year. Someone says, I’m going to give you a theme for this year. Economic sensitivity is very scary. That’s what I kind of encapsulate the first part of this year.And I say that because it’s like you think of tariffs and you think of, you know, what could be and what’s going to go on in the economy. These are all questions that have really affected economically sensitive businesses. So let me give you some examples. And we are mall rates. People have been very worried about what’s going to happen with the consumer and the economy. We are home builders. Oh, you know, is anyone gonna buy?

7:39 spk_0

and home builders.It’s very interesting.

7:42 spk_1

And then you go out to the oil companies. Interestingly, I always point this out to people, the lowest price on the oil companies didn’t come on the lowest price of oil. It actually came when the economic fears were the highest, which was right after the tariffs were announced on Liberation Day.And so I point that out because that’s been a pretty good theme for this year and, and naturally we’re the kind of people that love to take advantage of that. So Mr. Market as Buffett used as his euphemism, is very scared. And when he’s scared, you want to ask how do I take advantage of him because the stock market’s not here to instruct you, it’s here to serve you. And so taking advantage of Mr. Markets are kind of what we’re in the business of, but I point.because that’s really what I think the opportunities. If someone says like, I want to own a staple at 25 times earnings, I’d be like, guess what, you and everyone else in the stock market, because you don’t have to worry about tariffs and economic worries. I think the consumers on a way better footing than most people think. I think being short the economy, you know, fearful of the economy has been a pretty continued thing since the pandemic bottom.And yet here we sit unemployment’s, you know, fine and it’s

8:41 spk_0

a, it’s a very unloved rally, not a lot of participation that I’m seeing, but we’re very close to all-timehighs.

8:48 spk_1

Except the problem is that doesn’t tell you much about the future. And here’s why I say it back to like decades stocks lost money, that was the 2000s. We peaked in March of 2000 and then the funny part is we had a nasty bear market, but people always forget that we almost got back to that high in August of 2000. There is that analog, yes. OK, so, so the idea that just because the market gets close to where it was, it tells you nothing. If someone says, What do I learn about the stock market today where buyers and sellers met with prices.That’s it. Um, and I think the real misnomer again to the average investor, one of my big concerns like, I’m 41 years old. There’s a lot of millennials that are investing for the first time. Yes, they’re buying zero-day options. That’s a bad idea, just so you guys know. Um, but here’s why I say it is because, um, they all think that the stock market in the last few years is telling them something about the future.And it just tells you where buyers and sellers meet that day. What you do with that information, that’s what the investors to decide. And again, everyone going to deal with that? Well, probably not. So the question is how do they each need to go out and invest in a way that they can have success in the long run either through an index fund, through an investment advisor, or whatever that may be.

9:52 spk_2

You said, I think, I think you said 25% of people are successful.

9:56 spk_1

I say 2020

9:57 spk_2

and

9:57 spk_1

I be like,

10:00 spk_2

but.My thing for you, if you are just someone investing in ETFs, tracking the major benchmarks, you’re not doing options, um, you know, over the course of your life, you know, I’m a little over 30, 31, if anyone’s wondering, you know, it, I would say probably I’m going to end up with a pretty good nest egg. So wouldn’t, could I be considered a successful investor if I just do something as simple as that?

10:23 spk_1

Yeah, it’s a wonderful question, um.Again, thinking over long periods of time, the answer is yes. Now, um, the human proclivity is we buy high and we sell low though. That’s what we’re really good at. Like that’s what our core DNA says, you know, get really excited when other people are excited and get

10:39 spk_0

the Fed’s mandate. I like to point that out. Well,

10:42 spk_1

somewhat, but, but here’s why I say it. I’ll never forget this, and I think this is really important to crystallize these kind of ideas in people’s minds. At the bottom of ’09, you could look back 40 years, OK.And Bonds had beat stocks over the prior 40 years. I mean, just fathom that for a quick second. Bonds had beat stocks over the prior 40years.

11:02 spk_0

I remember Rosenberg bringing that stat up too in 2009,

11:05 spk_1

so. And a local New Yorker, Jim O’Shaughnessy. I remember seeing his date on it, and he talked a lot about that. And I point that out because again, everybody, you know, the old saying is do not confuse brains with the bull market. And yet

11:16 spk_0

that’s exactly whatwe do.Um, uh, back to some of these plays you were talking about, what’s your investing time frame? I get it that it’s long term, but talk to, talk to me about the, the value investing mindset and how long you’re willing to let these plays, you know, just kind of materialize. Yeah,

11:32 spk_1

so um.Uh, the ideal world, as Buffett would say, is like something you, you, you, you get to invest and you never have to sell. OK, now that’s just to make sure we’re on the same page. We don’t live in an ideal world. This is a fallen world, OK? So that’s an ideal world, but um, when you depart from that, you have to be pragmatic to what the market gives you. OK. So I’ll just use a longer term holding we’ve had.Um, we own the home builders, so we own uh Lenna, we own DR Horton, and we own NVR. We originally got involved in NVR back in 13, for example. OK. So someone says, where are we at? We’re 12 years into a stock where we’ve got the compound over multi multiple years, and here we wake up at a juncture where those stocks are down 30% to 40% from their prior highs. And so it’s like you’re back doing your analysis all over again and asking yourself, well, what was the long term things going on in that business? Well, we have a long term structural supply issue in America. There’s not enough supply.And if you go out, there’s a lot of negative nabobs who are like, oh, Texas, Florida, they got way overbuilt. Well, I’ll throw out a little number to you. If you look at the, the, the homes, um, that are out there as inventory, 75% of them have not been started or are still under construction, OK? So this idea that we have this vast amount of housing sitting out there ready for sale and, you know, that we’re going to have a bunch of supply meet the market. Now, here’s why I like it.Because one reason or another over the last 12 years, there’s been something that’s kept people at bay from owning those securities in a way that overprices them. The original argument, and this was a very New York argument, you know, millennials are never going to move out of the city. They’re never gonna get married and they’re never gonna have kids. And that’s like the things you had to meet in contention at that time. And then you fast forward and it’s like, OK, in 20.22, it’s like mortgage rates are high. Affordability is terrible. No one’s gonna want to buy a house with terrible affordability, and then you wake up two years later and like, oh, that, that didn’t prove to be true either. We’re kind of back at the same affordability argument, I would say. But then the second is that, that economic sensitivity argument, oh, you know, what could happen with terrorists and, you know, immigrants that might work at job construction sites and things like that.And you know, they, they fight a wall of worry, great long term compounders always do, not a lot like they talk about the market, but the 10 and 20 and 30 be your investments, which is very tough to do, and very few people do it, admittedly. You have to go through regular short term problems that are overcome either because the economics of the business or the industry is so great that it just doesn’t end up mattering 2030, 40 years later.

13:47 spk_0

Hold that thought. We got to take a quick break, but coming up, we’re gonna be talking about mounting interest payments for Uncle Sam and a literature-themed runway battle. Stay tuned.This episode is brought to you by the number $952 billion. That’s how much the US government will pay in interest this year on its $33 trillion and growing debt pile. And for some context, that’s more than we spend on national defense and coal. So I know you have a lot of thoughts about fiscal spending. Just dive into it withus.

14:22 spk_1

So I’m gonna quote Neil Ferguson, who’s a wonderful writer, he’s been great, great historian. I’ve met Neil before. He’s awesome.Um, he calls it Ferguson’s law, and his law goes to something to the tune of any country that spends more on interest costs than their defense spending.It will not be that great of a country in the long run, OK? And, and I don’t disagree with him, OK? But, um, here’s what’s interesting, you know, I’ll call it and, and, and I’ll like use all my spades and like show my colors. I am your classic right wing evangelical Christian. So like I was a Trump voter, for example. Now here’s what I find interesting about the whole dialogue is that dialogue on the right is like we’re not spending enough money on Americans. And it’s like, listen, sister, I mean, when I checked the federal budget, Social Security, Medicare and Medicaid, that is us. Last time I checked, that’s not Ukraine, right?And so I just point that out because that is a real cost. We have more boomers that are using those benefits than we’ve ever really had. And so the, the, the, the thing that Ferguson is really posing is whether we can afford that relative to the security needs that we have to meet, OK? And um I, I just find it really interesting conversation because ultimately, the bond market is beginning to ask this question, right, as we watch the 30 year go to 5%, it’s like, well, the bond market might have a concern with this, but then you look at the stock market, it’s like,Who cares? In, if the tenure goes higher, naturally stocks would get priced against a longer term bond instrument like that. And yet it doesn’t seem the stock market seems to care about that. So again, the juxtaposition what the bond market’s doing versus how the stock market’s taking that information, there’s a real divorce between those two things.

15:50 spk_0

I mean, I see that, but yet there are shorter term implications and maybe with your very long-term investing horizon, it’s not that much of a concern with the bond market is doing from day to day, but I see it because I have to track these things and I see stocks taking a nosedive as soon as the 30 year hits that 5% mark. So I mean, it does matter on some time frames, but just, uh, talk to me maybe about some of the, like how you manage some of the day to day, week to week, month.volatility here.

16:17 spk_1

Yeah, well, I mean, to your point, if your risk-free rate, AKA the 10 year treasury, is higher, all things equal, that would make you pay less for stocks, admittedly, because you’re discounting it at a higher rate. So we were just talking about this before, but I’ll throw this proposition out to you. And I always love asking this. I love asking stock pickers this because I think it’s a really important question to your point, to analyze risk and, you know, what’s risk of stocks versus bonds. So I always ask them, if I gave you the 10 year treasury today.Or the S&P 500, which would you take? And all the stock figures I know are like, oh, I’ll take the S&P 500 easily because you know, even with inflation, you know, stocks will do better. Well, here’s the catch stocks, stocks are affected by inflation just like bonds are. So that’s not like some panacea,

16:58 spk_0

but I canbuy the futures with 90 times leverage. So that’s my,

17:02 spk_1

that’s my that’s real heroin. Um, but, but here’s what I pointed out is because again the bond market’s giving you 4.5%, OK? If I go back to the 2000s, stocks lost money.Um, so I find the interesting question of like what’s that right, you know, risk measure, and I think the tenure is going to compete for equity assets as we move forward, particularly like who who owns stocks today? It’s boomers. Well, what do they need? They need income. And so I think we’re going to see this tension grow and grow and grow, particularly as of right now, people are asking, you know, inflation’s low, so therefore the real interest rates high because the tenure is much higher than than inflation.And I think the flip side question could be asked where if inflation rears its ugly head, the pressure on the bond market could force the stock market’s hand even more.

17:43 spk_2

What’s a good allocation then because you like

17:47 spk_0

bonds and we got about a minute.

17:49 spk_2

Is it, is it the 6040? Is it the

17:52 spk_1

50/50? Well, by the way, personally, I do not like bonds. I’m just posing it as an intellectual. I don’t either. I just mutual funds. That’s my bias.Point, I, I think, you know, um, if you’re walking into the stock market today, that is a big question you have to solve. And I’m not here to do that. I know you guys aren’t here to do that either, but I think it’s someone that’s something even someone like you said you’re 33, OK, I’m 31, sorry, my bad. I wasn’t, I wasn’t listening. My bad. My, my wife I’m pretty good at that. Um, so, so to your point, I think it’s a really good question to ask because the question is how do you be thoughtful in your investing to go out and have success.Early on in the process, not go out and blow a hole in your foot.

18:34 spk_0

Makes sense. All right. And so we’re going to think more about this on today’s Who Wore Better, which is taking us from the ballpark to the stock market with a literary twist, as promised. On one side, we have the Moneyball, Oakland A’s, the team that expired inspired Michael Lewis’s classic book, winning not with the big money, but with smart, disciplined spending, and a little moxie. Think patient investors who spot value.Overlook stocks, and on the other side, it’s the New York Yankees, known for deep pockets, big name signings, and betting big on superstars, much like today’s AI Titans, kind of pouring billions into data centers and infrastructure. Now, our guest here is not only a devoted baseball fan, he attended 32 games last year. He’s also a self-described book nerd who hosts the podcast, A Book with Legs, exploring life lessons through great authors. So, Cole, which style wins today?investing game, the discipline Moneyball approach, or the power hitting Yankees swinging for the fences?

19:29 spk_1

Well, per dollar, the Moneyball strategy would win, but if you had Aaron Judge on your team playing as good as he is, it’s really tough to beat that. And obviously, you know, they went to the World Series last year, so that’s just a good team. So I would say, you know, as a, as an investor, because, you know, this is not the Major League Baseball game, people forget that you’re actually competing against yourself.Which sounds bizarre to say. You’re not competing with other investors, you’re competing with your own ideas, your own risk, etc. And so I always think about this is like for myself, when I’m competing with myself, the Moneyball game is the game I want to play. Um, that being said, uh, you got to be a baseball fan. It’s such a good time to be a baseball, especially in New York. There’s some good players here in New York. That’s a good time to be here. Love

20:09 spk_2

baseball. I will say that I alwayspretend that I’ve seen the Moneyball movie when people ask and I never. I never have. I have a question about something big that investors talk about over and over, which is AI and the tech sector right now. You didn’t touch it. So how are you thinking of the space?

20:29 spk_1

This is a great question. OK, so this is really important, um.Think back to like, let’s say software. Why was the software business so great? Because it was operating expenditures that created these fabulous returns, whether we’re talking, you know, search or other things, OK? Now if you look at, I’ll use meta, um, meta is the most egregious form of Cax that you can find out there, where they’re spending just so much money, $70 billion as Zuckerberg said in his first quarter call. And here’s why I say that, do those businesses have a history of making massively capital intensive investments and succeeding?And the answer is, no, they’ve actually never done this before. This would be a first time for them. Um, if you go back and look at the history of the stock market, let’s use the prior American Revolution, the shale revolution, which was a big capex cycle. How did that go for the oil companies? Went terrible.Um, if we look back at history, railroads again took a long time. There’s really two big risks in that is that the time it takes or the marginal profitability that creeps up. Um, I think this kind of is the canary in the coal mine. Why are the greatest asset light businesses in the American stock market trying to drive returns out of these big heavy capital intensive investments when in the software era they never had to do that, OK? That is.The $10 trillion question, if you will. But AI. Well, and that’s the thing is like, let’s use the railroads. Do we use railroads even today and was it a great technology to create? And yes, the West would have really never been industrialized unless it was for railroads. The canals in the east, as I learned in my American economic history class at Whitman College, were fined for doing commerce there, but the railroads were really needed for the West. But here’s the catch. It took 70 years and the first owners and the last owners weren’tthe same people, and I think that’s the real issue. AI will be ubiquitous. We will use it like any other tool, and it will be cheap. The question is for those businesses, will they make good returns on capital for those investments? I do not think so. But again, that’s for the future decide. But the stock market’s betting on that feverishly.

22:25 spk_0

Well, in between the first owners of the railroads and the last owners of the railroads, you had the speculators. I do have a quote here from Mark Twain because he lost aFortune on railroad trucks. Everybody remembers this. Uh, there are 2 times in a man’s life when he should not speculate, when he cannot afford it and when he can. And on that note, I think we got to wind things down here at Stocks and Translation. Be sure to check out all our other episodes on the Yahoo Finance site and mobile app. We’re also on all your favorite podcast platforms, so be sure to leave a comment and subscribe wherever you get your podcast. We’ll see you next time on Stocks and Translation.