Investing in Long Term Value Stocks: an Interview with William Smead, Founder, Chief Executive Officer and Chief Investment Officer of Smead Capital Management

Wall Street Transcript

67 WALL STREET, New York - October 10, 2012 - The Wall Street Transcript has just published its Large-Cap Value Investing Report offering a timely review of the market to serious investors and money managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Large Cap Investing - Value Investing - Long-Term Investing

Companies include: Gannett Co., Inc. (GCI), Berkshire Hathaway Inc. (BRK-A), Media General, Inc. (MEG), Comcast Corporation (CMCSA), General Electric Co. (GE), The E. W. Scripps Company (SSP), The McGraw-Hill Companies, Inc (MHP), H&R Block, Inc. (HRB), Wells Fargo & Company (WFC), Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM), AFLAC Inc. (AFL), Darden Restaurants Inc. (DRI), Sears Holdings Corporation (SHLD), Starbucks Corp. (SBUX), eBay Inc. (EBAY), Cabela's Inc. (CAB)

In the following excerpt from the Large-Cap Value Investing Report, an experienced portfolio manager discusses his investment philosophy and top picks:

TWST: When we spoke about a year ago, you explained how you started the Smead Value Fund as a result of a dislike, or hatred, among investors at the time toward large-cap stocks in the U.S. Has that changed at all? Do you see investors today warming up to that category of equities?

Mr. Smead: Lipper reports each month on equity flows and equity mutual funds in the United States, and for 39 consecutive months investors have net liquidated our category - U.S. large-cap equity funds - and that probably continued in the month of September. We just won't have those stats until a few weeks from now. So there is an exodus out of actively managed equity mutual funds. Some of that money is gravitating toward passive vehicles in the land of exchange traded funds.

There are net inflows into exchange traded funds of a passive, long-only nature, and that appears to be kind of a give-up phase, where people have thrown their hands up in the air and say that this category that we're in - and we hear this a lot among institutions and consultants - "just has nothing that can be added by active management, so we're going to go passive in the large space and then seek out active managers in mid and small, where we think there is more opportunity for research to be valuable."

The irony of that is they are leaving the U.S. large-cap space to a relatively small number of stock pickers who have the kind of criteria and the kind of patience required to be a long-duration common stock owner. In a quote of William Sharpe's back in 2002, he argued that going passive works great if, and when, the large body of active investors does a great job of squeezing the anomalies out of the market - they're bidding up undervalued securities in the case of successful short sellers; they are exposing overvaluation - and all of that research that is being done lays the groundwork for a passive investor to participate in the common stock market in a positive, low-cost way because of all that research.

Well, we would hypothesize that in, say, a 50-year time period, the percentage of participants - be they institutional, equity mutual fund managers, separate account managers, individual investors, you name it - who are doing long-duration common stock research - in other words, analyzing companies, trying to buy at points of maximum pessimism and then hold for 10 or 20 years - is probably the smallest it's been in my entire career of 32 years.

The way we like to think about this is that every morning, 3 million brilliant people wake up and try to do macroeconomic analysis and extensive mathematical analysis to try to predict where the stock market is going to go. And we'd like to think there are about 30 of us that wake up in the morning and try to think about what companies they'd like to own for the next 20 years.

The first rule in business is competition ruins profit margins, so those three million people have driven down the profitability of macroeconomic thought, and the other 29 people, besides us, that are interested in what to own for the next 20 years are so small that the profitability from doing so is very high. And if you look at what's happened on a relative basis in the last 12 months since we talked last, you'll see that long-duration common stock picking has very high profit margins attached to it right now, which has materially and positively impacted our results.

TWST: Do you see a lot of opportunity out there then?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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