Dear fellow investors,
Virtual reality is not reality! We have just come through an era where virtual reality controlled stocks and bonds. For this reason, a series of unreal factors drove what we call the stock market metaverse.
What are the main realities of common stocks?
- The stock market is designed to move money from impatient people to patient people.
- Most people who engage in the stock market suffer stock market failure. Competitive endeavors are not created for everyone to win.
- Financial euphoria episodes are normal. These episodes destroy the faith in common stocks of a generation of investors when they break.
- Man cannot live on phishing among stocks with high price to earnings (P/E) and high price to sales (P/S) ratios.
- Interest rates serve as a gravitational pull in stocks. Higher rates drive lower P/E ratios and lower rates drive higher P/E ratios.
The years 2015-2020 were a stock market metaverse because it was virtual reality. In virtual reality, here is what the stock market did:
- The stock market moved money to impatient people.
- Most people who engaged in the stock market succeeded.
- Financial euphoria was perpetuated and prolonged by the massive liquidity created by the U.S. government and other foreign governments.
- Aggressive investors were phishing for high P/E and high P/S stocks, and the more risk people took, the better they did.
- Interest rates were near zero and lured investors into over-capitalizing stocks and bonds. This was especially true of futuristic/tech stocks.
Now the tech leaders want to convince us that the next great area of tech is in the metaverse. Since investors got rich from the virtual reality of 2015-2020 in FAANG stocks and other futuristic securities, why not try? Remember, if you are sitting in the poker game for 30 minutes and you don’t know who the sucker is, you are the sucker!
Therefore, investors need to make money from reality in the next five years. Here are a few realities we believe we will have to deal with:
- The big winners of 2015-2020 are likely dead money for a long time.
- Interest rates will normalize and compact P/E ratios.
- Millennials will dominate aggregate demand for necessities like homes, cars and kids.
- Impatience is driving clean energy investments, and the clean energy transition will take much longer than people expect.
- ESG investing could get skunked in its current phishing expedition.
- Inflation will become an ongoing reality and real assets will become the momentum investments of the 2020s.
We like the reality of oil, gas and land. Let’s leave alternative reality in the metaverse, where it really belongs.
Warm regards,
William Smead
The information contained in this missive represents Smead Capital Management's opinions and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, CIO wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.
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