We think the reason most investors do not gain the benefit of common stock ownership stems from the blight which comes along about once every five years on average in the stock market. We call this blight a bear market and it usually consists of a decline of greater than 20% in price from the prior stock market peak. There have been nine declines of that magnitude since 1950 in the S&P 500 Index. Three of those declines exceeded 40% and two of them were in the last 15 years.

In his 1980 book, Contrarian Investment Strategy, David Dreman opens with an analogy comparing the stock market to a casino with two distinct sides. The "red" room has lots of action and an occasional player striking it rich quickly. In effect, you become royal. Unfortunately, most of the players leave without the money with which they entered, because the house has the odds stacked heavily in its favor.

Malcolm Gladwell is a fantastic writer and his new book, David and Goliath, got us thinking about his current thesis: David as a poster child for underdogs is a mistake. Gladwell contends that David had significant advantages over Goliath. In true Gladwellian form, he incorporates a myriad of disciplines to defend his thesis. And in true Smeadwellian fashion, we would like to add stock picking to the list of disciplines that strengthen Gladwells argument.

Warren Buffett has admitted that selling Disney in 1966 was the biggest mistake of his entire career.

This is my 34th year in the investment business. You might not be aware that I trained and worked at Drexel Burnham my first nine years in the business. Michael Milken was the driving force behind the success and profitability of my original firm. What happened to Drexel and Mike Milken in the late 1980s is a study in how to have a brilliant vision and how to handle a business with a very wide moat. Its demise has created what I call the Michael Milken rule and we believe it should be used in present day analysis, in particular when it comes to evaluating moats.

What do Obamacare, Federal Government debt/budget deals, Quantitative Easing and jobs data have in common? To us they are all types of macroeconomic factors on which most investors focus. We believe the reason most investors focus on these types of news stories is because they can influence the US stock market over the next six to twelve months instead of the next 10 to 20 years. In this missive, we would like to challenge everyones thinking about their ultimate goal for investing in the stock market and the behaviors which lead to wealth creation.

At Smead Capital Management, we love to acknowledge financial journalists who really demonstrate an understanding of the underlying truths associated with high-quality and long-duration common stock investing.

As contrarians, we at Smead Capital Management frequently get questions about stocks like Gannett (GCI), Bank of America (BAC) and eBay (EBAY). To understand how excited we are to own these common stocks you need to understand how a long-duration common stock portfolio would benefit from the coming baby boom in the developed world. Thanks to wonderful research from The Bank Credit Analyst (BCA), we can understand the demographics of developed nations like the US. BCA concluded that a "baby boom" is coming in the US and in other developed nations.

If you dream about investment market outcomes which are already popular in the marketplace, your dreams can turn into nightmares. The Everly Brothers 1958 hit song, All I have to do is Dream tells us a great deal about the long-term posture of investors in late 2013 and how dreams can turn to nightmares. On the other hand, if you dream about an outcome which most experts arent expecting, the rewards can be explosive.

Will the US economy grow in an above-average way in the next ten to twenty years or do we need to resign ourselves to an era of anemic economic growth? Two pieces of information came out this week, adding to existing information on the subject and speak to this core debate in the US stock market. The first piece was called Slowing to a Crawl by Jonathan Laing from Barrons.

As long-duration owners of common stock, we believe it is the wealth created by the businesses which causes the owners to prosper. We have also been participants in the US stock market since 1980 and are very aware of big swings in enthusiasm for owning common stocks. So we thought it would be helpful to share our opinion on the current temperature of the market. To take the temperature of the market we need to examine the thermometer readings.

A venerable sage once said, "The markets do whatever they have to do to frustrate the most people." For the long-duration investor, this means that you need to look at what people are invested in to determine where the frustration will come from. Thanks to the Associated Press, we know what the masses have done with their investments in the last five years.

At Smead Capital Management, we believe the interest on September 18th in emerging markets, oil and gold are the last gasps of a dying trend. Our discipline demands that you must avoid popular investments and completely avoid investments attached to a perceived new era. We argue that the international investment markets reaction to Bernankes reprieve on September 18th is proof of a vision we have of the future.

There is no nice way to state this opinion: the end of Quantitative Easing and the ultimate allowance of the open market to set interest rates will create a grueling multi-decade bear market in US bond investments. Higher rates mean the re-pricing of existing bond instruments to lower prices and the principle risk of longer-dated maturities getting exposed. In 1983, I remember people losing approximately 15% of their market value in one year as Treasury interest rates rose from 11% to 14%, temporarily crushing owners of 25-year tax-free unit trusts.

The folks who select the companies in the Dow Jones Industrial Average (DJIA) came out with their latest changes on Monday, September 9, 2013. They removed Bank of America (BAC), Hewlett Packard (HPQ) and Alcoa (AA) from the DJIA. Added to the index were Visa (V), Nike (NKE) and Goldman Sachs (GS). At Smead Capital Management, we are always looking for important psychological clues to human behavior as it pertains to the popularity of common stocks.

Weve never quite understood why most sensible people dont apply the same economic logic to investing that they do to any other business. Take plumbing for example. If your town has 10 main plumbing companies and 10 more move into town, your economic mind tells you that the added competition will drive down profits. On the other hand, if five of the plumbing companies go out of business, profits should rise over time.

At a major conference in November of 2012, the futurist, Peter Diamandis, shared the concept behind his book, Abundance: The Future Is Better Than You Think. Diamandis, a graduate of MIT and Harvard Medical School, has been a thought leader in everything from space travel (International Space University and X Prize Foundation) to the Internet. His concept is simple. He believes that participants in the US economy and US stock market are drastically underestimating the exponential success which comes from the unlimited impact of the Internet and technology.

After watching "Forrest Gump" for about the thirtieth time recently, I realized that the US economy and US stock market share a great deal in common with Forrest. In this missive, we will be reminded of the journey of a true American folk hero and of the journey back from the abyss the US economy and stock market have made since early in 2009.

Major magazines have a history of putting a topic on their cover at the end of a long-term trend. For example, The Death of Equities was a Business Week cover in late 1979, near the end of a miserable stretch in the US stock market. Times recent cover story, The Childfree Life, got us wondering about the economics of childbearing in the US? Does Times cover mark the end of a trend? Can the US economy succeed without homegrown population increases? Will economic success driven by the current demographics in the US trickle down to unemployed blue collar

On a recent trip to Europe we participated in a forum in Milan of five stock picking organizations. Two were from Brazil, one was from Malaysia and one was picking stocks inside China via the Shanghai Stock Exchange. We believe what they said was an enticement to investors for the purpose of getting them excited about stocks in their country. To us, this reveals a great deal about where prices in emerging stock markets and commodities are headed over the next five to seven years.

A great deal of time and energy is spent trying to determine when the current bull market in stocks will end. We at Smead Capital Management make no effort to time the stock market because after 33 years in the investment business Ive never found anyone who did it successfully. We do try to avoid capital misallocation and thought you might want to look at the history of the investment asset classes to see how periods of popularity lead to misery and periods of misery lead to above-average returns.

On a recent business trip to Europe, we noticedanecdotallya lack of hope in the economic future of Europe. There is a good reason for the lack of hope. Hope, we believe, comes in the form of new life. When all of the austerity being practiced in developed nations around the world is pretty much done, something else needs to happen for economic growth to take hold. At Smead Capital Management, we believe developed economies need rebirth and the birth last week of a son to the Royal family is a watershed event.

A long time friend once said, "Bill, on the stocks that worked it didnt make any difference what you paid!" What he was referring to were the stocks which rose to many times your original purchase price and the investors who participated over the long run in the shares ended up happy and wealthier. Is Wells Fargo (WFC) one of those companies and will Warren Buffetts recent purchases get vindicated? As we enter the second half of 2013, this is a great discussion point for long-duration common stock investors in a market which has been strong since September of 2011.

A journalist from Fortune magazine once asked Andy Grove, the former CEO of Intel, for the best business advice hed ever been given. Grove provided a simple quote from a former professor at City College of New York: When everybody knows that something is so, it means that nobody knows nothin.

As long-duration value investors, we at Smead Capital Management have been very attracted to the conservative accounting, shareholder friendly dividends/buybacks and bright pipeline futures of major pharmaceutical/biotech companies like Merck (MRK), Pfizer (PFE) and Amgen (AMGN). Lately, there has been weakness in these shares and we’d like to review our best theory for recent fears and price weakness, while reviewing the merit of these high quality shares.

From 1997 to 2003 a show called, Win Ben Steins Money ran on the Comedy Central Network. The last five years, investors in the US have been playing a very similar game we are calling, Win Bens Money. The new game stars Federal Reserve Board Chairman, Ben Bernanke. The object is to win the money the Fed creates via Quantitative Easing (QE) through macroeconomic analysis. In this missive, we will look at how these investors chased Bens Money and consider what to do going forward.

We have argued vociferously that active managers have given up their preferred position in the investing marketplace to passive indexes because of high turnover. A recent Wall Street Journal article referenced 78% turnover as being the average among large-cap US equity funds. Studies have shown that as much as 144 basis points each year in return is chewed up by trading costs. Explaining turnover and its impact is one thing, but it is more important to ask a question. How do you practice low turnover while seeking maximal long-term performance?

We have noticed that there has been a dearth of stock splits among the S&P 500 index companies in the last 5 years. Our observation is that the natural habitat for stock splits is normally a multiple-year market upswing and numerous stocks trading over $60 per share. What does the history of stock splits tell us about where we are in the long-term stock market cycle for the S&P 500 index? Who will the marginal buyer of common stocks be in the near term and what do stock splits teach us about who the marginal buyer is?

We have been making a number of arguments about various asset classes over the last three years and we would like to keep our readers very aware of the progress being made in these markets. We have argued that a secular bear market is in place for commodities and US company shares which are attached to the commodity cycle. Additionally, we maintain that there is a secular bear market operating under the surface in emerging equity markets. We believe that July of 2011 was the beginning of the secular bear market involving a number of asset classes beyond just commodities and emerging markets.

Due to the recent strength in the US stock market, we thought it would be helpful to followers of Smead Capital Management to understand the history of our core investment beliefs and where our portfolio is in relation to those core beliefs. A review of the ongoing tension between valuation mattering dearly and the enormous benefits of long-term business ownership is especially interesting after a significant upward move in the stock market. How do you keep turnover and trading expense low, while maintaining a meaningful margin of safety?

We returned recently from the Berkshire Hathaway Annual Shareholder Conference. The most exciting and profound comment to us was what Warren Buffett said about the unprecedented actions the last three years by the Federal Reserve Board. Buffett was asked about the risks of the Federal Reserves current plan to buy Treasuries to keep interest rates very low.

In the summer of 2009, I was a regular guest on CNBC shows like Larry Kudlow. We believe we were invited to participate in those panel discussions because we were the token bull in the conversation and I am obnoxious enough to state my piece against significant mental and verbal opposition. The US stock market had bottomed in March of 2009 and rallied explosively into the late spring and early summer. What reminded me of this is the news coverage and expert reaction to the recent collapse in commodity prices, especially gold and corn.

This is the last installment in our five part series called The Road to Omaha. In this series of missives we have looked at the keys to the investing success of Warren Buffett leading up to the 2012 annual meeting.

We have been discussing keys to the investment success of Warren Buffett and Berkshire Hathaway as we approach the 2013 annual meeting. In this week’s edition, we are considering a company which might make a good “elephant” for Berkshire to buy.

We are spending the five weeks leading up to the Berkshire Hathaway Annual Meeting focusing on investment keys which are important to both Warren Buffett and Smead Capital Management. This week our focus is on owning high quality businesses.

In this five-part series leading up to the Berkshire Hathaway Annual Meeting, we discuss the keys to Warren Buffetts investment success. We believe these keys are available to all of us and are a part of the discipline of stock-picking at Smead Capital Management.

Valuation is the topic that will begin a month-long series were calling, The Road to Omaha. In the next five weeks as we build to the Berkshire Hathaway annual shareholder meeting, we will present a picture of Mr. Warren Buffet and his investments through the Smead Capital Management lens. There is one central fact on which Warren Buffett, efficient market theorists, and Smead Capital Management agreevaluation matters dearly.

Mark Hulbert and I started in the investment business in 1980. He chose to create a business out of analyzing the results and psychological implications of investment newsletter writers. At Smead Capital Management, we formed a business to analyze publicly-traded US common stocks through the prism of our eight proprietary criteria. We enjoy his unbiased third-party opinions on current circumstances and his consistently good historical perspective.

The payout ratio on the S&P 500 Index currently hovers around 30% of the after-tax profits of companies in the indexat the low end of the last 100 years. In comparison, the capital appreciation portfolio here at Smead Capital Management has a payout ratio of 27%. This is important because most studies show that over 40% of the returns provided by common stocks come from dividends over long stretches of time. With those figures in mind, we reasoned that this is a good juncture to remind everyone about our vision of the next ten years as it pertains to dividends.

In the March 9, 2013 issue of Barrons, writer Jonathon Laing wrote an excellent piece about Howard Marks. This article provides the base from which we can discuss the main components of investment portfolio composition. These components are information, analysis of information, and decisions made from information and analysis. In doing so, we will bring to light why we believe todays best opportunity is in long-duration common stock investing.

Harry Markopolos was working for a hedge fund of funds and attempting to put a portfolio together that would "smooth" long-term returns. In the process of marketing what his company was doing, he ran into a client who already had a money manager doing that for him. The money manager the client used was Bernie Madoff. When Markopolous looked at the long-term track record of Madoff's client, he instantly knew that it was mathematically impossible to have a return that high with as little year-to-year variance in the return. We at Smead Capital Management would like to ask a few questions.

Many times in my 32-year career people ask me to comment on whether an established trend for a popular investment will stay intact. My answer is always the same. We don't know when the hot streak will end for the popular investment and we don't feel comfortable with popular securities. In our view, there is a dramatic difference in what you do with popular investments based on whether they areto use terms borrowed from Warren Buffett currency assets, unproductive assets, or productive assets. It has to do with the ability to sell and the liquidity you have when the popularity disappears.

Interest rates have gone down on US Treasury bonds off and on for 31 years. This means that the coupon you are being paid has been joined by significant capital gains. Jim Grant argues that the only thing going for bonds is how well handlers of money have done on them; Warren Buffett calls it "rear-view mirror investing".

Warren Buffett describes the stock market's purpose as being "a wonderfully efficient mechanism for transferring wealth from the impatient to the patient". We are reminded of this by a series of news reports and commentaries on subjects greatly influenced by basic economics. In today's missive, we consider what the law of supply and demand says about China, oil, and housing in the USA.

The wealth management and institutional consulting communities have allowed indexing to be called "passive" investing and stock-picking disciplines to be called active management. This implies a mindless approach to indexing and a great deal of busyness to stock picking. We at Smead Capital Management believe these labels are at the heart of a great deal of confusion about what works and what doesn't work in both equity mutual funds and separately managed accounts.

Last week we spoke to the Washington Hay Growers Convention in Kennewick, Washington. Those who grow hay have enjoyed a very similar boom in the last twelve years that wheat and corn growers have enjoyed. The parking lot was full of nearly new heavy duty trucks and the convention floor was packed with $400,000 to $700,000 farm implements from major manufacturers. These farmers have been feasting in the boom and it got me thinking about how to correctly value cyclical businesses, because at Smead Capital Management valuation matters dearly.

Late in 2008 and in early 2009, a group of what we like to call "brilliant pessimists" hit the airwaves with their economic theories. The prognosticators' vision of the future was and is predicated on the history of similar situations and the mathematical realities of the huge debt overhang from the prior ten years of profligate economic behavior. They put very effective names on their visions like "new normal" and "seven lean years". They marketed their visions incredibly well to the point of shaming anyone who might disagree with their theories.

As long-duration common stock owners, we at Smead Capital Management don't put much emphasis on predicting the year-to-year movements in the stock market. We expect at least a 10 percent or greater decline during each year and a greater than 20 percent decline at least once every five years. With that caveat in place, we will throw our two cents into the debate about what the US stock market will do in 2013.