Bill Smead, an experienced investor, shares his philosophy of buying high-quality stocks that are undervalued. He predicts a downturn in the stock market and discusses out-of-favor sectors and demographic trends. He also offers insights on greyhound handicapping and the challenges of working with family members in the industry.
Bill Smead emphasizes the importance of buying high-quality businesses when they're out of favor and holding stocks for an average of six years.
Smead believes that moats, which signify a competitive advantage, are crucial in investing and cites examples like Coca-Cola and Starbucks.
Smead raises concerns about potential asset bubbles and warns that the bursting of these bubbles could result in negative returns for investors, emphasizing the importance of understanding time lags and taking a cautious approach in a speculative market environment.
Deep dives
Value Investor Bill Smead Shares His Long-Term Investment Strategy
Bill Smead, a value investor with over 40 years of experience, manages around $5 billion using a long-term concentrated value strategy. He focuses on buying high-quality businesses when they're out of favor and holds stocks for an average of six years. Smead emphasizes the importance of meeting an economic need, looking for companies with a competitive advantage, and considering their moat. He also discusses the impact of demographics on investment decisions and highlights the potential opportunities in the homebuilding industry due to factors such as a shortage of existing homes and millennials entering the housing market. Smead shares his insights on stocks, mentions his investment criteria, and aligns his strategy with successful investors like Warren Buffett and Peter Lynch.
The Significance of Moats in Investing
Bill Smead believes that moats, which signify a competitive advantage, are crucial in investing. He considers moats to be intellectual in nature and not easily measured mathematically. Smead points out the importance of the economic need that a company fulfills, citing examples like Coca-Cola and Starbucks. He also shares examples of companies that have exhibited strong moats, such as Target and Home Depot, and discusses the role of demographics in investment decisions. Smead emphasizes his preference for stocks that offer value and the potential for long-term success, while cautioning against the mania that can be associated with certain sectors or industries.
The Implications of the Current Market Environment
In light of the current market environment, Bill Smead raises concerns about potential asset bubbles, offering parallels to historical bubbles and manias. He warns that the massive amounts of free money and the widespread popularity of certain investment trends like AI and cryptocurrencies can lead to significant problems. Smead predicts that the bursting of these bubbles could result in negative returns for investors, possibly impacting influential companies in the tech sector. He emphasizes the importance of understanding the time lags in the system, recognizing the impact of second and third derivative economic effects, and taking a cautious approach in an environment dominated by speculative behavior.
The Value of Concentrated Portfolios
Bill Smead advocates for concentrated portfolios, with an emphasis on holding winners for a long duration. He shares his approach of treating stocks like actors in a play, seeking out the ones that consistently deliver positive results. Smead sheds light on his investment process, including identifying stocks that provide an economic need and possess competitive advantages. He highlights the importance of selling stocks at maniacal pricing and purging underperforming stocks, while also explaining the potential benefits of maintaining a concentrated portfolio. Additionally, Smead discusses the relationships between market movements, economic history, and the value of assets versus intellectual property.
The Outlook on Oil and Gas and the Importance of Understanding Economic Trends
Bill Smead shares his insights on the oil and gas industry, considering it to be a potentially valuable investment with promising economic trends. He points out the parallels between investments in companies like Philip Morris and the oil and gas sector. Smead predicts a rise in commodity prices in the future, emphasizing how factors like labor shortages and changes in energy sources will impact the industry. He discusses the significance of understanding economic cycles, recognizing the long-term potential in the oil and gas sector, and highlighting the impending inflationary environment. Smead concludes by cautioning investors about the potential consequences of the current mania surrounding AI and the need for a cautious and informed approach to investing.
Bill Smead has been in the investing business for over 40 years and has seen multiple cycles. He has an idiosyncratic investing philosophy which seeks to buy high quality stocks when they are out of favour.
He has a concentrated portfolio of 26 stocks with 45-50% in the top 10 positions. Yet his holding period averages over 6 years. He explains why he thinks the stock market is going down over the next decade and offers his views on the stocks that will deliver great returns, focusing on demographics and out of favour sectors.
