At Smead Capital Management, we practice our discipline of picking and owning stocks that meet our eight criteria in both favorable and unfavorable environments. The current “blithe spirits” were brought to mind in a movie of the same name. The main character, a novel writer, is visited by his dead ex-wife, played brilliantly by actress Leslie Mann. At first, she charms her widowed and re-married husband, but then she haunts him and his new wife, leading to their ultimate death.
This is exactly how bull markets work. They start out inexpensive and fundamentally advantageous, then they charm investors with attractive and many times spectacular returns. However, in the process, they lead investors down a rabbit trail, which ends up taking them off a cliff. Ironically, that is how the writer’s second wife dies. Her husband’s deceased wife sabotages the gas pedal and she plunges off a cliff on the coast of England.
The three prior episodes of financial euphoria, which hold characteristics in common with today’s blithe spirits, were the 1920s, the 1960s and the late 1990s. See the charts below:
These are so well known as euphoria episodes that they got names in the aftermath: the Roaring 1920s, the Go-Go 1960s and the late 1990s DotCom bubble. What did they have in common and what did their blithe spirits look like? They all included innovation, meteoric returns, stretched valuations and participation by investors who don’t normally participate.
The 1920s had the adoption of the automobile, the airplane and the radio by the masses. In 1900, 4,000 new autos were sold in the U.S. By 1925, that number reached 3.5 million (From Horse Power to Horsepower by Eric Morris). Radio news, music and entertainment shows dominated popular culture.
In the 1960s, we walked on the moon and saw mass adoption of IBM, Sperry Rand and Burroughs super computers. In the 1990s, we unleashed public use of home computers with software from Apple and Microsoft for “dummies” like me. Prior to that software, you had to write code to accomplish anything with a computer. If you had to have the patience to tell the computer how to do what you wanted it to do, yours truly would have never used one.
We also unleashed the web browser in the 1990s, which allowed unmeasurable amounts of information to be available on the internet. This laid the groundwork for Amazon, Google and Facebook to conquer the world in the last 10 years, along with other companies that have gained the benefit of the “network effect.” The “network effect” comes from learning more and more about your network participants and growing bigger and more profitable as your network’s size crowds out any meaningful competition.
As you can see the returns have been meteoric in the latest euphoria episode:
