The economist John Kenneth Galbraith, in his book, A Short History of Financial Euphoria, wrote the following:
“The second factor contributing to speculative euphoria and programmed collapse is the specious association of money and intelligence…The basic situation is wonderfully clear. In all free enterprise attitudes there is a strong tendency to believe that the more money, either as income or assets, of which an individual is possessed or with which he is associated, the deeper and more compelling his economic and social perception, the more astute and penetrating his mental process…The more money, the greater the achievement and the intelligence which supports it.”
At Smead Capital Management, we know that we must humbly own meritorious companies fitting our eight criteria for stock selection and seek them out among the industries that are owned in the minority and not in the majority. We must acquit ourselves in the marketplace and use the hysteria and euphoria to plant seeds for future profits.
Reed Hastings and Jeff Bezos are ascribed unbelievable intelligence for the platforms that they have formed and the amazing wealth they have created for themselves and fellow shareholders over the last five years. See the chart below:
Therefore, as long-duration value investors who seek victory, security and success in our common stock ownership, we will do the following:
1. Stick to our discipline and not chase the euphoria, regardless of the pressure to conform.
2. Use Mr. Market’s over-enthusiasm for tech to find bargains among the industries threatened by technological change. We believe bargains are found in the rubble of tech overconfidence. This means retail, old media and health care/pharmaceuticals.