William Smead
Chief Executive Officer
Chief Investment Officer 

Dear Clients and Prospective Clients:The stock market rallied in a powerful way yesterday and is begging everyone to take a position on up or down in the near term. I’d rather help us think straight. We own companies with very strong balance sheets, many of the most recession-resistant businesses, some of the most endearing brands and some of the most consistently profitable companies in the world. Creating and selling prescription pharmaceuticals, cable and network television (“couch potato” delight), cell phone service, women’s apparel, operating software, technology consulting, groceries, dry goods, life essentials, banking, investment management, custodianship of financial assets are all part of the mix. These are some of the most attractive companies the planet has ever seen and they were available at fire-sale prices on Friday. Even with Monday’s bounce, still are today!

We shouldn’t care where the prices go in the short run. We believe that they are highly likely to dramatically outperform other investment categories over the next 3 to 5 to 10 years and in the process meet our financial needs. If you have waited a long time to be side by side with the greatest investors of the last 20 to 40 years, start buying. You will stand out with the likes of Warren Buffett, Marty Whitman and Kenneth Heebner. Either through recent purchase actions or interviews in the media, (Google them and you’ll see) these guys are buying and holding while licking their chops toward the future when the crisis has subsided. I’ve had one client add to stocks in the last two weeks and it seems you’d have to kidnap and rob the folks sitting with cash on the sidelines to get them in. Who knows what the rest of this week will bring; just give me a long-term seat at Warren’s Buffet. 

Best Wishes,

William Smead

It’s Different This Time

3rd Quarter 2008

It is said on Wall Street that the most financially damaging expression is, “It’s different this time.” An up or down trend gets established in an investment or economic market for a long time and human nature leads people to believe in its permanence. A look at the circumstances which drew this attitude in the past could tell us a great deal about where to invest as we look out into the fourth quarter of 2008.

At Smead Capital Management we invented a slogan to represent the crowd psychology which causes people of good logic to arrive at the opinion that “It’s different this time.” We call it a “Well Known Fact”. A “Well Known Fact” is a body of economic information which is not only “known” by everyone in the marketplace, but has been acted upon by nearly everyone who could participate. Joe Kennedy, the father of President John F. Kennedy, used the shoeshine boys in New York in 1929 as an indicator to determine that stocks were overvalued. They were giving him stock tips after his shoeshine. He turned around and bet against the market and made a killing on the downside in 1929-1932.

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We believe we will succeed over the next ten years because the quality and financial strength of our companies leads them to survival and survival leads to prosperity. The number one damager of long-term profitability is competition. How many new drug companies are being funded by the IPO’s of Common Stock? How many phone and cable companies? How many brand-name retailers are appearing on the seen? How many new asset custodians and money managers? How many software or technology consulting firms are debuting? The answer is nearly zero and in fact the opposite is happening! Our companies are seeing their competitors decline or disappear in direct industry competition and investment alternatives are dropping like flies. How about those hot commodities and commodity-related stocks? How about those emerging international stock markets? How about those glamour tech stocks?

Is the population of the world shrinking? In the U.S. we are delivering the most babies (4.3 million last year) since the height of the baby boom in 1957. China and India should create massive new markets for pharmaceuticals, entertainment, software, consulting and money management/custodianship. More customers and fewer competitors, sounds like a dream come true.

History is on our side! U.S. investors were doomed to succeed in 1932, 1942, 1974, 1982 and 1990. They were blessed to fail in 1929, 1966 and 1999.

We have no idea when this panic hits bottom. However, if you can survive this, we believe you are doomed to succeed!

Warmest regards,

William Smead