William Smead
Chief Executive Officer
Chief Investment Officer

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Dear Clients and Prospective Clients:

We are all being drowned in information each day. Most of this information has to do with the effect of the current economic contraction and the policies being used to turn things around. Since it seems that nobody wants to talk about wonderful companies, I’d thought we’d share some of Smead Capital Management’s opinions on the subject.

Here’s a list of some of the attributes of a wonderful company in our eyes:
1) High levels of profitability on invested capital with little or no leverage
2) Number one or two in the industry
3) Brand synonymous with product or industry
4) Transparency of management
5) Non-cyclical core business
6) High Barriers to entry (Strong Moat)

We could go on, but let me get to the point. In 29 years in the investment business we’ve learned that wealth is created by owning wonderful businesses for a long time and that your returns are enhanced if you get to buy them when their price is depressed. Usually the only time wonderful businesses get depressed in price is when the whole stock market goes way down and/or the economy contracts and provides short-term difficulty to even the strongest businesses.

We believe that three to five years from now people will look back and say, “What was I thinking about in late 2008 and early 2009 as I sat on low interest paying vehicles and didn’t add to existing holdings or use these bargains to get in somewhere around the ground floor?” Help us to help you!

Best Wishes,

William Smead

The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. The securities identified and described in this missive do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.

William Smead
Chief Executive Officer
Chief Investment Officer

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Dear Clients and Prospective Clients:

We at Smead Capital Management love how gullible and short-term oriented most investors are. One of our favorite ways to understand this is when a company is the subject of a major public relations (PR) campaign. The PR campaign is almost always the product of someone that wants to gain some kind of financial advantage by smearing the company involved. A few examples would probably be helpful.

Did any of you see the documentary six years ago called, “Super Size Me”? A young man ate three meals a day at McDonald’s for six weeks and had to super-size his order if the employee asked him “Would you like to Super Size this?”. He gained 23 pounds and saw his cholesterol shoot through the roof. McDonald’s was viewed as evil at that time and their stock bottomed out around $15 per share. Today it is closer to $55/share.

WalMart has been the recipient of a major, multi-year PR campaign to present them as evil to support a nationwide attempt at unionization. First, the campaign convinced everyone that small business owners in the areas where WalMart put their stores were being knocked out of business. Second, WalMart was vilified for doing what thousands of companies across America do by employing some of their workers for less than 30 hours per week to avoid paying benefits to them. Everyone learned to hate both McDonald’s and WalMart, but a funny thing happened on the way to the public opinion forum. We’ve had an ugly recession and economic contraction and it just so happens that when people tighten their belt and look to save money on fast food and just about everything else, they come running to these two great companies. Notice how the PR campaigns have disappeared from the news. Notice how well the stocks have done in a quantumly difficult environment.

This brings us to today’s great PR campaign to smear the makers of Pharmaceutical products. President Obama seeks to cut the annual cost of healthcare in the U.S. significantly during his time in office. Most gullible Americans and short-term oriented investors believe that the high cost of drugs is the reason that healthcare is so expensive in the U.S. They think that the employees of drug companies care about nothing besides profits and know that if the prices of drugs were fixed by the government and all our healthcare was rationed, then everything would be alright.

The truth is that healthcare is getting more and more expensive because more and more people are demanding it, expensive technology keeps improving it and massive numbers of people over the age of 60 are living way longer than any prior generation. These older folks want quality of life and long life as well. This means they will have to put up with chronic illnesses that are most cost effectively treated with pharmaceutical products. The PR campaign is lead by trial lawyers, who have this wonderful love/hate relationship with the drug companies. They smear the drug companies to win verdicts in jury trials for the damaging side affects of any number of drugs. They then quietly root for the success of the pharmaceutical companies so that the drug companies can afford to pay the judgements that come from the future less than perfect, but effective medicines.

Just like McDonald’s and WalMart used to have depressed price to earnings multiples because of successful negative PR campaigns, the finest big pharma and biotechnology companies have them today. Will the story play out any different over the next few years?

Warm Regards,

William Smead

The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. The securities identified and described in this missive do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.

Our Abusive Parent Leads to Lots of Experts at Extremes

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William Smead
Chief Executive Officer
Chief Investment Officer

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Dear Clients and Prospective Clients:

Found in the old testament book of Genesis in chapter 6 is the story of Noah and the flood. God is described as “very angry” with the behavior of the people he created and instead of eliminating everyone and everything he chose to extend grace to a man named Noah, his wife, sons and their spouses. Once God chose Noah he gave him marching orders to build an Ark. This huge boat was to be 450 feet long, 75 feet high and 45 feet tall. Noah and his three sons obediently spent over 100 years building the Ark and explained to people that they needed to turn from their wicked ways and join his family in the boat.

This might have been the most difficult task ever set in front of a mortal man in history. There is no evidence in the first five chapters of the bible that it had ever rained before. Life spans were very long in Noah’s time (600-770 years), but it took about 20% of his life to build the Ark. Noah had no formal religion or community support mechanism surrounding him and his family. He had to be the ultimate contrarian and perform the whole time as if he were going to be right all along. When the flood finally receded and Noah was vindicated, God provided a rainbow as a sign that he would never drown everyone again and as a reminder to his people.

At Smead Capital Management we formed a company two years ago based on a series of things we believe about investing. We are building a mutual fund and separate account management business at SCM which is our Ark. Here are ways that we believe our work is similar to Noah’s task:

1) It hasn’t been easy to make money in stocks since early 1998 and that is equivalent to not raining for a long time.

2) Many retired investors wonder if they have the time to invest in the project.

3) The percentage of market participants who are actually long-term buyers and holders of good quality securities has become a small minority of overall participants.

4) Some financial institutions and some households are drowning in the lending and borrowing sins they’ve committed over the last ten years.

5) Aspects of our stock picking discipline which have generated big advantages over long periods of time have temporarily been postponed by the worst bear market since the 1930’s.

6) The economy that follows the aftermath of this economic and stock market flood could be more pleasing because market participants will be more humble and less debt ridden. This reduces economic swings going forward and makes us all more vigilant of the behaviors which caused the problems in the first place.

Unlike us, Noah didn’t have 24 hour news coverage of his project and massive amounts of information on the outcome of current human behaviors multiplying on the internet. His critics probably started out numerable, but lost interest quickly and had very little power to sway public opinion. Besides, he looked nuts right from the beginning. Our critics grow more numerous as time goes on even though all recorded economic history shows that time is a great healer and investment results revert to the mean. We at SCM are looking forward to our rainbows in the stock market over the next five to ten years when we believe the doors will open to the “Next Great U.S. Stock Market”.

Warm Regards,

William Smead

The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. The securities identified and described in this missive do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.

William Smead
Chief Executive Officer
Chief Investment Officer

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Dear Clients and Prospective Clients:

As the first four weeks of a powerful upswing in the stock market unfolds, we thought we would use a few moments of your time to ask a few questions.

1) What if the crowds of professional and individual investors are as wrong at extremes this time as they have been in the past?

2) What if the money in money market funds, CDs, savings accounts and T-bills all tries to come back into stocks at the same time?

3) What if Warren Buffett’s Oct 18, 2008 editorial about “Buy American, I Am” proves to be excellent advice?

4) What if the people who were smart enough to avoid some of the bear market on the way down never get back in on the way back up?

5) What if the fact that stocks dramatically outperform Treasury Bonds over long periods of time reasserts itself quickly?

6) What if buying and holding blue chips stocks works significantly better than trading in and out?

7) What if President Obama is the lucky man who leads our country as it successfully comes back from the worst economic contraction since the 1930’s?

8 ) What if gold, which has been trading exclusively on fear, goes down or nowhere for years?

9) What if everybody stops postponing the work they need to do on their home?

10) What if everyone who needs a new car buys one?

11) What if Starbuck’s coffee continues to be legal, addictive and tastes great?

12) What if the major Pharmaceutical companies sell more drugs in the future in China and India than they sell in the U.S.?

13) What if the people who sat through the worst stock market decline in 70 years are fully invested at the bottom and enjoy years of success because of it?

If you are underinvested in common stocks and/or are not investing with us, it is not too late to buy by any means!

Warm Regards,

William Smead

The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. The securities identified and described in this missive do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.