Sydnee Gatewood: Hello, everyone! Thank you for joining us on GuruFocus Value Insights podcast! You can subscribe through Spotify or your device's podcast app, so you never miss an episode.
We are pleased to have Bill Smead, the founder, CEO and CIO of Smead Capital Management, join us today.
Founded in 2007, his Phoenix, Arizona-based firm encourages investors to “fear stock market failure through a low-turnover, differentiated value discipline seeking wonderful companies to build wealth.”
Prior to establishing his firm, Bill was the managing director and portfolio manager of Smead Investment Group of Wachovia Securities. Previously, he was with Smith Barney and Oppenheimer & Co. He began his career in the investment business with Drexel Burnham Lambert in 1980.
Bill has been a guest twice on our Value Investing Live stream series and has been a speaker at the GuruFocus Value Conference in Omaha, Nebraska on two occasions.
Thank you for joining us today, Bill!
Bill Smead: Thanks for having us.
SG: All right, just to jump on in. Could you elaborate a bit on what it means to fear stock market failure? Is this in reference to individual investments or overall performance?
BS: Well, we know a lot about the human condition and we used to joke in the stockbroker business that dogs chase cars and people chase stocks. And neither one of those has a tendency to end up well, so people are inclined to want to participate in popular securities and in popular trends that have been maintained for a significant period of time. And what you need to do is to buy meritorious businesses. When, what John Templeton said, at the point of maximum pessimism is when you're gonna get the best returns. So we think that most individual investors do not succeed creating their own diversified portfolio mostly because they don't hold the securities long enough. And then we know from the statistics that most active investors have had a very difficult time keeping up with or beating the indexes. So the way I like to think about this was, you know, Buffett got together with guys that he had gone to Columbia Business School with once a year and they were all very successful investors. So he says it's like rolling the dice in a game of dice. If you found out that most successful dice rollers all went to the same educational discipline, you might think there's something to that. Well, the answer is that there aren't that many successful dice rollers. And that's what made indexing so popular. What was the fact that not only do most professionals not beat the market, but most individual investors go down too many unfortunate rabbit trails.
SG: That makes sense. Definitely. I think there are a lot of options out there and so a lot of people sometimes, especially if they're not, if they're just starting out, they don't know what they're doing. So that's great advice to give us some direction. How would you describe your investment strategy in the current environment of high inflation and elevated interest rates? Has anything changed?
BS: Yeah, things changed for us in April of 2020 when we received a chart that showed that commodities were the cheapest relative to common stocks as they've been for 220 years in the United States. We do business in Europe and 220 years isn't a long time in Europe because there's lots of buildings and roads that are 500 years old. But for the United States, that's really a long time. That's it. That's the whole history of the United States. So in a mean reversion trade that's likely to last 10 to 15 years, we had to get involved in an area that we had not been involved in at all. Pretty much from, say, 2011 to 2019. The reason we weren't involved from 2011 to 2019 is they got caught up in the prior euphoria, what they called the brick trade. So that forced us to look for ways through our eight criteria for common stock selection to get at more cyclical businesses that were involved in the commodities and the best way for us to do that is through an addictive legal drug called oil and gas.
SG: All right. Yeah, I think we're gonna talk about that a little bit more later on. But, yeah, definitely. A good way to find different areas and figure out where people aren't looking or find out of favor areas. What particular metrics or factors do you pay the most attention to when analyzing a stock, regardless of market conditions?
BS: Well, we have eight criteria for common stock selection and we have a crack analyst team, a senior and two junior analysts. And so I've spent a lot of time teaching them the last year and I always tell them we have eight criteria, but if we can only have one, the one I want of the eight, if I couldn't have the other seven, is strong insider ownership, preferably with recent purchases.
I'll give you an example this morning. We own Target (TGT, Financial). We're very dissatisfied with what's going on with Target. So, we compared it to Walmart (WMT, Financial). Well, what's the biggest difference on a controversial subject? Like what's going on with Target? Insider ownership; 46% of Walmart is owned by the founding family, which is huge. That's enormous. 56% of U-Haul (UHAL, Financial) is owned by the founding family. D.R. Horton still owns 7% of D.R. Horton (DHI, Financial) and Stuart Miller owns 7% of Lennar (LEN, Financial), but less than 1% of Target is owned by insiders.
So here they are embroiled in a controversy and we don't think that Target management is doing a good job of representing the owners because they're not that big of owners. So if that's the only thing we knew if Harold Hamm is buying $10 million every quarter of Continental Resources (CLR) and he already owns 84%. The SMES know and the people at Smead Capital know that if they didn't know anything else, that's pretty good starting point.
SG: Definitely. I agree that insider ownership can give you great insight. Ididn't know that about Walmart and Target, you know, the family, founding families. That's really interesting. But moving on and going kind of back to something you touched on regarding oil and gas, those companies appear to be out of favor currently due to the transition to green energy or the hopeful transition to green energy, rather. You have sizable holdings in several companies like Occidental (OXY, Financial), Devon Energy (DVN, Financial), APA (APA, Financial) and Ovintiv (OVV, Financial). Do you think these companies are looking to shift toward renewable energy sources as well or are they betting on the continued need for fossil fuels? How can they continue to, you know, stay afloat?
BS: Well, by the way, they're making money, hand over fist. So it's not hard to stay, stay afloat when you're making enormous amounts of money. But we have a classic conundrum here. The conundrum is that 40% of electricity in the United States is made with natural gas. Uh you know, 95% of the generation of moving cars and trucks around the country are from either gasoline or diesel. And then there's just a myriad of products that are made, you know, with, with fossil fuels, right? Plastics and all kinds of other things that make our society work. So there is a religion that has developed around environmentalism and it's not a sin to be religious, but it's a sin to confuse your religious attitude with economics. So here's the economics, almost everything that's being invested in clean energy is unprofitable, even with massive subsidies. And they are massive what we affectionately call the Inflation Creation Act, which I think was called, I can't remember but because I've called it Inflation Creation Act so many times. But even after getting a trillion dollars worth of subsidies, these businesses are all losing money.
If you check the last week or two in the stock market, a number of clean energy companies have announced bad results in the stocks that got drubbed into the floor. Well, in the three-year stretch, 2019, 2020, 2021, there was $437 billion invested in clean energy ETFs and $2 billion invested in oil and gas. OK. Yeah. Now this year oil and gas has not done well, but it was spectacular in ‘21 and ‘22. And we have a chart that shows that the current move in oil and gas is tracking almost exactly with what happened between 1971 and 1981 and between 1999 and 2011. Now I think this is gonna go toward answering one of your future questions. So what did ‘71 to ‘81 and ‘99 through 2011 have that made oil and gas such a good place to be invested?
And the answer is the classic definition of inflation is too many people with too much money chasing too few goods. So in the 1960s, the United States fought a very expensive war halfway around the world in a country called Vietnam, well known to people younger than myself through the movie “Forrest Gump.” Right. Everybody knows the Vietnam War because of Forrest Gump. So the government borrowing for that war and President Johnson's Great Society legislation, which in the history books is called Guns and Butter, was the largest government borrowing other than World War II in that whole stretch of 50 years and it got monetized. So baby boomers had 75% more humans than the age group before them. The silent generation was 44 million people. The baby boomers were 75 million. So 75% more people with too much federal government monetized debt were chasing too few goods that got exacerbated by the Arab oil embargo in 1973-74. Fast forward to 1999. The Chinese communist totalitarian communist government said, “Hey, let's try a command economy where we let these people do capitalist, right? Do capitalistic business under the guise of a totalitarian communist government.” So they did. Well, last time I checked that was about 1.2 billion people with way too much Chinese government monetized debt chasing too few goods. And what happened from ‘99, the price of oil went from ‘11. The peak was 2008, but still in 2011, the price was $115 a barrel, an 11 fold increase in the price. Too many people with too much money chasing too few goods.
Now, fast forward to today. There are 92 million millennials replacing 65 million Gen Xers. It's not as huge as the baby boomer group, but it's 40% more humans. And what happened is all of a sudden we get in Covid, $10 trillion of federal government debt gets monetized and those millennials start doing a whole bunch of necessity things that they've never done before. But like they'd never, not lived in an apartment in a large city. They had never done anything other than eat Chipotle burritos, drink craft beer or fancy whiskey, take Tuscany vacations and pay a lot in rent and taxes and travel like crazy. OK. That's those were all their money other than taxes and rent all went to discretionary spending and COVID hit and all of a sudden they were bombarded by necessity, spending too many people with too much federal government monetized debt, chasing too few goods exacerbated by supply chain issues. Ridiculously low price of oil because of Saudi Sunday. Saudi Sunday in April of 2000 was to this cycle what the Arab oil embargo was. Uh, and now you throw the Ukraine war and, and the trouble in Israel and you basically got a replay of the 1970s going.
SG: That makes sense. Thanks for that. This kind of piggybacks off part of what you said and it's not one I sent you, but I just thought of it while you were talking. Do you think, you know part of that, you know, there's a big push for EVs and there's lots of, you know, subsidies for that. And do you think, and it kind of looks like they're suffering too, just based off numbers, like they're not moving the sales as much as they would like. So I think that also kind of ties in, don't you?
BS: We, well see, here's the weird thing, we're not negative on clean air. We're not, we're not negative on the energy transition, but we think everybody is making a huge mistake on what is the electricity gonna cost? So we have, we have a chart that shows that electricity doubled in price the last seven years in California. And whatever happens in California, it kind of ends up happening everywhere that they're kind of a trendy, you know, they're in control of most of the media in LA. So whatever you see kind of originates in California, so electricity is doubled in price. Let's just fantasize for a minute and say that in 10 years, 50% of the cars on the road are electric. Well, so I'm in London about a month ago and the cab drivers got a plug-in hybrid. So I'm going from the London airport into town and I got, you know, 35 minutes to visit with the guy. I said, “Tell me about the economics of your vehicle.” And he says, “Well, my electricity is more expensive than my gasoline.” I said, “Really? Why is that?” He says, “Because I gotta stop work for a half an hour to plug in. So you count my lost labor into the cost of electricity and that's without the electricity going up in price, right?” So the oil and gas industry might as well be called the tobacco industry, but for a few different reasons. First of all, the same thing is there were, there was a moral campaign which, by the way, I think was a good campaign against cigarettes. I've never owned tobacco stocks. Not because I didn't know how profitable the business was. I just, I begged my mom to quit smoking for 10 years unsuccessfully and I thought, “I don't wanna make money off of somebody else's mom being in that situation.” Uh, but the United States government in 1970 said you can't advertise cigarettes on TV and radio. And for 40 years, tobacco companies were divested for moral reasons. Well, go to Europe. You wanna see morality? I mean, there is a religion around ESG and and clean energy. I doubt Al Gore (Trades, Portfolio) and John Kerry are the high priests over there, but they're the high priests here and, and that religion, I mean, they are vitriolic. Our sales team that represents us over there, I mean, they're looking for meetings among a third of the people that asset allocate over there because two-thirds of them won't even take a meeting with somebody that owns oil and gas.
So there is a religion around this thing, but the beauty of it is from 1970 to 2010, the price of a package of cigarettes went from 20 cents to $5. So even though Philip Morris (PM, Financial) was selling fewer cigarettes in the United States in 2010 than they were in 1970, they're making way more money because the price went up 16-fold on their part of the pack of cigarettes. The other half was federal state and local taxes went from five cents to $2.50 in that time period. So, what's the moral of the story? The moral of the story is, you wouldn't know who Peter Lynch was if Philip Morris wasn't his largest position, right? And so that is what happens when a good that is created in a way that causes more and more scarcity goes up more and more in price and makes the owners and producers of that product rich. And that's what we expect out of the oil and gas business.
Again, all those two prior years, ‘71 to ‘81; we're three years into this era in oil and gas. Those eras lasted, you know, 10 to 12 years and probably two-thirds of the money that you made in the oil and gas business in those prior eras happened in the last six years of the year. So we've only just begun to live. I think the lady saying one time white lace and promises and a skip for luck and we're on our own way and yes, it's just begun.
SG: All right. That that makes sense. Thank you for that. This kind of piggybacks off of the previous question. You mentioned the chart, which I believe is also in this missive that you wrote, “Energy Magicians,” where you discuss the rising electricity prices due to declines in production of oil and gas. And you also note that the renewable energies “might or might not develop” to meet the projections for increased energy demand. What sorts of obstacles do companies that are looking to produce clean energy have to overcome?
BS: Well, one, the wind doesn't blow all the time and the sun doesn't shine all the time. The sun shines in Arizona almost all the time, but in Seattle and Portland, it almost never shines. And they don't call Seattle the windy city, they call Chicago the windy city. Now, where are you gonna put the wind turbines in Chicago? The answer. You know, it's another “not in my backyard” kind of thing like nuclear power was not in my backyard. So look, I think wind and solar will develop, but almost all of that's gonna be needed to cover the decline in coal fire plants; 19.5% in 2022 came from coal fired. We're closing those as fast as we can, by the way.
Fukushima, in the aftermath of Fukushima in Japan, they went from 54 reactors to seven and they're now 70% coal fired in Japan. So Japan, China and India are 70% coal fired. Germany is huge coal fired. France is nuclear. We don't have any nuclear and we're eliminating coal fired, which was 19.5%. So the wind and solar, they have got to double just to make a part of what we're gonna lose in coal fired. I can't see natural gas not getting way more expensive. I just can't see that. And that's kind of the lonely stepsister of the oil and gas companies. Right, that's the relative no one wants to talk about because the price has been so cheap that it's been a detriment to stocks like Devon and Apache and Ovintiv. But at some point in time, it might be a gold mine.
SG: That's definitely a great perspective and I actually hadn't thought about some of those things before, so thank you for that. But shifting focus a little bit, another industry you like, or see a lot of potential in currently is homebuilders. As you know, Warren Buffett (Trades, Portfolio) recently bought a handful of them in second quarter, some of which I think you own already. With interest rates so high currently, what do you find appealing about these companies? Are there any major risks?
BS: By the way, we're huge Warren Buffett (Trades, Portfolio), Charlie Munger (Trades, Portfolio) fans. I've gone to the meeting like 12, 13 times and you have no idea how professionally pleasing it is to have Warren paying more than twice what we were paying to buy his OXY and then for them to pay two plus times what we were paying to buy our homebuilders. Now let me frame this in a Warren Buffett (Trades, Portfolio) way to help you understand what's changed there.
So back in 2008, 2009, Warren Buffett (Trades, Portfolio) started buying Burlington Northern Railway. Warren had grown up in Omaha, which is the crossroads of America when it comes to the railroads. That's where the east and the west meet. And so Warren said, “We got all the way down to four railroads and things had changed.” And what he's saying is the fundamentals of the industry have changed dramatically because there's only four railroads, which means that those four now have a very wide moat. OK. What happened in the homebuilding industry is that kind of massive shift.
So I'm gonna take you back 30-plus years. There was a builder out of Washington D.C. by the name of Ryan Homes and AA, and they went bankrupt in the S&L crisis era of the late ‘80s and early ‘90s. And they reconstituted the company and they moved to what is called the land-light model. And nobody paid much attention to that for a long time, but we ran into them in 2012 and 2013 and we invested in NVR (NVR, Financial) is the symbol, that's the name of the company too. NVR and the symbol's NVR and, and they have 100% land-light model, which means they don't buy any raw land and they don't develop any property. They take out six-month options on lots that have been developed by somebody else to build on. So what happened was over the course of the last 10 years, the two largest homebuilders, D.R. Horton and Lennar looked at that and said there is a great thing to do. So today, Horton is 80% land light and Lennar is 75% land light.
What that does is takes away a great deal of the cyclicality in the industry because what used to happen is every 10 to 15 years, the industry would go through an Armageddon period where things get really bad. And what you have to do is you've got debt that you've got to service and you've got lots and raw land that becomes way less valuable in the down cycle. And you have to run that through your income statement, the grief and that's what caused NVR to go out of business in the early 1990s and have to reconstitute itself. But guess what? We just had the most difficult thing you could possibly throw at the homebuilders in the last three years. We raised rates more in 18 months than we had ever raised interest rates. Right? We went from fed funds of a quarter to fed funds of five and a quarter. OK. But they no longer are buying raw land. They're no longer leveraged. They, I think one of them, I'm not looking at it right now, one of the two has way more cash than debt and the other one has as much cash as debt. I'm talking about Horton and Lennar and, and they're no longer big land developers as part of what they do. So they're still highly profitable, generating very high returns on equity. And there's nothing that Buffett likes better, and his people that are picking stocks like Todd Combs and Ted Weschler, than buying a high return on equity business that has 92 million potential customers coming, right. A large demographic population group that's 40% bigger than the prior. So that's, it's just fantastic.
So the industry has changed. They are home manufacturers. They're not land developers, but they're trading as a group at eight times earnings with 20-plus percent return on equity. Where else can you go to buy a company that has a bright 10-year future at eight times earnings with high return on equity? The answer is maybe in oil and gas.
SG: Well, thank you so much. In your third-quarter U.S. Value Strategy newsletter, you note that there are a number of industries that will benefit from millennial consumers, which you've touched on a bit previously. And these include homebuilders, financial institutions and certain retailers. Do you think these same areas will continue to benefit from the gen Z demographic a few years down the road or do you think some trends will shift toward other sectors? Obviously, homes will probably stay. But you know.
BS: You know, if we were in the same room, I would give you a kiss on the cheek. OK, because you've made a great point. There are 180 million people in the United States that we count below 40 out of 330 million people. Now, in the short run, that doesn't make that much difference, but over 10 or 20 years, that's great for business, right? That's just a lot of people that are coming. And so the group behind the millennials are just as big. So we've just got waves and, let me give you one topic that this applies to. Should we be really worried about the social security system? No, because we're gonna 10, 20 years from now, we're gonna have way more people paying in than we have taken out because unfortunately, my group is going to die off. We were a big group at one time, but we're dwarfed by the people under 40. So when all the millennials and all the gen Zs get into paying jobs, they're all gonna be paying into the system. And the boomers, which were the biggest group before, are gonna be much smaller by then. So why is anybody worried about the health of the social security system? I don't know, makes no sense at all if the future is very bright for the social security system.
So what's my point? Yeah, we had a chart back in 2018 that showed how much millennials were gonna impact about 20 different industries, mostly surrounding necessities. And of course home was number one, you know, home mortgage was the number one increase in expense, but car purchase, car insurance, kids; clothes, yada, yada. It it it was just a list of necessities. We are still very bullish on that. We're very unhappy with the way Target is being managed right now as a company because their bread and butter is moms. So the dang business is to make them happy, right? They make the world go round. So when it comes to making money from millennials, what you have to do is refer to the progressive auto insurance companies with Doctor Rick. You have to assume that they're gonna be like their parents when they're 55. So just invest in the companies that will receive their purchases over the course of the next 10 to 20 years and you could do quite well with it.
SG: Ok, great. Thanks so much. Moving on to another bit of a trending topic for this year regarding AI, what are your thoughts on its prospects and impact? Are there any aspects of it that give you pause or cause for concern?
BS: Well, uh, do we have enough time for me to tell a short joke or should I not?
SG: Of course, you can! We have lots of time.
BS: Oh, OK. So Satan had a big convention and he brought in like 10,000 demons to a big coliseum and he said, “You know, we gotta come up with a new marketing campaign. We're not having as much success winning people to our team as I'd like. So let's break up into small groups, come back and make some recommendations on how we might market better than we have.” So they gather together and a demon raised his hand on the left and he says, “What do you guys have?” He says, “Well, we'll tell him there's no heaven!” And all the demons go, “Great idea!” And Satan goes, “No, no, no, no. We've been doing that all along. That's not new. What else you got?” Demon raised his hand on the right side of the room. “We'll tell them there's no hell!” The other demons say, “Great idea!” And he says, “No, that's all been a key part of our existing strategy. Let's take a break, come back and let's see what we could come up with.” So they take a break, they come back. Satan walks in. He says, “I had a brainstorm while we were out. What we're gonna tell him is there's no hurry.”
OK. Now, I hypothesize that about a year, year and a half ago that the leaders of the major FANG and Magnificent Seven stocks got together and they said, “Hey, this financial euphoria created by zero interest rates and 1% interest rates was so much fun! You know, how can we continue to market this to investors in a way that will keep this financial euphoria going?” And they said, “Well, uh let's tell them all about something that we've already been doing for 10 or 15 years called AI and tell him there's no hurry.” And guess what? That's exactly what's been going on. Oh, you should want to own Google (GOOG, Financial) or Facebook (META, Financial) or Amazon (AMZN, Financial) or Apple (AAPL, Financial) or whoever because of all these really cool things they're gonna do with AI that's gonna make all this money when the truth of it is they were all already doing that stuff and, and IBM (IBM, Financial) was putting their AI product on “Jeopardy” in 2011 to compete on “Jeopardy.” And they've been running commercials for their AI called Watson for over 10 years. So it's incredibly disingenuous. It is nothing but a marketing ploy and, in our opinion, there's nothing worse than keeping people sucked into a euphoria episode. Go back and ask the people that were following the motley fool in 1998-1999. How they feel about tech stocks after getting crushed into the rubble in 2000 to ‘03? OK.
So we're not saying that those companies, those Magnificent Seven, aren't great businesses and that they won't succeed as a business, but there aren't, there is no pools of capital left on this planet that don't overflow them already. Where would the capital come from to invest in them? And that is, I mean, the passive indexes are way overloaded in them. The hedge funds are making all their money from them and so you absolutely have to avoid attempting to make money by having them at the core of your portfolio. It'd be like trying to get RCA to be a winner after the 1920s. It'd be like, yeah, the, the 24 stocks that were on the Nifty 50 list at both Morgan Guaranty and Kidder Peabody in 1972. Over the next 19 years, you underperform the S&P by 50% if you own the 24 stocks from the Bifty 50 list that was on both Morgan Guaranty and Kidder Peabody's list. It's a way to have stock market failure.
SG: Interesting. Thank you for that. You brought up a lot of points that I hadn't ever considered before. But yeah, you're right. There have been a lot of AI technologies in existence already and they're just now being like, “Hey, look! Shiny!” So yeah, that's definitely a good point.
BS: It's like a fishing lure, right? Fishing lures are shiny because they want dumb fish to come by and bite, right?
SG: Definitely. That's definitely some great points that you made. So thank you for that. But kind of shifting focus a little bit more. Are there any other sectors you see opportunities in over the medium term? Like 1 to 3 years?
BS: Well, our banks have gotten very cheap. Bank America (BAC, Financial) and American Express (AXP) look very attractive. By the way, there's a millennial angle and probably a gen Z right behind them. They like to travel; even when they get married and have kids, they like to travel. And so American Express is the number one credit card for millennials. So as they get older and higher income, it's just good for American Express. And if you look at the price earnings ratios of Mastercard and, say, JPMorgan (JPM) and realize that American Express is a maybe the half bank and half credit card processor. You blend those multiples together, you get about 18 multiple and that's way more expensive than what AXP is trading at. And then Bank America is down to a big discount to book value. And Bank America and JP Morgan have more millennial customers because they have the best mobile banking technology because they can spread that cost over a larger client base 10 years ago.
So they've got the deposits for the millennials, but Amex has got the credit card that they spend the most money on.
SG: All right. Awesome. Thank you for that. What is your outlook for the economy and market for the rest of this year and heading into 2024?
BS: Well, from a historical perspective, you have to have your head in the sand a little bit to think that the Federal Reserve isn't going to succeed in slowing the economy down, but we have no ability to predict six to 12 months. Stuff like that.
What we would say, though, and if you go back and look at Warren Buffett (Trades, Portfolio)'s talk in ‘99 summer, Sun Valley Allen and Co., which is recaptured in the November 1999 Fortune magazine edition by Carol Loomis who edits Warren Buffett (Trades, Portfolio)'s annual letter, you'll find that from 1964 to 1981 the United States economy grew 4.3% per year and the stock market went nowhere. One thousand on the Dow lasted from ‘64 to 1982. OK, so what's the moral of the story? You can have very good economic growth and a lousy stock market for 10 or 20 years. Where are we right now? We got all these young people. Is the economy likely to be good as they get older or bad as they get older? And the answer to the question is the more people between 20 and 50 you have, the stronger your economy is gonna be. So guess what. In general, we likely have a stronger economy and in general when the economy is stronger, what ends up happening is interest rates stay higher and you get compacted price-earnings ratios. So you've got to be real careful with high P/Es and you gotta look for your investments among below-average P/Es among companies that might benefit from the commerce that is created by those people.
SG: That makes sense. Thank you. That's definitely good advice and I know you, you know, nobody has a crystal ball to see what's going on, but I think that's a good way to approach or a good strategy to approach trying to figure out where what's gonna happen in the future potentially. What is the most important advice you have for individual investors?
BS: Well since most financial advisors are statistically not likely to be great stock pickers, most individual investors are also not likely to be great stock pickers. So Jack Bogle's advice of using the index was good advice until what he recommended got too popular and that's the problem.
So the answer is to diversify your investments into attractively priced choices in asset allocation. So again, we're not asset allocators, our fund trades at 11 times earnings. If you can put into non-U.S. market vehicles like an international mutual fund to get away from the concentration in popular U.S. stocks that looks pretty meritorious. We have a strategy outside the U.S. run by my son, Cole, my co portfolio manager. He's heavily invested in Canada and in Europe because there's lots of cheap stocks that fit our vision of the future. Of course, we advise them to seek out our strategy as part of what they do. But be very careful and there are financial advisors that do a good job of guiding you toward meritorious asset allocation. There are good asset allocators out there. But again, uh there's way more people that think they're good at picking stocks and there are good stock pickers. I'd say like by a mile, you know, I think if you ask 100 financial advisors, 50 of them will tell you they're good stock pickers. There's probably 10, but among those 100 there might be 70 that do a decent job of asset allocating. We like our shepherds there.
There's lots of what I call good shepherds out there. Men and women of good quality and well intentioned that shepherd people. And let me make a mention on that; Buffett's been kind of down on shepherds. I think the statistics from Dalbar show that people look after their own stuff significantly underperform those that have a good asset allocation strategy from a shepherd, even though you gotta pay them, right, you gotta pay more to have somebody help you. The Dalbar study shows that most of the people that do it yourself earn way below, you know, they earn half the S&P return in the process even though they save money on advice.
SG: Interesting. I had no idea. That's awesome. So it's a good little plug there for that. And then to just kind of piggyback off something you mentioned in your response. You mentioned you have some investments in Canada and Europe. Could you share one or two of the opportunities you see there?
BS: Well, in Canada, there are long-life oil assets, OK. For example, Ovintiv owns oil properties up in Canada. Now, ironically, that's why it's one of the cheapest American oil and gas stocks of merit, which is silly. Well, part of that is because the Keystone pipe pipeline got the Kibosh put on it by the Biden administration, so that makes it less easy to transport the inexpensive and longer life oil down from Canada down through to the mouth of the Mississippi River. So the bottom line is the same things we've been talking about. We own Canadian lumber producers because we like the U.S. homeowners because. That's where they buy their lumber. We like the oil and gas business in Canada.
We like a couple of automobile manufacturers in Germany. Right there, and because there are no Magnificent Seven stocks in Europe, there are indexes. The indexes trade way cheaper than the American indexes. And therefore, if you're an out of favor stock in an out of favor country in an out of favor continent, it's pretty good shopping.
SG: That's good. Thank you for sharing those with us. And just to round out our time here with a more fun question, not that investing is not fun, but, you know, anyway, whether they are investing related or not, could you recommend three books and three movies for our listeners to check out and please also share why you like them?
BS: Wow. Now you're getting into some of my favorite topics. OK. So first of all, when young people, and I talk to young people all the time, that, you know, are either already in or interested in getting involved in the investment industry, I recommend they read the Bible, they read “The Intelligent Investor” by Graham and, and they read “A Short History of Financial Euphoria” by John Kenneth Galbraith, who was a Harvard professor, but also the key economic advisor to both the Kennedy and Johnson administrations. It's a 125-page book. You read it right now, it takes 2.5 or three hours to read it and you think he wrote it three weeks ago.
So, by the way, we did a podcast with a Catholic priest from Grand Rapids, Michigan, Robert Sirico wrote a book called “The Economics of the Parables.” And I highly recommend that book to everybody. He basically breaks down the economics of many of the most famous writings in the Bible. So the point is that there's a lot to learn in those three books that can be very helpful.
Movies. Oh my gosh, I just I love movies and I end up quoting them all the time in my writing. So this latest missive this week is based on “The Godfather.” So obviously “The Godfather,” one and two. I count that as one movie. And the series that tells the story of making it that's out called “The Offer.” I count that as one movie. So I hypothesize it much like the big mafia families got together to have a peace gathering, right? And they said, “Hey, you know, we wanna sell heroin to people and we need your political cover and, and we'd stop fighting if you'd let us sell these drugs to people.” And, and I compared that to the tech people getting together and saying, “Hey, we wanna promote this AI thing like it's brand new. Are you on board with this?” And then what's gonna happen is these make, what's gonna go wrong with the Magnificent Seven is they're gonna start cutting each other's throats. That, that's, that's the moral of the story. OK.
So “The Godfather,” I mentioned “Forrest Gump” and then, it's really hard. I've got like 30 that are in my top three.
I'm a huge Jack Nicholson guy. So, “One Flew Over the Cuckoo's Nest” and, it's escaping my, the title is escaping my memory. He had a great line in there, where he, he, the lady comes up to him, he wrote ladies novels and, you know, and the lady comes and says, “How do you write so well about women?” And after that, he said, “The fact that I understand that makes me feel really good about myself.” By the way, I have said that so many times, “the fact that I understand that makes me feel really good about myself” is, you know, people that know me really well are annoyed. I've said it so many times because I don't know, we, by the way, we're liberal arts people, we know a little bit about a lot of things, right? You know, we don't use algorithms in our business other than the ones that are, you know, human algorithms in the brain. But we call that real intelligence, not artificial.
SG: All right. Well, thank you for those recommendations. I'll be sure to check the ones out that I haven't before. There were a couple in there that sounded really interesting. But thanks again, Bill, for coming on and sharing your thoughts with us and answering our questions. It's always a pleasure to have you.
BS: All right. Thanks for having us. Blessings.
