BILL SMEAD: Boy, that is such a great question. And it goes back to something that I remember trying to explain to people years ago about the connection between the United States economy and the United States stock market.

So people were always baffled that in the middle of a recession, when people's business attitudes were incredibly dour, that stocks and bonds would take off, that people would bid up bonds due to lower interest rates and they would bid up stocks even though the current outlook looked terrible. And I tried to explain it to them that when the Fed creates liquidity, if business activity is low, that money sloshes into the stock and bond markets.

So it's a great time to be in stocks and bonds when the Fed is friendly and the business activity is low. When the business activity is high and the Fed is the enemy of the markets and pulling liquidity out of the marketplace, which is where we are now, it's just the opposite. The economy is pretty good and stocks are doing terrible. Business sentiment might be pretty good. Brian Moynihan, the CEO of Bank of America, said yesterday he looks at what's going on with households and sees a pretty strong economy going forward.

JARED BLIKRE: And then does it matter what the Fed does at this point, whether it's 25 or 50 basis points, whether they go ahead with quantitative tightening that is actually shrinking their balance sheet maybe in May or June this year? What does this do for the global economy because it's clear that the Fed is behind the eight ball, stuck behind the eight ball right now, and they're trying to play catch up. Do they blink, do you think? Or are they on what Jerome Powell previously said, autopilot, even though he's never going to say that again. Do you think this is something they have to do?

BILL SMEAD: Well, it's something they had to do about a year or a year and a half ago. And so since they didn't do it a year or year and a half ago, they are going to be constantly behind the curve. So you've got a series of forces at work here that doom them. The first one is when the Fed and the federal government spending provide massive liquidity to the system for whatever purpose-- it might be the Vietnam War and Johnson's Great Society or it might be the pandemic war and the quarantine shutdowns. We don't care what it is. It is, right. Massive liquidity has been introduced into the system.

Now, when you do that and you have way more human beings in the household formation years of their life like we did in the '60s and '70s with the baby boomers, and now we have with their children the millennials, you've got a cocktail of inflation that is powerful. So you've got way too much money with way too many people who are going to do things out of necessity rather than by choice.

We're talking about necessity spending. Rent, gasoline, cars, houses, children, et cetera. Necessity spending. Too many people with too much money chasing too few goods. And then just for fun, in both cases, we had an oil embargo in '73, '74, and we had the Arab Spring in April of 2020. So you've got all the precursor all set in place to do an extended period of time where inflation becomes the most important thing in the economy and then watching investments and everyone adjust themselves to those facts over the following 5 to 10 years.

JARED BLIKRE: And how should investors be adjusting themselves to those facts right now? Let's bring this down to some concrete examples. Also, I have your newsletters. I have the ability to share my screen here. So if you want to reference any of the charts or pages in your newsletter as both the international one and the US one, we can do that as well.

BILL SMEAD: Well, that's fine. So we're calling this the Twilight Zone because it's literally things are starting to get very dark in the land of growth. So Buffett likes to say that Aesop invented investing. And Aesop says a bird in the hand is worth two in the bush. Well, as interest rates declined over the last 40 years, my 41 years in the investment business-- actually it'd be 42. I got hired June 2, 1980. The interest rates have been going down off and on for 42 years. And lower interest rates have a gravitational pull up on price earnings ratios.

So what's happened is Pavlov's dog has been trained to chase growth because the lower the rates got, the more the two in the bush was worth. But now we're going to do exactly the opposite. Interest rates are going to normalize. For example, let's be optimistic and say that inflation settles in at 4% to 5%. Well, what are short and long-term rate interest rates going to be at 4% or 5% inflation? The answer is short rates are going to have to be higher than 4 or 5. So that's going to be 4 and 1/2. And then and then 10-year rates are going to be 5 and 1/2 or 6.

Well, from where we are now, we're talking about a terrible bond bear market. And you're talking about having to reprice the two in the bush for the next 5 to 10 years. So that's why it's getting very dark out there. So today, in a matter of over the last 24 hours, this statistical fact caught up with Netflix shareholders. The two in the bush are not worth what people thought they were going to be worth. And you're going to see a lot of that. We're only in the early stages of this.

JARED BLIKRE: So you mentioned Netflix, by the way, having its second worst day ever. I think it's lost something like $55 billion in market cap today alone. By the way, three months ago, Netflix also lost $50 billion in one day after his prior earnings announcement. And it just kind of reflects maybe as you're talking about a new normal. I know you're not a growth stock investor. But is growth simply dead for a while as you expect value to outperform?

BILL SMEAD: Boy, that's a great question. In our company, we like to talk about we work for investors that fear stock market failure. And financial euphoria is just a ticket to stock market failure. So think about what we did to people. And think of history. So we had the internet thing go wild from Netscape going public through the end of 1999. And so it became, you know, that's going to change our lives. Were they right? It changed our lives. Did we massively over capitalize the internet bubble? Yes.

And it created stock market failure. And it drew millions of Americans into the stock market in a way that they had never participated before. So now this time we've got the social media and the cloud services and all those folks, the FAANG companies with their network effects and their unstoppable success stories going on. And of course then it trailed down into the DocuSigns and the Pelotons and the Paypals of the world. It just fed on itself. People learned, hey, buy the thing that just went up the most last year. And then it went up the most the next year. And then it went up the most the next year.

So your viewers need to understand the stock market was created to move money from impatient people to patient people. And when you get into a euphoria episode, the motive becomes, hey, I've got to get some of this myself. I need to get on that train. And so where we are, we're at that critical moment where everybody is learning the most important lesson, which is don't lose money. And the second thing is refer back to lesson number one.

JARED BLIKRE: I like that. I want to get to some audience, some viewer questions right now. Bill, love your insights. By the way, this is coming from Steve Mancini. Love your insights. Would love to get your take on housing and homebuilders. Do you have a preference for these companies to buy back shares or continue taking market share in their current environment? And I just want to add the last time we talked a year ago, you were very bullish on housing through the end of the decade because of secular reasons. We can go over those. But Steve wants to know if you have any company preferences or just, I would say in general, how are you going to approach this market?

BILL SMEAD: Yeah. We own Lennar and Horton and NVR. And together they build about one out of every five homes in the United States. So the reason that we're so passionate about that group of companies is, again, a 5 to 10-year outlook. And there's plenty of ups and downs. Whenever you're in an industry affected by people's view of interest rates or the economy, you always have lots of ups and downs. But there's a series of differences in this industry that people are not pricing correctly at the moment.

The first is it used to be a completely fragmented industry. Everyone could tell us who built the homes in their hometown when they were growing up. And it used to be all over the place. Mom and pops and a ton of people. In 1994, Dr. Horton-- we call him Dr. Horton, D-R Horton-- had 1% market share, and they were the largest builder. They now have 10% market share. Lennar has about 7.8%. And NVR has about 2.2%. So together they're 20% of the market. So it used to be fragmented. And now it's not fragmented. So in effect, they are the McDonald's of homebuilding. And when McDonald's came on in the '60s, they've unfragmented the restaurant business. OK.

The second thing that's happened is these companies used to be the buyer of the raw land, the developer of the raw land. And therefore, they had to leverage their balance sheet to do their business. They were in the business of using their balance sheet to make money.

Well, now in the case of Horton, it's only 24% of the homes they build are lots they develop. It's only 34% for Lennar. And it's 0% for NVR. So they have switched to being home manufacturers. And as the industry gets less fragmented and they have scale, they get the first Whirlpool appliances. They get the first of the union trade labor. It's just this wonderful set of circumstances. And there's 90 million millennials that got kicked into gear by the pandemic to want a house.

And I was back to the dotcom thing. It was the Y2K thing that put the grand finale on that internet bubble. And the pandemic put the grand finale on the FAANG bubble. It just lines up perfect. You had to have something at the end that got people way more jacked up on the whole thing, even though the 10-year future, the two in the bush, was about to get a lot less expensive due to interest rates.

JARED BLIKRE: Yeah. I remember in 1999, that was when Greenspan at the time added a flood. He just flooded the market with liquidity in preparation for all those problems that never materialized because of the Y2K issue. But back to the housing, I do have a quick follow up for you on that. Mortgage rates, multiyear highs. That's as the 30-year Treasury rate reaches 3%. I think the 30-year mortgage rate is 5% now. How much of a headwind is that, at least on maybe some of the smaller time frames, for the housing market in some of these investment plays you're looking at?

BILL SMEAD: Wonderful question. So first of all, a 5% mortgage with inflation running substantially higher than that right now is money that's being given to you.

JARED BLIKRE: Good point.

BILL SMEAD: Second point. We look back over 60 years at what the biggest homebuilding years were as compared to population. Very important to compare how many homes are being built to population. The answer to that is I think the third biggest percentage move in homes built divided by population was in 1983. And that was 13 and a quarter on the mortgage rate.

So think in terms of this. If you can borrow money at way below inflation to buy a piece of property that insulates you from rent increases, right-- it's a fixed-rate mortgage. So you become your own landlord at negative real interest rates and then get tax deductions on top of that. Now, here's what's going to cost people a lot of consternation. They're looking at their expensive metropolitan area they live in. They're going, gee, five and a quarter to buy a house now in Phoenix after it's gone up or any of these other places.

You're saying, wow, that gets very unaffordable. We're going to see the largest intracountry migration the next 5 to 10 years since the coal mines closed because millennials are going to be forced to arbitrage land values to get the home they want. And so they're going to spread themselves all across the country. So the booms are going to be in the suburbs of Cleveland and Detroit and Kansas City and St. Louis. It's already happened at Boise and Henderson, Nevada and Reno, Nevada. Now it's going to move to Helena, Montana and an hour away from Nashville and all those kind of things.

JARED BLIKRE: Well, I want to transition now to Warren Buffett because his name is in the webinar title here. And we do have a question from an anonymous attendee. Buffett was sitting on a lot of cash for a long time and has been deploying quite a bit of it lately. Doesn't this tell us he thinks we are near the bottom in the sectors those companies he purchased are in?

BILL SMEAD: Oh, boy. Again, great question. First of all, that's not so much the way he operates unless the stock market is trading at 80% of the GDP like he was in the financial crisis when he wrote his editorial in late September in the "New York Times" buy American. I am. Because the stocks were so depressed in relation to GDP that he couldn't resist just buying a bunch of stocks. What he's doing now with OXY-- let's just use OXY as a poster child. Since we own a big slug of it, it's fun to talk.

JARED BLIKRE: I was going to get to them anyway. So I'm glad you brought it up. I'm going to put up a chart here.

BILL SMEAD: So Buffett said he was reading the transcript of their quarterly earnings report. And we know exactly what hit him like a ton of bricks was the fact that they had, in the fourth quarter last year, they had $2.9 billion of free cash flow. And at the time that he started buying it, maybe they had a market cap of, what, maybe $40, $45 billion. Well, you annualize it means they're generating 25% of their market cap at that time in free cash flow.

And, remember, they borrowed their money to buy Anadarko back in 2019. So think about it this way. If anybody likes to think about the hedge fund world, the perfect trade on January 1 of this year was to be short long-term bonds, which means sell them first, right. That's what shorting is, selling them first. Short bonds. Long oil. And what was OXY on January 1? Short bonds that they'd sold to buy Anadarko, long oil. So Buffett is looking at this and going, wait a second. A company that used to not have great returns on equity is about to go through great returns on equity in a way that he never could have envisioned.

So I don't think he envisioned when he put that money into OXY, for the preferreds, back in 2019, I don't think he thought we'd get to $100 barrel oil, even though he said something to all of us in the annual meeting a year or two ago that helped us think about this, which was he said, you know, the people that think we're going to make a quick transition away from fossil fuel and the people that think we never will are both crazy. He said that. Well, when the guy that owns the largest energy utility in the United States of America says that, you pay attention.

JARED BLIKRE: Is Berkshire going to buy Occidental, do you think?

BILL SMEAD: I'd say there's maybe a one in four or one in three chance, which there's a very good chance.

JARED BLIKRE: Yeah. Because they're sitting on all that cash. If not Occidental, any other targets you think might finally sop up some of that extra cash?

BILL SMEAD: Well, let me give you another example. We just talked about housing. He owns the largest home builder in the nation, Clayton Homes. And he owns seven or eight private builders that Berkshire bought. And then he owns the second largest real estate brokerage company, Berkshire Hathaway Realty. OK. So DR Horton owns like 7% of DR Horton. And Stu Miller owns about 7% of Lennar.

It's like when the time comes for those guys to sell, we know that Buffett is bullish on housing. He said it a number of times in the last three or four years. So the answer is it would fit completely within the scope of Berkshire Hathaway. And as a guy that's about to pass the baton to Greg Abel, Greg Abel runs the largest energy company utility in the United States of America. Nobody would be in a better position to understand the benefit to Berkshire Hathaway's energy utility than owning Occidental Petroleum.

JARED BLIKRE: Well, let's talk about that succession real quickly. I perused comments before. I don't remember who it was by. But somebody was asking about Warren Buffett's succession. As you said, it was kind of leaked that it's going to be Greg Abel. I believe that was at last year's meeting. What do you expect to happen at that time? It's very well broadcast. But also no one quite has Buffett's Rolodex.

BILL SMEAD: Yeah. And anyone in the world would take a call from him. I think probably most everyone in the world would take the call of the CEO of the 10th largest market cap company in the United States anyway. In fact, it might be-- it might have moved up the list in the 10th largest world's market cap because some of those tech stocks have dropped off the list. But anyway, so you're right in some ways.

In other ways, I don't know if you read the story, or maybe you guys did this story about when the guy was finding out about Peter Thiel making so much money by sticking low-priced PayPal shares into his Roth IRA and ended up with a gigantic Roth IRA. Well, whoever wrote that report did some research and found out Ted Weschler had paid the tax on his IRA rollover and then put all of his IRA rollover money that was into Roth IRA and that his Roth IRA might be worth like $400 million now. So my criticism in the changeover is why didn't Buffett two years ago when he was kind of in his quarantined coma just give Ted Weschler another $30 billion and say, hey, Ted, this looks like a good Ben Graham moment. Go shopping.

But he didn't give them the money that he could have done some wonderful damage with. And so the answer is the sooner you get Ted in his chair and the sooner you get Greg in the CEO chair, it'll be a different company, but it'll still be-- in some ways, it might be more interesting to us because we've felt-- and we've been accurate on this over the last five or six years. We have de-emphasized our ownership of Berkshire Hathaway to emphasize things that we're doing because we thought we we're smaller. Like massively smaller.

And he said many times as much capital as we have is going to impinge on our ability to make higher returns. And he's been very honest about that. And you've got to give him a lot of credit. He's forewarned people about that. And, boy, two years ago, that was a perfect situation. He would have been firing a fire hose into a teacup back then. But if he gave $20 billion to Todd and Ted, they might have been able to do some real fun damage.

JARED BLIKRE: Well, speaking of Todd and Ted here, we've got to do one more question here. Then I'm going to put on a little show here about Yahoo Finance Plus. But one more question. This comes from anonymous. Hey, Bill. You wrote a piece on letting Weschler-- just mentioning him, one of his two portfolio managers-- has pinch hit for Buffett. Could you comment on any of the Berkshire portfolio companies that you think are most compelling?

BILL SMEAD: Well, somebody asked me about HP-- the new HP investment by Berkshire. That's got Todd or Ted written all over it because you can tell by the size, the positioning size, they each-- I don't know. They each run maybe $15 billion. So a 4% position in a $15 billion portfolio is $600 million. So whenever you see an investment that size, you can kind of think, well, that's probably Todd and Ted. Now, I noticed in the last report, there's some pretty good sized investments in Japanese stocks. And it's big enough to where that might be a Warren thing.

But, basically, position sizing. So OXY, that's Warren. Buying 15% of OXY, that's big enough that that doesn't fit very well into a $15 billion portfolio. Whereas the HP, it does. So that's how we get a feel for who's doing the picking. And, again, what we learned about Ted Weschler-- we don't know as much about what Todd Combs is doing. But when it comes to Ted Weschler, we learned that that guy is a great stock picker. And, again, I won't be a bit bashful to turn him loose.

JARED BLIKRE: All right. We're going to take a second here. I'm going to share my screen. And we're going to talk about Yahoo Finance Plus here. So just give me two seconds to set this up. And there we go. All right. Well, if you were to log on to Yahoo Finance Plus through the desktop app, this is what you're going to see. I have a portfolio in here that I loaded several years ago.

And as you can see now, it is underperforming the S&P 500 as of this year. I don't care because it's completely arbitrary. But there are a number of insights here to be gleaned from Yahoo Finance Plus. One of them is valuations. And this has to do with the Peter Lynch model of valuation. And you can see here as we go through some of these lists, portfolio allocation, portfolio news. Up at the top, we do see that the risk profile is a moderately aggressive here. Valuation, five. We're overvalued by the Peter Lynch method. Three, nearly fair value.

Two, undervalued. You can look at the diversity based on your sector holdings. 68% happen to be in communication services. That's going to be companies like Alphabet, companies like Facebook. Haven't done so well. So maybe a little bit over subscribed to those sectors. Others, let's see. Energy, just a little bit of exposure there. Not too good in the current environment. And consumer cyclical about 15%.

I'm going to go back and illustrate some of the other highlights that you can find in Yahoo Finance's Plus. Investment ideas is something I'm going to focus on here. And let's just get to that straight away. Now, two styles of alerts that you're going to get here, fundamental and also technical. Let's go over the fundamental ones here since not doing too much in technical analysis today with this particular webinar.

But here's Hasbro. And these are based on the fundamental research reports of Argus Research.

BILL SMEAD: Nick. Nick.

JARED BLIKRE: And you're going to get-- and you're going to get some price targets.

BILL SMEAD: Are you on a call?

JARED BLIKRE: We're hearing you, Bill. If you could just mute yourself

BILL SMEAD: Grab my water.

JARED BLIKRE: We do have a number of bullet points here. If you want the full report, you can get that by clicking View All Reports. And you're going to see a number for this particular stock, Hasbro right now. I'm going to go back and also show you what is available in terms of the technical setup. So we're going to filter by technicals right now. And let's just pull up something. I'm looking for a big ticker. Not seeing a big ticket right now.

But the benefit is that you're going to get a lot of ideas to screen from in here. Now, if we view the chart, we can see the technical formations here. Bottoming triangle. This is a bullish formation according to this research right here. You have mid-term target-- excuse me. You have midterm slightly bearish here. Long term is bearish. Short term is bearish. We have resistance, support levels, stop-loss levels.

And if we go back right here, we can view the original report. Let me just get back there. And let's see. Pool is-- I think I scrolled down quite a bit further than I'm seeing it right now. So I'll just move on to another one. Here is Yelp. And this is a diamond bottom pattern that we see here. Let's view this in the chart. And we can see that right there. And this is a bullish pattern. So we're seeing the longer term is aligned with the mid term and the short term as well.

Another feature I found really helpful personally in Yahoo Finance Plus is the community insights. And here you're going to find-- this is based on data that we have based on user traffic at Yahoo Finance, as well as aggregated data on portfolio performance from people who have uploaded their portfolios here. Again, aggregated data.

So if we look at, for instance, Twitter, we got a little spark line there. You can see this goes back several weeks and how the visitor interest has waxed and waned. We can also see portfolio changes for the last one, two, three, it looks like year. And you can see a lot more additions than removals. Although for Twitter, we can see the removals from the portfolio going up and have now exceeded the additions. So that's an interesting feature.

And then community conversation. This is based on sentiments. We got negative, neutral, positive here. All in all, a pretty powerful tool. You can sort by consumer cyclical. Energy. So the various sectors here. And there's a lot more to be gleaned from this page in particular. So now I'm going to kick it back to you, Bill. And let me just-- let's see. What have we talked about here? I said we're not going to talk about crypto. But I did say we're going to talk about gold. And we've seen gold kind of perk up recently. And your views on it, well, it's a currency. But it's for speculation. Can you expand?

BILL SMEAD: Well, we are entering a phase of going from being the euphoria in the market was around technology and futuristic things. The two in the bush. And I would guess that in three or four years, we'll wake up and inflation beneficiary investments will be the cool kids on the block. It will be the thing that everyone is chasing. And so gold always gets a nice bid when the inflation is causing them to be the cool kid. So they are one of the cool kids.

So you got gold. You got oil. And then of course, you've got Scarlett O'Hara in "Gone With the Wind," who was really in a lot of trouble, and she could hear her dad whispering into her mind. Scarlett O'Hara. Land is the only thing worth working for. Land is the only thing worth fighting for. And land is the only thing worth dying for. Go back to Tara. So land, gold, commodities like oil. They become the cool kids. In 1981, 29.74% of the S&P was in energy. It's now, what, 3 and 1/2 or 4?

OK. So I would guess that in societal importance, it's always been about 10% or 15% of the economy. So we're a long way from 10% of the S&P 500 on oil. Gold is a classic inflation hedge. It protects you from inflation because it goes up in price as the inflation goes up. We don't own gold. We don't buy a gold because it's an inanimate object.

We like the gasoline because it's an addictive legal drug. It's like owning Coca-Cola. If you like the taste of Coca-Cola, you want to own Coke. If you drive a gas-powered automobile or if you're in California and you use a lot of electricity, you've got gas-powered turbines that are making electricity. We don't care. It takes 60 barrels of oil to create a Tesla vehicle.

JARED BLIKRE: Good point there.

BILL SMEAD: Think about that.

JARED BLIKRE: Exactly. I want to get your take on the financial sector. Traditionally viewed as a value sector. But we have a lot going on there because we have the Fed aggressively hiking rates, or at least the expectation is that they will. We have a yield curve, which just inverted by the way, the twos tens anyway. Not on all the different tenors there. But you hear the word recession, and how does that fit into your view of the financial stocks right now?

BILL SMEAD: Well, there's three things at work. Two positives and one negative. OK. Our view is that the bond market's going to do poorly the next 5 to 10 years. And the S&P 500 and growth stock investments are going to do poorly. And guess where most of the money is? In the S&P 500 index and in growth stock investments and then in the bond market. That's where most of the money is.

So the financial advisor component of a Bank of America or a JPMorgan is going to struggle. The investment business is not going to be the incredible gravy train for Bank of America and JPMorgan that it was in the past 10 years. OK. That's the negative. The positive is the millennials have never been liability customers. So you got 90 million adults that have barely borrowed money to buy houses and cars. And so they're getting kicked into gear as liability customers. So that's a positive. A lot more business to do with the largest adult population group.

The third one is the last four or five years, the banks learned who has money on deposit that doesn't care about what they get paid, which is going to make the banks incredibly slow to bring short-term interest rates up on their savings accounts and their money market accounts and their short-term CDs compared to past history because they know who doesn't care. They know who just has the money there as a place to hold it. And so what they pay people is going to go up way more slowly than what they charge for loans.

JARED BLIKRE: Yeah. It's interesting to think about it that way. Here's a quick question, which I will answer. Can we have the presentation file after the conclusion, please? Yes. And we are also going to-- I believe we're going to email it. We're also going to be posting it on Twitter. At least I'll be doing that in the next 24 hours as well. Here's something regarding Buffett and Munger. Curious to hear what Bill thinks about the market warnings from Charlie Munger and Jeremy Grantham actually. Do you think these will have major spillover effects to the economy?

BILL SMEAD: Wonderful question. We have a chart in tomorrow's webcast. And it shows the eight historically valid stock market measurement tools that have had an ability to forward predict equity returns over the following 10 years. So everything from Shiller's Cape and Buffett's stock market capitalization to GDP, the Tobin Q.

All the ones that have had any significant statistical validity. And they're charted in colors over the years. And you can see there have been times when those eight methodologies said that for returns look very attractive, which would like be in 1981 and right after the '87 crash or in 2003 or at the bottom in '09, and then the times when you wanted to be really nervous, which was like 1999 and six months ago. OK.

So what they're telling you is the returns are going to be terrible in the index. And they're going to be terrible in growth stock investments. And so Grantham is right. Munger is right. And people need to adjust what they're doing appropriately. Our portfolio is the farthest away from buying great growth companies at a reasonable price, which is the easiest thing for us to do, to owning wonderful cyclical businesses that will be the most likely to benefit from 90 million millennials doing necessity spending, which is basically the value trade.

JARED BLIKRE: It sounds like your position for that for sure. I want to shift gears a little bit. Do you have any advice specifically for my high school investing students? I think that's a great question because we got a lot of new investors in the market. I think the stimmy checks have largely been spent. And, unfortunately, a lot of people lost their shirts last year in the market overall as the initial growth trade kind of petered out in the early part of last year. Even though it came back, we know that it hasn't come back at all this year. What would you say to some high school students who are dipping their toes in the stock market for the first time?

BILL SMEAD: Great. I will connect your prior question about what Munger and Grantham say to the kids. So when we have interns come and work for us, the first thing they ask is, what would you read? So the first thing I'd have the high school kids do is read three books. OK. The Bible, Ben Graham's "Intelligent Investor," and John Kenneth Galbraith's 125-page paperback "A Short History of Financial Euphoria." Great book.

So what do they each do? Obviously, the Bible. The wisdom in there associated with investing is huge. Ben Graham's "Intelligent Investor" teaches you a lot of the framework that Buffett works off of. And then "A Short History of Financial Euphoria" tells you that most of the problems people have in investing is by chasing popular investments. You do not want to chase popular investments. That is the wrong behavior. And so I would start there. OK.

And then the second thing you do would be to remind them of their own circle of competency. So I have my wife and I had five millennial kids. So I'm a bit of an expert in the behavior of millennials. And then my wife is one of the great all time shoppers because she had a large family. So she had to do everything from Costco to all the places that you'd shop, and then is it very generous person on top of that. So she's always shopping for gifts, et cetera.

So hedge funds will pay somebody a lot of money to fly helicopters over mall parking lots in November and December to find out what's going on. Or they'll trace credit card receipts. All I've ever had to do is talk to my wife. So I've got a pretty good circle of competency that operates there. Find your circle of competency. OK.

What are your hobbies? What do you like to do? What do you think you're knowledgeable about? Are you like Bill Gross? Did you count cards and play blackjack? Were you like Buffett and went to the horse races and then started a tout sheet? Do you like to take well-stacked risks? Because, really, common stock ownership is stacking risks. That's what it is.

And a lot of times you can get by owning an index as long as you're in the middle valuations to the low valuations. But every 10 to 15 years, the index gets caught up in the most popular trades, and then you've got to be real nervous. So figure out what you know, what you're good at, what you like. And then focus that when it comes to making investments.

JARED BLIKRE: And you just touched on risk. And I want to go back to that because, how do you specifically in your firm manage risk? I think it's a point that really is lost on especially newbie investors. Everybody who's been in this game for about 10 years or so has learned it along the way probably a few hard times. How do you manage risk for your clients?

BILL SMEAD: That, boy. We got to take you to our next institutional presentation. You're asking the perfect questions. So we have eight criteria for common stock selection. It's literally the backbone of what we do. You could forget all of our knowledge of economic history and stock market history. You could forget any premonitions we have about what's going to happen in the next 5 to 10 years. And if you just stuck to our eight criteria for common stock selection and then practiced our discipline of every three or four years we try to figure out where we're wrong and we sell poor performers and then as much as we possibly can we hold our winters to a fault.

So if you look for the companies that fit our eight criteria-- things like a long history of profitability, consistent free cash flow generation, wide moat available at a big discount to where they've traded out in the past, shareholder friendliness, strong insider ownership with recent purchases. There's eight of them.

So as long as we work off that, that's automatic risk abatement right there. Or like Munger would like to say, it's automatic ignorance avoidance. So a lot of people say things to us like, you know, Bill, you guys have done pretty well while the growth stocks did well between, say, 2011 and 2021.

Why is that? Well, because we held our winners to a fault. And we were operating off of the backbone of our eight criteria. That led us to eBay and Starbucks and Home Depot and Target and some pretty darn good growth stocks that we owned. Qualcomm, et cetera. So that gave us a framework for buying deeply out of favor of growth stocks. OK. And now we've kind of pivoted and turned our attention toward companies that would benefit from inflation that can meet our eight criteria for common stock selection.

JARED BLIKRE: Bill, we got one more question. We've got time for one more. Just a couple of minutes. Fun softball question for you from anonymous. This will be my first year attending the Berkshire shareholder meeting in Omaha. Have you been? If so, any advice or suggestions?

BILL SMEAD: We went 11 consecutive years until it went virtual. And I'm not going to be able to make it this year. I've got a very dear friend's daughter is getting married that I need to go to. I will watch it, of course, and study what he has to say. I highly recommend it. It's something you should do at least once. We've had most of our employees have gone to it for that reason.

The fact that these two men will sit there for hours and answer questions in an honest way is so wonderful. And so it just reminds me of how thankful we are to Warren Buffett and Charlie Munger, how kind they've been, what great teachers they've been. I cannot thank them enough for what they've done. And it's a chance for you to get up close and personal with that and then just be surrounded by a bunch of relatively wise, affluent people that have taken full advantage of that in many cases. It's pretty entertaining.

JARED BLIKRE: Yeah. I've seen quite a few of them myself. Really appreciate your time here. Got to leave it. But lots of wisdom. I hope everybody paid attention, especially to that last part about risk management and the books to read if you're just getting into investment. Lots and lots of wisdom there.

Thanks to everybody for attending. This has been Yahoo Finance Plus webinar with Bill Smead, Chief Investment Officer of Smead Capital Management. Thanks again.

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