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Argo and Ethel: America Has Never Been a "Rose Garden"
Smead Capital Management
By Bill Smead
November 13, 2012


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Dear Fellow Investors:

We recently had the pleasure of seeing a movie, Argo, and a documentary on HBO, Ethel. Argo is the story of the rescue of the six Americans from the Canadian Ambassador’s residence at the time of the Iranian takeover of the US Embassy in Teheran. Ethel is a documentary which tells the story of Ethel Kennedy, the wife of Senator Robert Kennedy. It was produced, directed and narrated by Ethel Kennedy’s youngest daughter, Rory. I rate both of these films highly and believe they tell US investors something they need to be reminded of.

Argo recounts the lousy choice US diplomacy had pertaining to Iran in the 1970’s between a despicable dictator, the Shah, and the chaos which might occur in his absence. It showed the hatred the Iranian people had for the US and it reminds us how incredibly miserable things were in 1980.

Not only were dozens of Americans being held hostage and psychologically tortured, but oil and gas prices were soaring in the aftermath of the second oil embargo. Interest rates were hitting 200-year highs at 20% on the bank prime interest rate and long-term treasuries were heading to a peak of 15% on the ten-year and thirty-year bond. Mortgage rates were in the high-teens and double-digit inflation caused residential housing prices to be elevated in price. The combination of a record setting number of baby-boomer first-time buyers and the assumption that real property was an inflation hedge drove a severe lack of affordability. Smoke-stack industries were being driven into bankruptcy and down-sizing, which led Billy Joel to write the song, “Allentown”, describing how damaging these circumstances were on US manufacturing companies and the towns where they were located.

Ethel Skakel married Robert Kennedy in 1950 and together they had 11 children. Robert Kennedy was the younger brother of John F. Kennedy, the senator from Massachusetts, who was elected president of the US in 1960. Robert served as the US Attorney General during his brother’s administration. Robert was elected to the US Senate in the state of New York in 1966 and ran for President of the US in 1968 on an anti-Vietnam War and Civil Rights platform. Ethel was pregnant with her eleventh child at the time of her husband’s death.

Things were miserable in the US in the 1960’s. African-Americans were only allowed into colleges in the South with military protection. The President was assassinated in November of 1963 as a young man with two children of his own. In 1968, the spiritual leader of the Civil Rights movement, Dr. Martin Luther King, was assassinated in a motel room on April 4th. Two months later, Senator Robert Kennedy was assassinated at an event celebrating his strong showing in the Democratic Primary in Los Angeles, California. The Vietnam War was escalating and young American men were drafted, splitting the country between patriotism toward the military and patriotism against the war effort. Race riots occurred in 100 US cities as African-Americans tired of being treated as second-class citizens.

We at Smead Capital Management believe that every one of you can recite the litany of things that have caused the last five years and the current circumstance to be miserable. We’ve had the deepest recession since the 1930’s in 2007-09, Europe’s fiscal and economic problems are newsworthy daily, the US governments voluntary fiscal cliff, record setting US government budget deficits, stubbornly high unemployment, etc., etc., etc. Loretta Lynn sang a very profound song which was very popular in 1973 called, “I Beg Your Pardon, I Never Promised You a Rose Garden”. THERE ARE ALWAYS MISERABLE THINGS GOING ON!

Were the early 1960’s or the early 1980’s a good time to buy US common stocks for the long-duration common stock investor? The Dow Jones Industrial average opened the 1960’s at 679.35 and the 1980’s started at 824.57. Today it is 13210 as I write on November 1st of 2012. The total return on the S&P 500 index from 1960 to today is 9.53% and the return since the beginning of 1980 is 11.20%, both compounded annually. Disney (DIS) has increased more than 750 times your money since the lows of 1966 and McDonald’s (MCD) went public in 1965. An investment in 100 shares at the initial public offering price of $22.50 had grown to $7.3 million in 74,360 shares via 12 stock splits (March 30, 2012).

Franklin Resources (BEN) was trading publicly in 1983 at as low as 11.9 cents (adjusted for stock splits) and trades currently at over $132 per share. Nordstrom (JWN) was a popular shoe store in Seattle in 1960 and became a popular department store, about to expand outside the Northwest into California in 1980. If anything, difficult times appear to provide terrific fertilization for entrepreneurship and long-term investment success.

It looks to us as if most everyone around us is afraid to own large, successful US companies and hold them a long time because of the possibility that we won’t get a “Rose Garden”. For this reason, you are getting a better price to enter into ownership of shares than you would if there was a “rosy” outlook. At Smead Capital Management, we are encouraged by knowing the history taught by these two wonderful films and the dose of reality they provide.

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. It should not be assumed that investing in any securities mentioned above will or will not be profitable. A list of all recommendations made by Smead Capital Management within the past twelve month period is available upon request.

 

(c) Smead Capital Management

www.smeadcap.com


 

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