Mr. Smead: We started our firm in July of 2007 and we felt that the circumstances of the prior seven or eight years had pushed investors away from the central tenet of value investing, which is to buy outstanding companies when for one reason or another they get out of favor and hold many of them as they succeed throughout the cycles for a long time. Little did we know that the market panic and liquidation of 2008 and early 2009 was going to put a major bit of punctuation on the end of that seven or eight years . What investors didn't want to do at all was to buy large capitalization quality companies with the idea of trying to find the ones that would make you wealthy over the next 10 years, which I think is what people used to think the stock market was all about 30 or 40 or 50 years ago. This is what investors were about in the 1980s and 1990s.
We formed our company with that premise. I brought a legacy business where I managed money for individual investors and a few family offices. I had managed money under the umbrella of Smith Barney and Wachovia Securities in the prior 15 years, so we had been managing money and making a living that way already. We wanted to pursue it under our own company umbrella to eliminate any disagreements or conflicts that our approach had with the larger companies we worked with. And secondarily, we wanted to be able to communicate to a larger audience what our investment thoughts are.
TWST: For your value-oriented investments, tell us how exactly you define value.
Mr. Smead: I came into the investment business in 1980. I was young, 22 years old, with an economics degree from Whitman College. I had very little prior knowledge about the stock market, but had a great deal of experience with risk taking and handicapping. I played a lot of nickel, dime, quarter poker growing up and handicapped greyhounds on the side in the summers in college as a way to augment my income. So I had a lot of experience with taking risks with money but I didn't know a lot about the stock market. Fortunately for me, in the early 1980s, interest rates were at record-setting highs As an economics major, I knew enough from the history of economics to know that if the United States Treasury wanted to guarantee at 13% or 14% interest and a strong municipality wanted to give a guarantee at 12% interest, that even if there was a significant amount of inflation, there was an attractive opportunity. In the early years of being a young stockbroker at Drexel Burnham Lambert in Seattle, Washington, I was putting 80% of the money I was coming in contact with into those great bond yields at that time.
Around that time, I started to read and study everything I could get my hands on. I couldn't wait till Forbes came out every couple of weeks, I read The Wall Street Journal every day and I got into reading Barron's. I literally started to absorb everything I could. I began to study what John Templeton did and said and of course watched Peter Lynch, who was the star of that era in the 1980s. I also began to follow what Warren Buffett had to say and what he was doing. What ended up happening by the end of my first 10 years of being in the investment business was that I had settled in on eight criteria or eight characteristics of what I was looking for to choose stocks. And that's our eight criteria.
Tickers included in this excerpt: AMGN, BEN, EBAY, MRK, MSFT, PFE
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