William Smead
Chief Executive Officer
Chief Investment Officer



Dear Clients and Prospective Clients:

In his book, Day by Day, Reverend Billy Graham wrote the following: “Columbus was called mad because he decided to sail the uncharted ocean….Martin Luther was called mad because he presumed to defy the entrenched religious hierarchy of his time. Patrick Henry was considered mad when he cried, ‘Give me liberty, or give me death!’ George Washington was thought to be mad when he decided to continue the war after the winter at Valley Forge, when thousands of his men had died and other thousands had deserted, leaving only a handful of men. We have become too sophisticated and too respectable to be called mad in our generation.”

Every twenty to thirty-year stretch in the stock market includes a multiple-year sequence where it seems like those of us who stay invested in quality common stocks have gone mad. Numerous studies have come to the same conclusion over and over again. Human beings sell their stocks after big declines and buy aggressively near stock market tops. In the process, they rob themselves of a large part of the benefit of owning common stocks. Ibbotson measured the return from 1926 through 2007 at around a 10% return including dividends on the S&P 500 Index. Numerous studies show that investor enthusiasm in the form of mutual fund purchases at the top and investor pessimism in the form of mutual fund redemptions at the bottom caused those investors to dramatically underperform the long-term results of the funds they owned.

Is an investor more likely or less likely to make the historical return of 10% from here forward? We believe the math, the history and the crowd psychology all say that it’s more likely. Do we know what we have to put up with to get it? The answer is no. Much capital has been temporarily lost while many investors have deserted the stock market and are sitting on a record amount of cash relative to total stock market capitalization.

Warren Buffett is the greatest investor of all time and many articles are being written about him. They infer that he has gone mad to be buying into strong companies and is recommending others buy as well during this tough economic period (”Buy American, I Did”, New York Times Op-Ed October 16, 2008). We at Smead Capital Management believe that we have never owned more attractive companies at better prices than today.

We must have gone mad!

Best Wishes,

William Smead

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