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Voluntary Exile

October 25, 2012

The US stock market can have a significant correction at any time and most likely will every year. It is likely to suffer a bear market once every 5 years on average. Those mini-famines are the price you pay to earn 8-10 percent over long-term holding periods (15-20 years).
-William Smead, ceo, Smead Capital Management

Dear Fellow Investors:

The Bible is full of stories of God's people living in exile on their own volition. A famine occurred in the land of "milk and honey", so the Hebrews moved to Egypt at the time of Joseph. The father-in-law, brother-in-law and husband of Ruth left Israel to live among the Moabites during a famine. Mordecai and Esther lived in Babylon among the Persians, even though God called his people to rebuild Jerusalem.

We at Smead Capital Management (SCM) believe that institutional and individual investors have moved their asset allocation away from large cap US stocks. Institutions are in exile in private equity, hedge funds and all things commodity and BRIC-trade related. Individuals are living in bond land and the rest of their liquid assets are residing in wide asset allocation through funds and ETFs.

Why did the Hebrew people get into so much trouble? They didnít rely on Godís promise to take care of them even in famine. The Israelites stayed in Egypt long after the famine ended in Israel and ended up slaves to Pharaoh. Ruth's male relatives dropped dead among the Moabites, stranding their families. Mordecai allowed his adopted daughter to sleep with the King. She became Queen and used her leverage to keep Haman from slaughtering all the Jewish people.

A famine occurred in the US stock market from March 10, 2000 to March 9, 2009. It was teed up by the 1990's tech stock and large-cap growth stock boom. This triggered a movement out of long-only U.S. large-cap equities. According to the NACUBO studies done in 2010 and 2002, the pool of endowment funds sampled had only 15% in U.S. Equities on a dollar-weighted basis in 2010 vs. 36.7% eight years earlier.

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