“It is much better to know who is smart than to be smart at what we do,” Smid said. “Or as Munger used to say: In the investment world, plagiarism is perfectly acceptable.”
Smead has implemented the Smead Value Fund’s investment philosophy, outperforming 99 percent of similar funds over the past 15 years, according to Morningstar data.
It also outperformed the index ofStandard & Poor’s 500During that period, the index returned an average of 14 percent annually, compared to an annual gain of 13.8 percent for the index, according to a report by Business Insider, which Sky News Arabia Economy reviewed.
But while Smidt uses Buffett and Munger’s strategy to succeed on the upside, he also notes when Buffett is preparing for downside risks.
He believes that is the case now as Buffett continues to significantly reduce his positions in stocks like Apple andBank of America.
For Smidt, there are many similarities between Buffett’s current actions and his views in 1999.
At the height of the dot-com bubble, he chose not to buy into the tech hype and warned that the market was unlikely to continue its frenetic pace.
Between July and September 1999, Buffett shared his market outlook in a series of talks that were summarized by Carol Loomis of Fortune in November of that year. In the talks, he argued that stocks had performed well in the years leading up to 1999 because of two factors: low long-term interest rates and high corporate earnings.
But stocks are unlikely to stay on that path, as it will be difficult for corporate earnings to grow as much as they did in the 1980s and 1990s, even if interest rates fall, Buffett said. Plus, valuations — which are closely tied to interest rate levels — have skyrocketed, hurting expectations of future returns.
Of course, the S&P 500 continued to fall by 50 percent over the next few years, and exactly a decade later, in September 1999, its value exceeded 20 percent.
Since then, however, investors have enjoyed 15 years of rock-bottom interest rates and rising corporate profits—a fact that worries Smidt. A winning streak like this can’t go on forever.
“The only problem is that it’s been a curse on the S&P 500’s long-term performance,” Smidt said of the 15-year run.
Smidt takes a contrary view that inflation is set to rise again as the Bank cuts Federal Reserve For interest rates. While 10-year Treasury bonds are falling, he believes a resurgence in inflation could push them back toward 6 percent. With valuations at all-time highs by many measures, that spells trouble for the market, he said.
Is inflation a serious threat? The Fed and many others don’t think so, with the labor market showing signs of weakness. But Smid believes the labor market is stronger than many give it credit for. The unemployment rate, at 4.2 percent, though high, is still historically low, and businesses are still struggling to find employees.
Given all that—a return of inflation that would push interest rates higher, rising valuations, and the impossibility of high corporate growth rates to continue forever—Smid is betting on the index’s future underperformance. And, by his reckoning, so is Buffett.
This means that Smid believes that eventually the market rally will reverse and turn into a vicious cycle of selling. Because the index will start to underperform, people will start selling it, which will cause its largest components to underperform, which will cause those stocks to sell, which will cause the index to fall further, and so on.
“It’s going the other way at some point,” Smidt said. “A lot of the variables that Buffett talked about in 1999 are now there to be a curse rather than a blessing.”
Repeated scenario
For his part, Bilal Shuaib, director of the Vision Center for Economic Studies, warns that companies operating in the artificial intelligence sector may face an experience similar to the dot-com bubble that the markets witnessed between 1995 and 2000. During that period, there was a rapid spread of modern technology and the Internet, which led investors to rush to seize investment opportunities in technology companies. This rush, which lacked careful study, resulted in random demand for the shares of these companies, as the markets expected huge profits that exceeded what other investment sectors could offer.
But the reality was different from these exaggerated expectations, as earnings were much lower than expected. This gap between expectations and actual results led to mass selling, resulting in a sharp collapse in technology stock prices, and investors incurring huge losses.
Shoaib points out that history could repeat itself, as we are currently witnessing a similar rush on AI stocks. If this situation continues without a careful assessment of market risks, it could lead to a significant discrepancy between exaggerated expectations and actual results, exposing investors to significant losses. Betting on the success of these companies can be risky if not approached with caution and with well-thought-out investment strategies.
recession
Head of Global Markets at Cedra Markets, Joe Yarak, told Sky News Arabia Economy that the AI boom will not lead to a bubble like the dot-com bubble, alleviating concerns about major collapses. However, he stressed the possibility of an economic recession, pointing to the impact of a high-interest environment on companies’ performance in the medium and long term.
He added: “It is noted that the Federal Reserve cut interest rates by 50 basis points, which reflects its delay in this measure, as this cut is often accompanied by a recession afterwards.”
He points out that the markets are monitoring the huge investments in artificial intelligence, such as those of Nvidia, which may be exposed to various risks (referring to the increasing spending of companies on artificial intelligence and the extent to which this is reflected in the revenues of those companies in the hoped-for manner), explaining that at the beginning of next year 2025, it may become clear in practice that investments in this sector need a long time to achieve the desired returns.
As for Warren Buffett, the head of global markets at Cedra Markets says that he has shown caution towards the markets recently, after investing in American certificates of deposit, benefiting from high interest rates, stressing that Buffett is waiting for the perfect opportunity to return.
Yarak expects that the first half of 2025 may witness a recession with continued high inflation, despite the possibility of growth rates between 2.5 percent and 3 percent, and unemployment reaching 4.2 percent.
