FEBRUARY 6, 2018 William Smead Chief Executive Officer Chief Investment Officer Buffett’s, Bezos’ and Dimon’s Tapeworm Dear fellow investors, Scott Galloway, Professor of Business at NYU, points out correctly that these FAANG companies2 have more Warren Buffett, Jeff Bezos and Jamie Dimon recently power than a free-market capitalist system can handle. announced that their three companies will form a Government on both sides of the political aisle have yet to non-profit entity to attempt to drive down healthcare recognize this, and those on the left side of the political costs for them and possibly other companies. In the spectrum love Bezos’, Dimon’s and Buffett’s moral and process of making the announcement, Buffett called the financial support. Buffett looks like he is “talking his healthcare sector of the U.S. a “hungry tapeworm” in the book,” because he owns very little in the healthcare economy. We view this as PR grand standing, incorrect sector in common stock or entire companies. Ironically, in its assumptions about healthcare costs, and the this grandstanding isn’t likely to do much more to drive height of hypocrisy. It reminds us who might be the real down costs any more than Obamacare or the other tapeworms in the U.S. economy and could open some companies that have tried the same thing. great doors to future appreciation. The worst part of this lambasting of healthcare is the Jeff Bezos has spent the last year creating future many erroneous assumptions made by everyone involved. revenue fantasies by spooking entire industries as he Pooling in Obamacare attempted to drive costs lower by created the largest net worth on paper in the world. forcing healthy young people to buy insurance. The folks Every time he does this, the target companies plummet who had to buy and the surcharge tax on high-income and Amazon’s shares benefit. The healthcare sector is Americans subsidized many who gained insurance. Costs his latest punching bag, as reflected in these stocks continued to soar anyway. getting trounced on January 30, 31, and February 2, 2018. Below is the chart of what happened in the aftermath of Why are costs soaring? the retail and grocery bloodbath from Amazon’s Whole Foods acquisition last year:1 Cost are soaring for three main reasons in our view. 1. The forth commandment in the Bible says, “Honor your Mother and Father and you will have long life.” This has become true in the U.S. Life expectancy has grown more than six years during my lifetime. We are gracious to the elderly and most of what is spent on healthcare is spent the last ten years of our lives. Warren Buffett received prostate cancer treatment in 2012 at 81 years of age, as an example. 1Source: Barron’s (https://www.barrons.com/articles/amazon-heres-what-big-retail-stocks-did-post-whole-foods-1517428528) 2FAANG companies include Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google parent Alphabet (GOOGL). Please see important disclaimer at the end of the document. | 1 877.701.2883 SMEADCAP.COM 2. There is a growing number of Warren Buffetts. The baby- tax avoidance. He pays himself a pittance salary, pays no boomers are hitting 70 years of age by the thousands shareholder dividends and has pledged to send his low every day. The cost of healthcare explodes after 70. cost-basis stock to the Gates Foundation, meaning his Consorting with Jeff Bezos’ 27-year-old software personal wealth creation machine has largely skipped engineers and Jamie Dimon’s Gen X age bankers won’t federal and state taxation. Bezos and Buffett may have any impact on keeping the Warren Buffetts of actually be the “tapeworms” of the economy and not the this world alive. Willie Sutton robbed banks and the healthcare industry. healthcare sector uses scientific brilliance to extend life because that is “where the money is!” Just like last summer, when bargains showed up in retail 3. Chronic illness (heart disease, diabetes, cancer) passed and grocery shares on the Amazon/Whole Foods spook acute illness (flu, pneumonia, malaria) years ago as session seen above, we see bargains in healthcare. We the leading cause of death in America. Therefore, it is like Amgen (AMGN) and Walgreens (WBA) trading at deep way less expensive to treat these chronic maladies with discounts to the S&P 500 Index on a P/E basis. Most Wall pharmaceutical and biotech remedies than constant Street analysts seem to be underestimating Amgen’s new hospital visits. drug, Repatha, which drastically reduces bad cholesterol. This has been a terrible flu season in the U.S. and Buffett has become famously rich by owning high profit Walgreens might be having their best winter ever. Bezos, margin businesses which made products customers Dimon and Buffett might be laying these bargains in our became addicted to, such as Coke, Dairy Queen and See’s lap. candy. Refined sugar is a leading cause of healthcare expense in our society. How would Warren like it if I worked under Jamie Dimon during my time at Smith someone at Merck or Amgen lobbied with Congress to Barney. I respect and admire him as a person and a shut down or socialize the beverage, fast food or candy business manager. His involvement in this consortium business in the U.S.? looks like hypocrisy wrapped in a stock price that has done very well and a legion of business people that love Bezos’ hypocrisy is shown in the way he has siphoned and adore him. I wouldn’t want to be the healthcare money in our society away from federally-taxed banker calling on the clients of the respective publicly- companies to his money-losing e-commerce business. In traded businesses that were just punished for seeking the twenty years it has existed, it has barely paid federal a profit in today’s healthcare system. Hopefully, Bezos, income taxes. This forced all other tax payers to shoulder Buffett and Dimon have good intentions for being involved the federal, state and local healthcare tax burden. This in this consortium. We hope they aren’t just adding doesn’t surprise us. He brought tens of thousands of pavement on the road to hell. people to Seattle so that the rest of us would pay the preponderance of local taxes. He has starved Washington Warm regards, state of revenues, as it taxes business revenue done in the state only. We love Buffett’s value investing discipline and his generous teaching, but Buffett is no slouch to federal William Smead The information contained in this missive represents Smead Capital Management’s opinions, and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, CIO and CEO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request. This missive and others are available at www.smeadcap.com. | 2.