The Fight Over the Orthodoxy of Value Investing

When I was still in high school, John Rekenthaler began his career researching the mutual fund industry. I remember reading articles from him many years ago. His long resume brings with it a degree of credibility.

Seminal Investing Concept Questioned

So, it was with great interest that I read of his attempt in a recent article to destroy investors’ belief in one of the seminal ideas of Benjamin Graham, often considered the father of modern financial analysis and the founder of fundamental investing as a discipline. The seminal concept is this: the stock market is occasionally schizophrenic producing unusual highs and lows not based on reason and the available facts. Graham captured this concept in his famous metaphor called Mr. Market.

Debunking the Mr. Market metaphor is no small matter. Warren Buffett has said that the two most important things ever written about investing are contained in just two chapters of The Intelligent Investor. One of those chapters is chapter 8 which is where Graham discusses Mr. Market for the first time. (The other is chapter 20, where Graham discusses the equally important concept of Margin of Safety.)

Distorting the Truth

In reading this article, I feel the same as I often do while reading the rantings of a liberal theologian trying to explain away some orthodox belief of Christianity. The feeling I have is this: they’ve distorted the truth to fit the conclusion they were looking to champion all along.

In this case, Rekenthaler wants to debunk the Mr. Market concept, but just like those liberal theologians, he has to distort the original message in order to do so. He claims in his article that Graham said that there are basically two types of investors in the world: the thoughtful investor who uses reason and unbiased judgment to assess stocks as businesses to be bought or sold. The other is a wildly erratic investor who speculates daily about the value of stocks.

Are There Just Two Types of Investors?

In setting up this straw man, Rekenthaler is then able to easily debunk the Mr. Market metaphor by stating the obvious: that there are many investors that are driven by different financial models and motivations. Many are earnest and are attempting to be rational. Rekenthaler states what we all know to be true: the number of truly deranged investors participating in the stock market is quite small (although I can assure you from 25-years of professional experience the number isn’t zero!).

While much of what Rekenthaler says is true, he ignored Graham’s basic teaching and missed the point at the outset. Graham never said there are only two types of investors: the rational and the deranged. Graham’s concept was dealing with the overall stock market’s observable behavior and concluded that there are times in which it does appear that the market at large has moved too far in one direction or another. During these swings in the market, some companies are mispriced as a result, meaning the price of the stock has come unhinged from the value of the underlying company. Therein lies the opportunity for the Intelligent Investor, according to Graham.

The Markets Movements…Sometimes Justified, Others Not

Let’s be clear: some movement in stock prices are justified by certain headlines—terrible economic developments, world wars, and legislative breakthroughs have real impacts on companies and their values,

But occasionally, if someone were to take a step back and look at those movements with a thoughtful eye, they would find opportunity associated with times when Mr. Market was overly emotional on a given day, week, month or year.

A Recent Example of Mr. Market’s Psychosis

How else would you explain that a perfectly fine company like Lam Research (LRCX) could fall in price from a high of 220 in 2018 to a low of 121 just months later and then more than double to 298 in early 2020? After those extreme movements in such a short period of time, I think a little Prozac may be in order for Mr. Market.

If Mr. Rekenthaler believes that Mr. Market didn’t get those extreme movements wrong, that’s fine with me and the other True Believers in Graham’s orthodoxy. I am sure my investors were not the only ones to profit from this psychological market meltdown. I bought LRCX for my investors near the low at $146 per share when it became clear that Mr. Market had gotten it wrong, and I recently sold out of the position on behalf of my investors at $291 per share, netting a 100%+ gain and a $4 Million profit in less than 14 months.

I’m Thankful for His Unbelief

Instead of seeking the truth, Mr. Rekenthaler sought to support a belief that he had apparently already come to. Evidently this pattern happens in financial markets just like it does in theology. But in the case of investing, Mr. Rekenthaler’s unbelief is a good thing because that means that fundamental analysis, reason, and sound investing (what I call More Thoughtful Investing) won’t likely lose its advantage any time soon.

Note: In addition to his formal education in finance and economics and 25-year career as a professional investor, the author, Ted Kerr, attended a Christian seminary to attain a Masters of Arts Degree in Christian Ministry and Missiology.



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