Matt Franz : Zealous For Knowledge

They Built The Acropolis Without Newton

Value investors know that stock prices fluctuate much more wildly than stock values. These fluctuations present investors with the opportunity to outperform. Ben Graham wrote about this in The Intelligent Investor when he said Mr. Market is your servant and not your master.

Graham observed this in the 1920’s and 1930’s but it is just as true today as ever. Below is the 52-week range of prices for the top ten companies in the Fortune 500.

 

Company Current Market Value (billions) 52-Week Low 52-Week High % Change (High/Low) Change In Market Value (billions)
Wal-Mart Stores Inc 302.1 65.28 102.35 56.8% 109.8
Berkshire Hathaway Inc. 526.0 237,983.80 323,630.00 36.0% 140.9
Apple Inc. 901.9 118.22 179.39 51.7% 314.1
Exxon Mobil Corporation 370.4 76.05 87.99 15.7% 50.6
McCormick & Company 13.4 90.25 106.50 18.0% 2.1
UnitedHealth Group Inc 228.4 156.09 236.92 51.8% 78.2
CVS Health Corp 80.4 66.45 84.72 27.5% 18.5
General Motors Company 62.6 31.92 46.76 46.5% 21.1
AT&T Inc. 225.2 32.55 42.70 31.2% 62.3
Ford Motor Company 48.4 10.47 13.48 28.7% 12.0

Source: Fortune, Yahoo Finance, Accessed 2018-01-17

The average fluctuation, low to high, of this group was 35%. And these are among the most stable, large, and widely-followed companies in the world.

If you’re like me, you begin to wonder “why?”

On the first day of his value investing class at Colombia Joel Greenblatt said:

The reason why that is…….in the final analysis……why do the price fluctuate so widely when values can’t possibly? I will tell you the answer I have come up with: The answer is I don’t know and I don’t care. We could waste a lot of time about psychology but it always happens and it continues to happen.

I don’t know and I don’t care. I just want to take advantage of it. We could sit there and figure it all out, but I like to keep it simple. It happens; it continues to happen; the opportunities are there. I don’t know why it happens and I don’t care—I just want to take advantage of prices away from value.

This isn’t the most satisfying answer. But Greenblatt does have a valid point. Consider the Acropolis in Athens. It was built between 460 and 430 B.C. and still stands, largely intact, today. Yet it wasn’t until 1687 A.D. that Newton published his three laws of motion which laid the foundation for the classical mechanics that explain how a structure like the Acropolis stands.

The Greeks could have sat around debating how to put a roof over their heads for a couple millennia. Or then could get down to the business of building. They knew their building methods worked. They just didn’t know why. And that was okay.

I recently came across Ben Graham’s testimony to the Senate Banking Committee in 1955. It’s an interesting read if for no other reason then that we still have these hearings today and are asking each other largely the same questions.

One question in particular caught my eye:

The Chairman: When you find a special situation and you decide, just for illustration, that you can buy for 10 and it is worth 30, and you take a position, and then you cannot realize it until a lot of other people decide it is worth 30, how is that process brought about – by advertising, or what happens?

Mr. Graham: That is one of the mysteries of our business, and it is a mystery to me as well as to everybody else. We know from experience that eventually the market catches up with value. It realizes it in one way or another.

Graham, like Greenblatt, didn’t have the answer. But that didn’t stop him. Value is its own catalyst, and beyond that we don’t need to understand much else.

Questions or comments? Email matt@eaglepointcap.com

This is not a recommendation to buy or sell any stock mentioned. I do not have a position in any stock mentioned unless otherwise noted in this post. Do your own research: you are accountable for your own returns. Please read my full disclosure



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