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This week: Intrinsic value; King Leopold’s statue; Influenza and WW2.
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Several famous investors have completely missed the stock market rally. Their main reasoning had to do with the valuation of the market, a measure that they saw as elevated before the pandemic, and still elevated at the March bottom because the economy had by then significantly deteriorated.
But when we talk about the market’s valuation, or say that it is overvalued or undervalued, we are implying that the market and individual stocks all have intrinsic values. This is a cornerstone belief of the investment management industry and it has led to decades of people trying to figure out the best model to ascertain the intrinsic value of each security. The question is whether this value can be found at all, given not only the change in parameters that impact each company, but also the fact that investors watch and influence each other.
A few years ago, I made the case that Large Stocks are Widely Mispriced because analysts are not working independently and are influenced not only by each other but also by feedback from market prices. After Tesla stock started this year at $418 and more than doubled within five weeks, analysts scrambled to raise their price targets from $600 to $800, $1000 and beyond. There was a strong incentive to do so because optimism always looks good and because the analyst with the highest price target gained some useful if brief notoriety.
Intrinsic value is not really discoverable and we tend to zero in on price targets that align with our own appetite for risk and preferred form of analysis. There is more rationalization than reason in this effort. Having said that, it is reasonable to talk about a range of intrinsic values for each security, provided that it is a wide range. But then how useful is that to an investor?
King Leopold’s Statue
This week in Antwerp Belgium, a statue of King Leopold II who reigned in Belgium from 1865 to 1909 was burned then removed to be sent to a museum. Leopold’s crimes in the Congo have been widely documented (though remain unknown or taboo to many people, including in Belgium), notably in Adam Hochschild’s excellent book King Leopold’s Ghost.
More broadly, is it a good idea to remove statues or does it in fact achieve the opposite of the desired goal by erasing from sight and memory a dark chapter of history? Allowing in a park or public square only statues of upstanding characters seems like a race to the bottom, and a divisive one at that. What is to become of statues of slave owners George Washington and Thomas Jefferson? Should France remove Napoleon from the Invalides?
Though it is difficult to accept in the most nefarious cases such as Leopold’s, it may be better to keep history in place and to treat these statues not as honors, but as testimonials to that history with all its good and evil. In this vein, a good solution may be to remove the more controversial actors from their pedestals and to set them down at eye level. It is better to keep them in our sights as reminders and to keep the memory of their actions alive than to have them removed and have that memory erased for future generations.
Influenza and WW2
In his book on The Great Influenza of 1918, author John M. Barry argues that President Wilson suffered from influenza and its common sequel, temporary dementia, while attending the 1918 Paris peace conference. This, according to Barry, led Wilson to reverse his original more lenient position towards German reparations and to go along with Clemenceau’s extreme demands.
There is consensus among historians that the demand for reparations and other punishments imposed on Germany led to its bankruptcy and hyperinflation and to the rise of a vengeful mindset personified by Adolf Hitler. If Barry is correct, the great influenza planted the seeds of WW2.
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See our latest in National Review: Why the Market is Rallying.