October 2022

To Our Business Partners


The Efficient Market Theory (EMT) was presented to the investment community in the mid-1960’s.  It posited that stock prices reflected all known factors, are efficiently priced, and therefore there is no way to gain an advantage in the marketplace through any analytical efforts.  This theory spawned the indexing movement, a strategy to mimic the market indexes, which is still very much with us today.

We have a lot of trouble with this theory when we see what happens day-to-day in the markets.  For instance, a couple of weeks ago, a stock we own reported earnings (as expected) and immediately declined almost 17% from its previous day’s closing price.  Over the course of the day the stock recovered, rising 30% from its low, and closing the day over 3% higher than the prior day!  While this is admittedly an extreme example, at which point during the day was the stock efficiently priced—the high, the low, the close, or an intra-day price?

On a broader scale, the prices of stocks fluctuate more than 50% over the course of a year.  Again, at which point are these stocks efficiently priced, given all the available information???  

One must remember that stock prices are a reflection of decisions made by humans.  Human nature being what it is, investment decisions are sometimes (often?) based on emotions, especially in the short term.  Whether it is through the old fashioned way of buying and selling, or the more recent phenomenon of trading via computers, they all require human input.  That will never change in the securities marketplace.  In fact, the introduction of computer-based trading is blamed by many for the increased volatility.

We take our cue from Benjamin Graham, writing in The Intelligent Investor:

“Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings.”

Your managers spend considerable investment research time conducting appraisals of businesses and approximating their values.  When prices compare favorably (or unfavorably) to conservative estimates of business value, we take advantage of the sometimes wild swings in stock prices to buy well below intrinsic value, or sell well above intrinsic value.


The PRICE of our group* of widely owned stocks is 77% of estimated VALUE.  It’s not bad, and would yield a decent return, but it still doesn’t motivate us to be aggressive buyers of stocks.  More stocks are meeting our tests of financial soundness, profitability, growth, and value, so we’re gradually spending idle cash to add to or initiate new positions.  We believe prices will continue to come our way in the foreseeable future.


Stock market indexes suffered a second consecutive month of declines in September, with declines of 9-10% across all the indexes we monitor.  For the year to date, returns remain negative, with the NASDAQ down a whopping 32%, while all other indexes are down 20-25%.  For the trailing twelve months, declines cover a range of 15-26%, with the NASDAQ – chock-full of overpriced technology stocks – continuing to experience the greatest decline. The prices of our group of portfolio stocks*, while also down, are moderate compared to the indexes over all three periods discussed above.

Steve Nichols, CFA • Bill Warnke, CFA •  Andy Ramer, CFA

*The group of “portfolio stocks” — our Equity Composite for the purpose of evaluating investment performance — consists of 19 stocks that are held in our clients’ accounts. Portfolios might hold some or all of these stocks, depending on investment guidelines unique to each client, the timing of purchases and sales, and start dates of accounts. The performance of this group of stocks is a good proxy for our equity performance but might vary widely among accounts. Of course, past performance is not necessarily indicative of future results.

We hereby offer to deliver to you without charge a copy of our current Form ADV Part 2, in accordance with the U.S. Securities and Exchange Commission’s “Brochure Rule.” Please contact us if you would like us to send you a copy.