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Our guiding principle: Absolutism within relativism in value investing

Tong Kooi Ong and Asia Analytica
Tong Kooi Ong and Asia Analytica11/3/2021 10:4 AM GMT+08  • 6 min read
Our guiding principle: Absolutism within relativism in value investing
Beauty may be in the eye of the beholder, but stocks have absolute values.
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It is quite obvious that asset prices are, oftentimes, driven by investor emotions and sentiment, especially in the short term. It explains how cryptocurrencies, created as jokes and based on a dog meme with zero real-world utility, can appreciate by gazillion percentages and how companies whose businesses are in secular decline can still be valued at market capitalisations of tens of billions of dollars.

Tesla recently broke above the trillion-dollar market cap milestone, joining an elite grouping that comprises Apple, Microsoft Corp, Amazon.com and Alphabet. The thing is that its bonds are below investment grade, according to rating agencies Standard & Poor’s and Moody’s Investors Service, while debts for the other four companies are of the highest triple-A rating. It sure appears as though investors are irrational — but are they really?

We could point a finger at the foolishness of this generation, the YOLO Robinhood traders. But the reality is that such investor behaviour has persisted for far longer. British economist John Maynard Keynes explained this behaviour in his book The General Theory of Employment, Interest and Money, which was first published in 1936. He theorised that investors are in fact acting quite rationally — they are pricing stocks not based on what they think is the intrinsic value but what they think other people are thinking that other people are thinking. This concept is called the Keynesian beauty contest.

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