TaketheFifth 71average market price, and bad managements produce bad market
prices.”^1
Managers also undoubtedly attempt to influence the company’s
stoc kprice all the time in ways ranging from the mundane (casting
unfavorable announcements in the rosiest light subject to antifraud
constraints), to the unlawful (manipulating earnings, a subject con-
sidered in Part II), to something in between (say, extraordinary dis-
tributions to shareholders from the sale of debt or assets).
Those attempts, however, are not motivated primarily by a desire
to produce stoc kprices equivalent to underlying business value. On
the contrary, most managers want the company’s stoc kto trade at
the highest possible prices in the market, without regard to business
value. This is a mistake, as Buffett emphasizes repeatedly, for such
delinkage means that business results during one period will not
necessarily benefit the people who owned the company during that
period.^2
While investors rather than managers are in the best position to
evaluate and translate into market prices a company’s performance
as measured by its underlying business value, they cannot guarantee
a perfect translation. Information, transaction, and trader volatility
all interfere with the identity between business value and market
price. Even subject to these distortions, however, it is worth an in-
vestor’s time to understand business values and promote their iden-
tity with market prices. The larger investors have greater incentives
to do this and to reap its rewards, which increase in proportion to
shareholding size.
Together, therefore, these insights justify active, informed, large,
and long-term investors focused on business analysis or, in Buffett’s
characterization of Berkshire Hathaway, “major, stable and interested
shareholders” who are “supportive, analytical and objective.”^3 In-
stead of asking whether such investors will make EMT more than
about 70 to 80% correct, however, this perspective confirms the
prospect that such investing can take advantage of what EMT has
papered over for nearly three decades: the systemic separation of
business value from market price.
STICKING TO YOUR KNITTING
The separation of business value from market price calls for invert-
ing the usual thinking about investing. Too often tools and people