The case for Overlapping Value - An alternative approach to valuation

Back in 1955 Ben Graham, known as the ‘father of value investing,’ was summoned to Washington DC, into the corridors of the Capitol Building. The Senate Banking Committee wanted to understand how the stock market worked. Politicians managed to get their head around the idea that there was a difference between a stock’s price and a stock’s ‘intrinsic value’ - i.e. it’s ‘true’ value. But politicians couldn’t quite understand how or why the price eventually came into line with the intrinsic value. Senators grilled Ben Graham, who responded by putting on his politician’s hat and refusing to give a direct answer…

Senator: 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 realise it until a lot of other people decide it is worth 30, how is that process brought about – by advertising or what happens?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 realises it one way or...