Should you ever find yourself at a loose end in Iceland’s capital Reykjavik – perhaps having first chased the Northern lights, bathed in the thermal springs of the Blue Lagoon and run a mile from the local delicacy of ‘hakarl’ (rotten shark meat) – then you could always enrol in one of the half-day courses, complete with diplomas for successful students, that are offered by The Elfschool (http://www.theelfschool.com).
There you will learn about the elfin ‘huldufolk’, in which more than half of all Icelanders apparently believe – to the extent vehicle breakdowns are often attributed to having upset these ‘hidden people’. What is more, construction companies now employ special consultants to look after the interests of the huldufolk when they are building roads across the island. A national elf service, so to speak.
Anyway … before any readers begin snorting too hard at the idea of money being gained or lost as a result of something that does not exist – or at least, in deference to any Icelandic visitors to The Value Perspective, to something that cannot be seen – we would remind them there are plenty of examples of the stockmarket operating on just this basis.
These unseen forces have various names – John Maynard Keynes used the term ‘animal spirits’, Paul Krugman talks of ‘the confidence fairy’ in an economic context while, here on The Value Perspective, we constantly refer to those twin gods of the markets ‘Greed’ and ‘Fear’, which have the power to drive share prices above and below what we believe to be their long-term intrinsic value.
There are plenty of examples we could offer but we are going to go with banks. The invisible force at play here, of course, is confidence. If everyone believes in banks – believes they are good for the money they owe people and believes in the people who owe the banks money – then all is well. But then something can happen to fracture that confidence and life becomes very hard for the sector.
Here on The Value Perspective, we would argue the balance sheets of many banks are in significantly better shape now than they were in 2008 and 2009 and yet the confidence the sector lost as a result of the global financial crisis has still fully to return. To our minds, it is only this confidence element that is preventing banks’ share prices from reflecting the intrinsic value of the underlying businesses.
We would not pretend to understand all the whys and wherefores of these unseen market forces but we do know they can serve to throw up opportunities for investors who are disciplined enough to focus on what exists on the balance sheet as opposed to only in the mind. Our job as value investors is, in effect, to take the other side of the sentiment trade.