Ben Graham is considered to be the first proponent of value investing, and has been credited by Warren Buffett as being a major influence on his investment approach. It was Graham who observed that:

  • In the short term, the stockmarket behaves like a voting machine, but in the long term it acts like a weighing machine. In the long term, true value will be reflected in the stock price.
  • The investor is best off concentrating on the real life performance of his companies and receiving dividends, rather than being too concerned with Mr Market's often irrational behaviour.

The share price performance in recent months of Immunodiagnostic Systems Holdings (LON:IDH) , in which I have a holding, is a good illustration both of the above observations and also of the opportunities thrown up for private investors who choose to invest with the mindset of long term owners. It also illustrates the inherent weaknesses of the UK's capital markets processes in supporting the development of the sort of Mittelsand companies which the UK economy so badly needs. Here are some salient features:

  • The share price has moved from 800p (mkt cap £225 million) in August 2010 to a high of 1218p (mkt cap £345 million) in August 2011 to a price of 291.5p (mkt cap of £82.6 million) on 23rd January 2012.
  • The price drop in Autumn 2011 was occasioned by the impact of increased competition in the Vitamin D market. The company had told the market during the previous year that increased competition would occur and had also, in my opinion, outlined a sound strategy for mitigating over the medium term the effects of increasing competition.
  • A former senior investment banker tells me that as the market cap rose to its high in August 2011, it passed certain trigger points which brought in new institutional investors. However, as the market cap fell, it triggered the need to sell on the part of those investors. As readers will know, my views on the ability of the marketmaking system to provide a stabilising influence under such circumstances are unprintable!

In my opinion the company did not articulate its strategy for being a growth stock as clearly as it could have done at the time of its November 2011 interim results announcement. The commercial reality of developing a long term business does not always occur as…

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