Lord Keynes, the influential British economist and keeper of the investments of King’s College, Cambridge, expressed the gist of the institutional imperative when he noted that “[most] investors may be quite willing to take the risk of being wrong in the company of others, while being much more reluctant to take the risk of being right alone.” Peer pressure, in other words, prompts us to do things as members of a group that we would not do as individuals. ‘Groupthink,’ as Irving Janis called it and demonstrated in Groupthink: Psychological Studies of Policy Decisions and Fiascoes, has a range of undesirable consequences.

Graham-style value investors, unlike most (particularly major institutional) market participants, are staunch individualists: they work individually or with one or a handful of colleagues but virtually never within large organisations; they seek and analyse primary data and sources of information but discount secondary sources (such as media reports); and they draw a sharp distinction between the popularity and the veracity of their actions. They endeavour to reach sound conclusions based upon justifiable premises, valid logic and reliable evidence. They are not dissuaded from a course of action simply because others or ‘the market’ may disagree. Nor do they undertake an action simply because others are doing so.

According to Mr Graham, “you are neither right nor wrong because the crowd disagrees with you.” Rather, “you are right because your data and reasoning are right.” Indeed, and as he also emphasised, “the right kind of investor [takes] added satisfaction from the thought that his operations are exactly opposite to those of the crowd.” The rise of the Internet provides a recent and outstanding example. Since the mid-1990s few ‘Internet companies’ have been profitable and fewer still have reported profits on a regular basis. During this same interval, however, hundreds of billions of dollars has been lavished upon these companies. To the extent that commercial calculation rather than an orgy of sheer speculative greed underlay these placements, the formation of this veritable tsunami of capital was based upon the conviction that the Internet will generate enormous returns to those who could unlock its potential.

During the late-1990s and into 2000 the Internet and associated phenomena thus posed tremendous challenges to institutional and retail investors alike. They asked themselves “is it an unprecedented bonanza of opportunity? Or has it been hyped into a bubble of unprecedented speculative excess? Should investors change – indeed, abandon – their principles in response to its development?” By and large, market participants, referring to each other rather than to logic and evidence, concluded that it was a bonanza and bent their principles in order to suit this conclusion. By early 2000, many derided any sober attempt to estimate the intrinsic values of these and other companies as superfluous and anachronistic.

Resisting the institutional imperative means that Leithner & Co. allocates its assets on the basis of value rather than popularity. This does not mean that this process is error-free; nor does it mean that the assets so selected will necessarily generate superior results. It does imply that its portfolio differs markedly from most institutional portfolios; that it comprises solid (on the basis of their financial statements and past operating results) companies in what many would regard as ‘unfashionable’ industries; and that it consists disproportionately in ‘unpopular’ companies (i.e., good businesses whose intrinsic value seems to be greater than their securities’ current market prices). The construction and maintenance of this portfolio bears strongly in mind an exhaustive statistical analysis, conducted by David Dreman and stretching back to the late-nineteenth century, which concludes that “the evidence strongly supports an investment philosophy of buying solid companies which [judged by the market price of their shares] are currently out of market favour.”