Q3 2021 – Annandale Capital Quarterly Commentary

What determines the price of a stock? Interest rates, the business cycle, revenue growth, the political climate, business profitability, earnings surprises, investor sentiment, price momentum, fund flows, seasonality, etc. The number of possible explanations is endless, and there is some level of truth to each of them. Furthermore, the answers from one investor to the next are varied. Here is a slightly different question: what should determine the price of a stock and why? We speak with investing peers daily and one thing has become clear, few investors think about basic questions like, “what determines a stock’s price in terms of first principles?” Instead, the preferred framework is a mix of cause-and-effect reasoning, reasoning by analogy, and/or blind trust in what has been taught (at school or on the job). Rarely do investors ponder the most basic building blocks of financial knowledge, the foundational propositions and assumptions from which their investment philosophies and strategies are born. In this commentary, we will build a simple framework for thinking about security prices from the ground up and use that framework to discuss our investment philosophy and the current market environment.  Download Q3 2021 Commentary