News & Insights / Outlook

TO INFINITY, AND BEYOND!

Nothing is more irritating and frustrating for a value investor than to see the price of a stock rise on speculation, optimism and often, sheer irrationality. The prudent purchaser does extensive research, uses time-tested methods of asset valuation, and comes to a measured decision about the value of a company. Then Elon Musk, or some other highly popular promoter, opens his mouth and suddenly nothing else matters. Price becomes completely separated from value and reasoned analysis is swept aside. This resentment of seeing the seemingly undeserving get rich is as old as time and is famously stated in Psalm 73: “For I was envious of the boastful, when I saw the prosperity of the wicked”.

Warren Buffett had a more pragmatic outlook on the subject. One of the most well-known of his aphorisms is that “Price is what you pay, value is what you get”.  Here is the full quotation:

“Additionally, the market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie and me. Indeed, we enjoy such price declines if we have funds available to increase our positions. Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
(Warren E. Buffett, Berkshire Hathaway Shareholder Letter, 2008)

During the first half of 2026 we saw a more or less complete divorce of price from value in the two most important sectors of the stock market: the giant software and technology companies, sometimes known as the “Magnificent Seven” or more recently, the “hyperscalers”, and the emerging companies involved in artificial intelligence (“AI”) and outer space-related projects. In the first case, we have seen prices fall sharply below what we and many others consider to be fair value, and in the second case, prices have increased far beyond any reasoned notion of value.

For example, in the first half of the year we have seen the price of Microsoft slide by more than 20% in spite of consistently growing revenues and earnings. The reason: fear that AI will replace the core software products that almost everybody uses and from which Microsoft makes the lion’s share of its profits. The same phenomenon has affected, among many others, the share prices of Constellation Software and Meta (Facebook). There is no evidence that this replacement has happened, is happening or will happen in the future, but markets trade on fear and hope.

The primary example for the second case is of course the initial public offering (“IPO”) of Space Exploration Technologies (“SpaceX”). The IPO valued the company at about $2 trillion, making it among the 10 most valuable companies in the world, in spite of the fact that it has revenues of only $19 billion, and has never come close to earning a profit, losing almost $5 billion in its last year. (This could be compared, for example, to Amazon which has a similar market capitalization but has revenues of over $180 billon and profits of over $30 billion in its last year.) In its first few days as a public company, SpaceX shares became the mostly highly traded stock by retail investors in history, and shares rose by some 67% at their peak, briefly giving the company a market capitalization of $3.3 trillion, or the third highest in the world. This is without doubt a textbook example of irrational exuberance and the departure of price from value. At the time of writing, shares have fallen 25% from their highest level, and the stock is now at a price more or less equal to its first trades following the IPO.

What should a value investor do when the markets are in a frenzy? Buffett’s advice is, as always, the best. Buy and sell based on value, not on sentiment, momentum, or unsubstantiated forecasts. By all means, be annoyed when you see the undeserving prosper, but rest assured that value always asserts itself in due course. Price fluctuates, but value persists.

In spite of the speculative activity noted above, our style did do well in the 2^nd quarter, with our Growth Equity Pool, held by many of our clients, up by 8.8%. We expect this trend to continue in the second half of the year as the value inherent in some of our currently out of favour names is recognized.

Finally, I want to share my astonishment at the things that otherwise reasonable people are prepared to believe. Two of them are data centres in space and the colonization of Mars. The apparent attraction of building data centres in space relies on the abundant solar energy available above the Earth’s atmosphere. The average data centre takes up about 150,000 square feet, and the large ones being built by companies like Amazon and Anthropic will be over 1 million square feet. The largest inhabited structure currently in orbit, the International Space Station, is 357 feet long and has the same volume as a large passenger aircraft. You would need thirty structures that size for one smallish data centre. Building it, getting it into orbit, and perhaps surprisingly, radiating the waste heat, are currently beyond our capabilities.

However, these difficulties do not compare to the SpaceX dream of colonizing Mars. Elon Musk believes he can establish a colony of one million people on Mars in his lifetime. No human, of course, has ever set foot on Mars, which at its closest is thirty-four million miles away, or 130 times further than the moon. With current technology it takes between 6 and 9 months to get there, and nobody has suggested how a human spacecraft could land on Mars and return to Earth. Getting two or three people there and back in the next ten or twenty years might be possible. Setting up a viable long-term colony is science fiction at this stage. Those who purchase SpaceX shares in hopes that it will build orbiting data centres and colonize Mars are going to be disappointed. Those who are buying the shares to flip them to the credulous (generally known as the “greater fool” method) may make money in the short run, and many already have. Our clients know that is not our business.

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