Wasatch Advisors owes its beginnings to a simple market theory: a company’s growth in earnings should eventually be reflected in its stock price. While our firm’s founder, Dr. Samuel S. Stewart, Jr. held this belief for years prior to Wasatch’s start, one key event served as the catalyst that caused him to act:
SAM STEWART, Founder and Chairman
It was the 1970s and I was a lowly assistant professor at the University of Utah. I had the good fortune one day of attending a lecture by a visiting dignitary, Professor Eugene Fama of the University of Chicago. At the time, he was the foremost proponent of the controversial “efficient market theory,” which, in layman’s terms, held that stocks are always correctly valued since everything that is publicly known about a company is reflected in its price.
Professor Fama’s appearance in Salt Lake City came on the heels of a sudden, steep decline in the markets. It was Professor Fama’s view that this was simply the market’s way of efficiently—if not cruelly—valuing companies.
I wasn’t convinced. I found it hard to fathom that—notwithstanding what had happened on Wall Street—the inherent value of all those companies had really dropped that far, that fast. I suspected the herd mentality on Wall Street and the emotional reaction it produced in investors had played a significant role in the downturn.
Professor Fama’s lecture did not dispel an idea that had taken root in my mind: There had to be a better way to make sense of the market. Subjective elements seemed to play a significant role in driving the price of common stocks. If a person studied companies carefully, and managed to subtract emotion from the equation, over the long haul I believed a person could beat the efficient marketeers.