Genzyme's Bout of Irrationality

By Brian Graney (TMF Panic)
October 6, 1999

It seems every investor's favorite manic-depressive, Mr. Market, is still up to his same old tricks. Yesterday, biotechnology firm Genzyme General (Nasdaq: GENZ) sank like a stone and ceded 23% of its market value after an analyst report raised concerns that a key product may face competition soon. But today, a press release from Genzyme dismissed those fears. The quick affirmation allowed the company's share price to smartly revert to its pre-freak-out level like a temporarily submerged buoy rising back to the ocean's surface.

This latest demonstration of Mr. Market's irrationality left long-term investors scratching their heads and efficient market theorists shaking their fists. How can an analyst report followed by a corporate press release alternatively lop-off and then add-on some $900 million of business value in such a short span of time? Four Wall Street Wisemen answered that question today in the only way they know how -- by calling yesterday's movement an "over-reaction" and issuing a string of upgrades.

Longtime Fools are likely familiar with the story of the mood swing-prone Mr. Market, which was a favorite of Berkshire Hathaway (NYSE: BRK.A) Chairman Warren Buffett's teacher, Ben Graham. "At times he feels euphoric and can see only the favorable factors affecting the business," the Mr. Market story goes. "At other times he is depressed and can see nothing but trouble ahead for both the business and the world." The story emphasizes the important role that day-to-day emotions play in the act of investing.

What is often glossed over in present-day recountings of the traditional Mr. Market story is the crucial punchline: "Mr. Market is there to serve you, not guide you." In other words, a stock's price performance over a selected period of time -- be it one day, one month, or one year -- can only tell you so much. Just because a company's share price in the short term is rising or falling does not necessarily mean that the value of the underlying business is rising or falling in lockstep. The price-value disconnect is heresy to most momentum traders, but a lasting truth for long-term investors.

In Genzyme's case, the short-term concern was that its cash cow Cerezyme enzyme-replacement treatment for the debilitating genetic problem known as Gaucher's disease would soon face competition from a product being developed by Britain's Oxford GlycoSciences. In its press release today, Genzyme called the development "premature speculation" and emphasized Cerezyme's strong market position, patent protection, safety, and efficacy. To make sure that all of the worry-warts were reassured, the company also said its treatment development programs in other areas are making "excellent progress."

Here's the real lesson to be drawn from Genzyme this week: Instead of scanning for big percentage drops in stock prices every day in the hopes of discovering over-reactions, investors should take the time to understand businesses thoroughly. Proper knowledge of the underlying value of a business is always more desirable to precise knowledge of that business' share price on any specific day. The more you understand the businesses in which you are investing, the more you'll recognize and profit from Mr. Market's bouts of irrationality.

As Buffett himself cautions, "If you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game."

Related links:

Fool on the Hill, "Mr. Market is a Manic Depressive Idiot," 10/06/99
Berkshire Hathaway, "Chairman's Letter to Shareholders," 1987

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