There’s a famous gentleman out there in the world of investing called Mr. Market. He was invented—Mr. Market isn’t a real person, of course—by an investment guru by the name of Benjamin Graham, and his views have been widely reported for many years.
A piece of commentary we recently read online revisited Benjamin Graham’s impact on investing by quoting from a Berkshire Hathaway (that’s the company run by Warren Buffet and Charlie Munger) investor letter originally published in 1987. Though dated, it’s worth re-reading.
“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price, since he is terrified that you will unload your interest on him.”
Breaking Down An Allegory
Let’s break this allegory down. Mr. Market, an inspired invention, is:
- Emotional and moody.
- Often irrational.
- There to serve you, not to guide you.
- Someone who will offer you a chance to buy low and sell high.
- Frequently efficient, but not always.
Sound familiar? It should.
The behaviours attributed Mr. Market allow the investor to wait until Mr. Market is in a ‘pessimistic mood’ and offers you a low sale price, which is when (all things considered) you should consider buying. It therefore stands to reason that patience is an important virtue when dealing with Mr. Market.
Play the Long Game
The stock market today is dominated by a lot of participants who are extremely motivated by, and receive incentives based upon, their short-term performance.
Wall Street and Bay Street analysts largely get scored (and paid) on how well they predict quarterly results, and rarely do they project out more than a year or two. With all this obsession on short-term results, those of you with a long-term focus can take advantage.
Beware the One-Hit Wonders
In a nutshell, we should value those businesses that are going to steadily generate cash far into the future over those businesses that are merely ‘one-hit wonders.’
A company that creates a dollar in profit today and will create a little more than a dollar in profit tomorrow is worth much more than a company where tomorrow’s dollar is in jeopardy.
Learn to Under-React
Warren Buffett once famously said,
“The most important quality for an investor is temperament, not intellect… You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”
Just as in competitive sports, it pays to play it cool especially when the pressure is on. You will not only minimise turnover in your portfolio (which, all else being equal, will improve your performance), but maintaining rationality will help in taking advantage of Mr. Market’s occasional madness.
- Mr. Market tends to over-react and consider merely bad news as abysmal. When this happens, there’s an opportunity to buy.
- If Mr. Market takes good news and, as a result, pushes prices up to nosebleed levels, that’s an opportunity to sell.
A credit union financial advisor is an excellent person to advise you about the famously unpredictable quirks of Mr. Market. Contact yours today. If you don’t already have a financial advisor, why not arrange a meeting with one of Everything Retirement’s credit union partners (Coastal Community Credit Union and Coastal Community Private Wealth Group) to find out how they could help you invest wisely.