Understanding The Market
Benjamin Graham, for those that don’t know him, is often referred to as the father of intelligent value investing. He mentored Warren Buffett during his formative years.
Graham invented a parable which very elegantly explains the way in which the stock market operates.
Who is Benjamin Graham’s Mr Market?
Mr. Market is your partner in a private business. Without fail, he appears daily and names a price at which he will either buy some of your interest in the business or else sell you an element of his interest. The choice is always yours.
The business has economic characteristics that make it stable but Mr. Market’s price quotations are erratic. In truth, Mr Market has incurable emotional problems and suffers from extreme mood swings.
Sometimes he feels euphoric and with overwhelming optimism towards the business. In that mood he names a very high price because he fears that you will snap up his interest and rob him of imminent gains. This presents you with a wonderful selling opportunity.
At other times he suffers from manic depression and can see nothing but trouble ahead for both the business and the world. On these occasions he names a very low price, since he is terrified that you will unload your interest on him. Now you have an interesting opportunity to buy at a favourable price.
Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow.
So, at each price, the choice of whether to buy, sell or do nothing is always yours.
Mr. Market is there to serve you, not to guide you. It is his willingness to buy or to sell at your convenience that is valuable to you. You are not interested in his wisdom.
If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.
If you aren’t certain that you understand the business or if you don’t possess the skill set to ascertain a value for it yourself, then you don’t belong in the game.
What Does This Mean For An Investor?
Markets go up and down. The thing to bear in mind is that market gyrations are a mark of market sentiment and not a reflection of the quality of a company.
By way of example, Amazon Inc was trading at $2,400 per share when the Covid pandemic hit. It dropped to $1,600 because market sentiment was negative, not because Amazon became a bad investment. Shortly thereafter Amazon rallied to $3,400.
If you bought at $2,400 as a long term investment and two years later the stock is up nearly 50%, do you care that it temporarily went to $1,600 due to the mood swings of Mr Market? I think not.
The losers in this situation are the people that behave like Mr Market. They would have bought Amazon at $2,400 and sold in panic at $1,600, losing 33% of their capital.
Look at this from a different perspective. If you invest in a private company that is not listed on the stock exchange (maybe a clothing store, a restaurant or a travel agency) would you worry if the stock market dipped? Of course not. So why should you worry if you are invested in a good listed company when the market dips?
The Rock & Turner Partnership finds good companies and buys them at a good price for the long term. We buy a share in the company and then ignore what the market is doing. We almost act a though the stock market has closed for 10 years.
When the market falls we see a price dip as the equivalent of a SALE in the stock market … Everything is 25% off…. Fill your basket!
Another way to look at it is that if you want to out-perform the market then you need to take money from people who under-perform the market (the people who habitually lose money). Most people buy when the market is high because they think it will keep going higher (real estate, Tesla shares, Bitcoin, etc) and then panic and sell when it drops. Buy high and sell low is why most amateurs lose money.
As Graham says, you don’t want wisdom from other market players, you want their money! Said differently, ignore what others are doing in the market except to the extent that it presents a money making opportunity for you.
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