Mr. Market was introduced to me in the first book on investing that I read: Ben Graham’s “The Intelligent Investor”.
Mood Swings
Mr. Market arrives at your door, Monday through Friday. He opens shop and shows his wares to you: Thousands of companies, all available at different prices. On some, he feels very excited about. These usually command a high price, but Mr. Market tells you not to worry, as these will keep going up in price (He can indeed be very persuasive). In fact, he seems to not have a single negative thing to say about these businesses.
Then he has businesses going for cheaper. He doesn’t care much for these. At this very moment, they are not living up to Mr. Markets expectations, and his attention span is low. The exciting wares is what he really likes. Some of these discounted businesses he can’t even give away. Granted, Mr. Market is right on some of these lemons, and you may smell something fishy in these too. Then, as we browse through his discounted items, every once in a while we find a gem. Something that Mr. Market has become overly pessimistic about.
He’s Here To Serve, Not To Instruct
When you find these businesses that have been discounted too heavily considering their merits, you need to find out Mr. Market’s reasons for offering them to you for a discount. As we know the fellow is a manic-depressive and is completely at the mercy of his emotions (in the short-run). If you stay rational, weigh the facts and ignore the poor fellow’s emotions, you can indeed find something great for less than its worth. Once you’ve purchased his wares for less then they’re worth, there is nothing left to do but wait. When Mr. Market realizes his mistake, he usually is quite quick to correct himself. But no one can tell you when.
In business school, you can take many courses on finance. Once again, I need to praise Buffett’s wisdom when he was asked about these classes. He said all you really need to teach are two subjects: “How to value a business” and “How to think about markets”. Understanding Mr. Market is what Buffett is referring to in the latter. Mr. Market creates volatility through his mood swings, and you should use it to your advantage.
Enjoy The Process
When I read “The Intelligent Investor”, I had no idea what to expect. My knowledge was very low and I didn’t know much about stocks. But the book had a few core philosophies that I understood immediately and the feeling was like being hit by a two-by-four on the head. I knew that I can do well with the right philosophy and mindset. So far the journey has been fulfilling, with failures and successes. But due to the right philosophy and process, the successes do indeed make up for the failures.
I’ll continue to make mistakes, that’s certain. But that’s the price you pay for the successes, as with anything in life. If you truly understand the philosophy, you’ll trust the process. Ignore the street, stay independently minded and trust yourself.
I strongly recommend reading Klarman’s excellent speech on capitalism, its benefits, its problems and its future.
-IGTSKasimir
Further Reading
Warren Buffett – The Partnership Days (1956 – 1969)
Philip A. Fisher – Lessons From The 15% Man
The Best of Ben Graham – Security Analysis
Phil Town – The Compounding River Guide
Margin of Safety – The Most Important Thing
Intelligent Investing = Thinking In Probabilities
The Emotional Stages of a Value Investor
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