Meet Mr. Market

On multiple occasions, the world of finance gets bloated with external information that turns out to be very irrelevant. These factors inflate the economic state of businesses, world economies, and the next “big new thing”.

This is not new, even more, it has been around for many business cycles, but investors, as well as employees, in the financial industries get caught up in this mirage. Fortunately for us, these incoherent movements create market fluctuations which assist us by opening opportunities when the market oppresses a sector or a specific company.

Let’s make this clear. We cannot predict short-term market movements in any direction, and it is extremely hard to engage in investing decisions in which the future of our clients’ money lies on the prophecy of others. There is no proof that either experience or logic can help the average investor predict market movements versus the general population.

What we can do is study and learn from those before us. We strongly recommend that you read The Intelligent Investor by Benjamin Graham. In this book, you will find one of the most interesting views regarding the stock market, investors and their behavior. Ben Graham writes in chapter 8 of his book what to expect as an investor. This is extremely important and, believe it or not, tends to be extremely hard to convince many investors and clients to avoid their gut feeling and go against the herd. In case you would rather delay the reading of this book, here is what we think are the most important points of chapter 8 (numerical order does not reflect level of importance):

  1. Every investor must be prepared both financially and psychologically for fluctuations in the market for periods ranging from days to years.
  2. Avoid trying to time market levels but concentrate on when it is a good entry or exit point in an investment. “It is easy for us to tell you not to speculate; the hard thing will be for you to follow this advice.”
  3. Every investor who holds equity, such as common stock, should expect them to change in market value throughout the years. These changes in value can range the price of a stock up to 50% in any direction.  If you cannot withstand this, then you should not be in the business of investing in stocks.

To close this segment, this is the most important piece of this chapter and what better than to show it from the words used by Ben Graham:

“Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly. If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise?”

The former statement is, single-handedly, the most important piece of writing ever about the stock market fluctuations.

So, next time your investment fluctuates in price, think about Mr. Market as a manic depressive individual that wakes up every day having multiple moods and wants to trick you. It is your job to take advantage of this and act toward your own benefit rather than for someone else.

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One thought on “Meet Mr. Market

  1. Pingback: Keep an eye out, this could be an investing opportunity! | SONOMAN Rx

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