Mr Market Turns Up Everyday

'Well, you know, I get quite nervy about my investments from time to time – especially when the market is jumpy. I think, should I buy? Or sell? Or hold? I mean, don’t most people feel that way?'

The short answer is ‘yes’, unsophisticated investors frequently feel that way … while those with experience rarely suffer such apprehensions.

A great illustration on countering investment anxiety is to consider an analogy created by ‘the father of value investing’, Ben Graham – he’s the man who educated Warren Buffet, one of the world’s wealthiest investors.

The subject of Mr Graham’s analogy is ‘Mr Market’.

Mr. Market, he said, could be likened to a partner in business with the investor. He would turn up every day and offer to sell his share of the business to the investor, or to buy the investor’s share.

The point about Mr. Market is that he is worryingly inconsistent: on some days he is wildly optimistic and on others the very essence of pessimism. Mr. Market’s characteristics are that he is emotional, often irrational and frequently unpredictable.

Graham’s key point in all this is that the investor should recognise that Mr. Market (a proxy for the market as a whole) should not be allowed to influence or persuade the investor to buy or sell unless the investor has sound, arithmetic reasons for doing so. In short, the investor should make decisions based upon thorough company analysis and avoid both the utopian and dystopian views of market prices.

The bottom line: rationality trumps emotion every time when making investment decisions.

Key Points

• While no investor welcomes market uncertainty, nor its twin, volatility, these promote no reason to panic.
• A well-constructed portfolio is defence against attitudes of confusion or anxiety.
• Though himself unpredictable, Mr Market appears every day to put a price on the shares he offers for sale and those he is prepared to buy from you.
• Judge his offer (the market) purely on the basis of sound arithmetic and rational research.

Notes on ‘The right price’

• The quoted market price of any security is frequently at odds with its intrinsic value.
• It is a responsibility of good value investors to identify under-priced securities on behalf of their clients.
• Identification of such opportunities belongs to those who have long market experience underpinned by rigorous research.
• At Joseph Palmers & Sons we have the experience and spend considerable sums on research … it pays off for our clients.
• For more on this, see this narrative of Ben Graham in our series on Great Investors.

Disclaimer & General Advice Warning

This publication has been prepared by Joseph Palmer & Sons (ABN 29 548 490 818) an Australian Financial Services Licensee (AFSL 247067). Whilst the information contained in this publication has been prepared with all reasonable care from sources, which Joseph Palmer & Sons believes are reliable, no responsibility or liability is accepted by Joseph Palmer & Sons for any errors or omissions or misstatements however caused. Any opinions, forecasts or recommendations reflects the judgment and assumptions of Joseph Palmer & Sons as at the date of publication and may change without notice. Joseph Palmer & Sons, their officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. This publication is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Any securities recommendation contained in this publication is unsolicited general information only. Joseph Palmer & Sons are not aware that any recipient intends to rely on this publication and are not aware of the manner in which a recipient intends to use it. In preparing our information, it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual recipient. Investors must obtain individual financial advice from their investment advisor to determine whether recommendations contained in this publication are appropriate to their personal investment objectives, financial situation or particular needs before acting on any such recommendations.