Mr. Market – The Conceptual Individual Every Investor Should Know About
Have you ever flogged down to your favorite store to hog up some items during a sale? – I believe most of us have. Picking upΩthings at a sale seems like the easiest way to save up some money on items which you would otherwise buy on a non-opportune time.
This includes everything from your groceries and must-have clothing accessories to early bird offers to your favorite concert or shows. For example, I always load up on extra toothpaste when there is a one-on-one offer. Toothpastes don’t turn bad and I need it every day. It only makes sense to buy those toothpastes when the company that is manufacturing it is kind enough to offer me two packs at the price of one.
The problem with this arrangement is that the price is being set only by a single entity – the manufacturing company, who obviously has some agenda behind the generous offer. This decision of offering 2 packs at the price of one has probably, or rather, most definitely been pondered over by some of the best minds of the country and it occurs only on the rarest of occasions.
Also, toothpastes are a consumption item and it offers no chance of value appreciation or money making opportunities other than if you decided to hoard up on these toothpastes during their sale and sell them when the sale is over. Although this might be a nice idea, but the hassle you’d have to go through for a couple bucks is probably not worth it.
But what if you could buy stocks when they’re on sale and sell them when the sale is over? You cannot consume the stock and it’s a product which may very well appreciate in value over time. It’s not much of a hassle these days. With a click of a button, you can hoard up on the stocks and then with another click of a button, you may sell off these hoards. Sounds good right?
This is exactly what Benjamin Graham contended when he was alive and used the same strategy to consistently beat the market over decades.
Benjamin Graham, the father of value investing and teacher of Warren Buffet had come up with this conceptual and hypothetical figure of a Mr. Market. Unlike the big toothpaste manufacturing company, it is Mr. Market who decides whether the stocks are on sale or not. Mr. Market is not a single entity – it is made up of everybody who participates in the stock market, including me and you.
Ben Graham said that this Mr. Market is very moody, it can change the prices of the stocks at will and quite frequently as opposed to the well thought of decisions of the toothpaste company. Since Mr. Market is made up of every participating body in the stock market, it reacts quite erratically due to multiple decision makers which confuse it. As a result, the prices of stocks fluctuate widely.
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This is where money making opportunities are hidden in plain sight. When Mr. Market is feeling depressed, scared and fearful, it will lower the prices of the stocks – it would make the stock go on sale. As stocks are non-consuming, value appreciating items, wouldn’t it make sense to load up on these stocks and sell them when Mr. Market is feeling good?
But how would we know that Mr. Market has gone on sale? It’s quite simple actually – all the news channels and newspapers would tell you so. When you see gloomy faces on the people, you should know that Mr. Market is depressed – stock prices are falling due to reasons such as highest interest rate, higher tax rates, higher regulation, lesser government expenditure, trade war, comments by a top ranking government official, uncertainty of the future etc. These are instances when the entities comprising Mr. Market are fearful and have upped their guards. They sell most of their stocks to protect them from losing further value. All of the market is doing the same thing – they are selling. Due to temporary fearful reasons when the stock prices are down, it could be a perfect time for you to hoard up good stocks when their prices are deflated and wait out the storm. When the storm is over, and it will definitely be over, you would stand to gain a lot of money by selling those fearful people the same stock that they sold you at cheap prices.
By having a little patience, you could take advantage of Mr. Market. It gives you enough opportunities to buy the stocks at the price you want and to sell at a price you want. You just have to wait for these prices to reflect. They would come, you’d just have to be watchful and cashful to make the most of a given opportunity.
All Mr. Market does is give wide and fluctuating prices of the same thing over a course of time even though the value of the item remains little changed throughout. If you know the value of the item, this service of Mr. Market to allow you to enter and exit the stock at will should be a welcome gesture to you.
It’s alright if you cannot ascertain the value of stocks. If it was easy, everybody would be doing it. Since it is not easy, and if you can’t devote substantial time to understand and evaluate a business, it would make sense to hand your money to someone who does know how to value stocks.
I am an MBA in Finance, a finance enthusiast and an ardent follower of Warren Buffet. I write detailed and well researched financial articles in niches such as investments, value investing, stock markets and personal finance. You can find me on LinkedIn.