Have you heard of Benjamin Graham? He is the author of a book called ‘The Intelligent Investor,’ and it was published in 1949. Much has transpired with the investment market since then, but Graham’s advice, especially as it pertains to Mr Market, still rings true today.
What does Warren Buffet have to say about Mr Market, an allegory from Graham’s book?
First, it is good for you to have a little background information on Mr Market. He is your business partner as an investor. To be a more rational investor, one is supposed to act as though he or she is buying shares in a company from Mr Market. The objective here is to buy low and sell high, obviously, but human emotion often causes investors to do the exact opposite.
Stock valuation is very important when discerning whether or not to make a particular investment. That being said, Mr Market acts as sort of a buffer against making foolish investment decisions. Mr Market is very emotional, and he, being the stock market itself, tends to fluctuate quite dramatically. While that was the case in 1949 when Graham wrote his book, fluctuation within the market is more widespread than ever before.
Certain companies’ stock prices are more volatile than others, and there is also market manipulation to workaround. These days, it is even more important to do your due diligence in terms of stock valuation because you don’t want to buy into market manipulation trends. You need to know that the shares you are buying are worth the money you’re paying, and you want to pick up company stock at a value.
The value buy is the ideal way to handle the stock market. After all, you have to remember the basic objective is to buy low and sell high. Determining the value of a company’s stock is based on many objectives. You have to first take into account sales. Without sales, a company isn’t a company.
That’s just the bottom line.
You want to see forecasted sales growth that spells out profits. Naturally, you have to also look at a company’s debt. At the same time, you want to look at the market cap or what the company is worth. Price to earnings ratio is also important. It’s kind of ridiculous in some ways that companies are priced well ahead of earnings. Without that happening, however, there wouldn’t be the significant gains you see in today’s market, save for high dividend payouts.
Warren Buffet wrote an essay about Mr Market in his letter to Berkshire Hathaway shareholders in 1987. He urges investors to think as though they were investing in private companies. That makes it more personal, and to be clear, investing is certainly a personal matter. At the foundational level here, Buffet uses this allegorical figure, Mr Market, to solidify his belief about buying and holding when it comes to investing in the stock market.
Whether you buy and hold, swing trade or day trade, the philosophies learned from the tale about Mr Market have truth. One aspect of investing that people need to understand is that you don’t lose money until you sell. While you don’t want to ride a losing investment all the way down, you have other options. You can set a stop loss order, and you can also average down.
The fact of the matter is that investors need patience. If you are as manic depressive in your stock market investing as Mr Market is, then you are going to be allowing him to buy low and sell high, not yourself.