Fool's Eye View

[ April 17, 2000 ]

Three Cheers for Mr Market!

By Maynard Paton (TMFMayn)

Carburton Street, London -- I love market stock market declines. In fact nothing there is nothing I enjoy better than watching a "Sea of Red" flow across trading monitors or reading the morning newspapers proclaiming the next "Black Monday" is upon us.

Why? Because short-term panic allows any investor to pick up their favourite companies at sometimes fair or bargain prices. Tales of stock market doom leads to investors' depression, despondency and despair as share prices plummet. Have a read of TMFNigel's Market Crash Survival Course should you think that the current stock market decline now means it's time to offload your investments.

All the to-ings and fro-ings can be neatly summed up by legendary investor Warren Buffett, who I guess is having a chuckle at the latest stock market tumble. Buffett recounted the following sound tale of investment advice within his 1987 letter to shareholders, after touching upon the market volatility of that year.

"Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations coming from a remarkably accommodating fellow named Mr Market who is your partner in a private business. Without fail, Mr Market appears daily and names a price at which he will either buy your interest or sell you his.

"For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can only see favourable factors affecting the business. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him"

"Mr Market has another endearing characteristic: He doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behaviour, the better for you."

"In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behaviour of stock and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts from the super-contagious emotions that swirl about the market place. In my own efforts to stay insulated, I have found it highly useful to keep Ben's Mr. Market concept firmly in mind."

"Mr Market is there to serve you, not guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up in a particularly foolish mood, you are free to either ignore him or take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren't certain that you understand and can value your business far better than Mr Market, you don't belong in the game."

And further words of wisdom from Buffett:

"Investors who expect to be ongoing buyers of investments throughout their lifetimes should adopt a similar attitude toward market fluctuations; instead many illogically become euphoric when stock prices rise and unhappy when they fall. They show no such confusion in their reaction to food prices: Knowing they are forever going to be buyers of food, they welcome falling prices and deplore price increases."

"The most common cause of low prices is pessimism -- sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer".

And the final words from each paragraph require repeating:

" Knowing they (investors) are forever going to be buyers of food (or shares), they welcome falling prices and deplore price increases.

"It's optimism that is the enemy of the rational buyer"

It's simple really. Market declines are great opportunities to top-up on your favourite long-term holdings at fair or bargain prices. In these volatile times, remember Mr Market and Buffett's allegory:" Under these conditions, the more manic-depressive his behaviour, the better for you."

So three cheers for Mr Market then, for bringing today's depression!

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Related Links
• Market Crash Survival Guide