The Tale of Mr. Market
By: Matt Koppenheffer for Smart401k.com
Benjamin Graham was a finance professor at Columbia University and is known to this day as “The Father of Value Investing.” He taught some of the most renowned investors including Warren Buffett, Bill Ruane, and Walter Schloss. He also wrote one of the most influential investing books, The Intelligent Investor.
In The Intelligent Investor Graham tells a story about a man he calls Mr. Market. In the story, Mr. Market is a business partner of yours. Every day Mr. Market comes to your door and offers to either buy you out of the partnership or sell you his stake in it.
But here’s the catch: Mr. Market is a bit manic depressive. Because of this, on some days he’ll come to the door feeling jubilant and will offer you a high price for your share of the business and demand a similarly high price if you want to buy his. On other days, Mr. Market will be inconsolably depressed and will be willing to sell you his stake for a very low price, but will also only give you the same lowball offer if you want to sell your stake.
On any given day you can obviously buy from or sell to Mr. Market, but you also have the option of completely ignoring him. If you do ignore him, he never holds it against you and always comes back the following day.
Now Mr. Market the man isn’t real, but the stock market behaves a lot like the fictional character. Every day we can pull up quotes for various stocks or for the entire market as a whole. If we think the prices are low in relation to value, we can buy; if we think prices are high in relation to value, we can sell; and if prices fall somewhere in the grey area in between, we’re never forced to do either. And every day (every weekday at least) the market does its thing all over again no matter what we did or didn’t do the day before.
The catch here is that though Mr. Market offers some great deals from time to time, investors have to be alert and ready when those offers come up. Investors have two options when it comes to this. The first is to do the analysis themselves and take up Mr. Market on his offers directly. While many individual investors are very successful with this, it requires a lot of knowledge, time, and, most of all, interest.
Fortunately, for those that don’t have the time to or aren’t interested in tracking the markets there are mutual fund managers that are ready and willing to roll up their sleeves and do the work for them. When taking this route, though, the investing dynamic changes. Instead of focusing on patience and diligent analysis, the focus should be on steady, consistent investing.
The reason for this is that it is very tough for investors that aren’t doing their own analysis and closely following the market to accurately gauge where the market is headed. Many investors try to do this anyway, and the unfortunate result is that they tend to invest more when Mr. Market is in one of his overexcited moods, and stop investing altogether when Mr. Market is depressed and offering the best deals. When investing with a fund manager, making regular contributions over an extended period of time allows an investor to build an ever growing retirement portfolio while leaving the specifics of where and when to invest to the fund manager.
Of course, picking the fund manager(s) is a topic in and of itself!
