Who is ‘Mr Market’? Do you still rely on the price of a stock at the time you decide to buy, and the time you decide to sell? Are you pre-occupied with price action? Today, we will take a closer look at one of the corner stones of Pure Value Investing (PVI)- Mr Market. We will learn how market price is mainly part of the noise we need to filter out- how market price is nearly irrelevant.
Pre-Occupied with Price?
Are you the type of investor who checks their stock prices regularly, such as weekly or monthly? Why? Are you pre-occupied with the price of your stock and assume that it is a measure of inherent or intrinsic value? Do you think this pre-occupation helps with your long-term results?
Most of us will answer ‘yes’ to all of these questions, but we are wrong in all cases. Value Investors, or Pure Value Investors (PVI) as I like to say, answer ‘no’ to all of these questions. Importantly, concerning the very last question, we have strong evidence over many years proving that paying little attention to stock prices actually pay off.
Our pre-occupation with market prices is understandable. On a daily basis we are bombarded with the media, the ‘experts’ talking about the past and future price of a stock, or the price of global markets. They suggest price action is an exact, predictable science. This is clearly not the case.
The ‘industry’, technical analysts or chartists, the media, and all predictors of market price fail both in the short term and in the long term. Why? Because market price is not a science. It is fickle. Market prices are now so complex, particularly with global and digitally connected markets, that it is not predictable. There are at best, broad market cycles, but they are always subject to the global and company fundamentals. Today, knowing Mr Market is more important than ever.
Who is Mr Market?
Mr Market was the analogy Benjamin Graham first introduced in 1949 in his watershed book on securities analysis, The Intelligent Investor (Graham, B 1973, The Intelligent Investor, Revised Edition, HarperCollins, New York). Mr Market came alive in the famous ‘Chapter 8’. It is probably fair to say, if you as an investor do not know Mr Market well, then things are likely to be very challenging for you.
Mr Market is a light-hearted characterisation of market price, or the misnomer of ‘market value’. The market price of a stock or other security is nearly irrelevant to the decision to buy a company, or the rare decision to sell it. Mr Market is only relevant when he is having a bad day- when prices are low and the stock is cheap when compared to its Intrinsic Value (IV).
If you know how to calculate Intrinsic Value, and how to define a great company based particularly on free cash flows over the long term, then you buy when Mr Market’s ‘quote’ is significantly or reasonably less than the Intrinsic Value. You will look to hold great companies for the long term, perhaps indefinitely. Great companies held long term maximise the power of compounding.
“Time is the friend of the wonderful company, the enemy of the mediocre.” – Warren Buffett
You will see we said earlier, the stock price is nearly irrelevant. We say nearly because it’s principally relevant in the buying decision. Some may talk to Mr Market in deciding when, or if to sell, but here too, it is best to leave the fickle nature of Mr Market alone.
If you have a great company, look to hold it perhaps indefinitely, despite Mr Market. If its Intrinsic Value continues to grow, if other company criteria are sound, including free cash flows, debt levels and management, then why sell it? Why trigger tax and cost issues?
At all other times, you can ignore Mr Market. At all other times you can filter out the technical analysts, the media, the finance journalists, the pundits, the predictors and the pretenders.
You have bought a great, growing company at a great price. You intend to hold it long term. Simple.
The Benefits of Knowing Mr Market
If we stop and pause now, and deeply digest the power of largely ignoring Mr Market, we see there are many benefits flowing to us. These include-
- Psychology. We can manage our psychology better. We know and accept market price cannot be predicted. We do not try to ‘time the markets’. We just look for great companies at a cheap price compared to Intrinsic Value. When corrections come along, and we expect them to come along, we see these times as ‘the best of times’. Corrections give us the opportunity to buy great companies even more cheaply. When Mr Market is depressed, Value Investors are usually excited and joyous.
- Freedom. Largely ignoring Mr Market frees up time and energy. We can invest part-time if we wish, work on other projects, ‘semi retire’, look to take on a philanthropic project, and so on. Mr market gives us back our time. Knowing Mr Market gives us freedom.
- Valuation. Third, by not looking for ‘market value’, by not focusing on Price to Earnings (P/E) ratios or Book to Value (BV) ratios, and looking for Intrinsic Value based on free cash flows, we get to the heart of a great business. PE or BV numbers are, at best, crude shortcuts. They are usually used by people who are either too lazy, or who do not know how to calculate Intrinsic Value. By digging deeper in this way, we avoid such valuation errors, and are put in a powerful position when it comes to company valuation and related decision-making.
- Creative Edge. Finally, knowing and applying Mr Market places us in small group of investors. Value Investors are still a minority. We are still outside the mainstream, and outside the industry. Yes, this is despite the proven results, particularly of people such as Warren Buffett going back over 50 years. Being in the minority gives us a creative or contrarian edge. This is where the best returns lie.
Our quick look at Mr Market is timely. Markets today in 2019 are very much at, or near, all time highs- again. It is harder to find good Intrinsic Value. This is fine. Value Investors just patiently wait. By largely ignoring Mr Market, not only do we have a creative edge to our investing, we have a rare ‘sleep at night’ factor. We do not care what Mr Market is doing most of the time. We ignore volatility; it does not truly measure risk. We have faith in our proven methodology now going back some 70 years. We know, so long as we find patience and simplicity, things will be fine in the long term. We move to a place we might call Zen Investing.
“Being in the minority gives us a creative and contrarian edge. This is where the best returns lie.”
By Lee Spano, Creatness International www.creatness.com
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