Mr Market turns 70
16 July 2019
23 September 2019
“Mr Market” is one of the best analogies in finance. He was born in 1949, in The Intelligent Investor, by Benjamin Graham. Seventy years on, we think he has aged rather well.
Imagine that you own a small business, along with one partner, Mr Market. Your working relationship is unusual. Every day, Mr Market walks in and tells you how much he thinks your share of the firm is worth. He then gives you a chance to buy more of the business, or to sell some of your shares. You can choose to buy, sell, or do nothing. Once you give him an answer, Mr Market clocks off for the day.
There are other odd things about Mr Market. First, he doesn’t care what you do – buy, sell or do nothing. He’ll come back every day, name a price and pose the same question. Second, because of how little time he spends in the office, he has little knowledge of how your shared business actually works. He pays attention to the details, maybe once a year, at your small shareholders meeting. His daily quote for the value of your company is based mostly on how he feels when he wakes up each day. Third, and most importantly, how he feels changes a lot. Mr Market is emotionally unstable. He can go from elation to despair in a week, based on as little as the morning headlines. His feelings towards the business and therefore his valuation quotes can vary wildly.
As the person who runs the business, you have a far better idea than him of how it is going. This can give you some opportunities. Occasionally, Mr Market can get so down in the dumps that his offer looks tempting enough for you to increase your stake. At other times, he is so full of beans that he makes you an offer you can’t refuse, and you might offload some of your shares in the company. Most of the time, though, you ignore him.
Investing for the long term
This would be a strange way to run a business, but it’s exactly how long-term investors should operate when thinking about their portfolios. Mr Market doesn’t care about portfolio construction, time horizon, or risk. His quoted price is simply the end-product of millions of transactions by various buyers and sellers – all of whom have different motivations.
The information content of a daily change in market price is almost always zero in relation to the long-term value of a company. Mr Market is just there to tell you his latest prices – the main knowledge you take away is whether he is feeling miserable or euphoric that day. Mr Market gets the value of your business right in the long run, on average, but there can be big ups and downs in between.
Still strong at seventy
Things have changed a lot since Ben Graham’s day. Ms Market has far more headlines to digest. She uses computers. And she’s constantly providing quotes, rather than just once a day. She’s still not doing any real work, though. The implicit assumption with efficient markets, is that any move in stock prices is related to a change in business fundamentals. Much of the time, though, that isn’t the case.
A real example: in September 2018, the financial world reclassified Alphabet (Google) and Facebook from the ’technology’ sector to the ‘communications services’ sector overnight. Technology index funds had to sell those shares (and buy others) immediately – pushing their prices down. Nothing happened to their underlying businesses. But their prices fell, all the same.
Ms Market doesn’t give you that context – she never will. Just a price. It’s up to us as investors to be confident in our views of our portfolios. That way we can spend most of our time ignoring Ms Market, but take advantage of her pricing when we think she gets it wrong.
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.