Tenets of Value Investing – Mr. Market

For those of you unfamiliar with Mr. Market, he is an analogy that Ben Graham introduced to explain volatility in the markets.  Every day, Mr. Market provides a price for every stock in the market that he is willing to buy at and sell at.  Some days, Mr. Market is exuberant, and will gladly buy or sell stocks at fair or even lofty prices.  However, some days Mr. Market is depressed and will only buy or sell at depressed (low) prices to reflect his mood.  The key is to take advantage of Mr. Market when he is depressed by buying from him to cheer him up, and then wait until he is exuberant and willing to buy back those shares at a fair price.  Buy low, sell high.  The difficulty in all of this of course, is emotion and the nature of the public market itself.

If you owned a 50% stake in a private company, it would be very strange to have your partner come up to you every day and offer to either buy or sell an addition stake in the company to you at a different price.  If you think about it though, this is essentially what the stock market does for public companies.  Someone is providing a price that they are willing to pay for the stake in a business that you own.  Correspondingly, they are also offering to sell you a larger stake or a new stake in many other businesses.  However, just because they are making an offer does not mean you have to accept it.

Warren Buffett has a great quote relating investing to baseball where he says that investing is a no-called-strikes game.  What this means is that as an investor, you don’t have to accept any of the offers thrown your way on any given day.  You have the luxury of simply sitting at the plate watching Mr. Market offer up prices day after day.  If you do this long enough, and are prepared, one day you are assured that Mr. Market will give you a great pitch (company) at a great price that you can hit out of the park by buying as much as you can.  You then simply sit at the plate waiting again until Mr. Market recognizes the error of his ways and offers up a fair price for the company that you just obtained on the cheap.

And that is the entire trick to investing.  Doing your homework so you can recognize a great investing opportunity when it comes along, patience to wait for that opportunity, and then confidence to bet big when you see that perfect pitch coming your way.

Until next time,
Nathan @ EngineeringIncome.com

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