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The concept of Mr. Market:
Today, I will talk about one of the brilliant metaphors that have ever been created to understand how stocks get mispriced.
Grab a cone of Cornetto ice cream and let's get started.
Today, I will talk about one of the brilliant metaphors that have ever been created to understand how stocks get mispriced.
Grab a cone of Cornetto ice cream and let's get started.
Imagine you own a piece of share in a private business that is worth $1,000. You have a partner named Mr. Market who is a Drunken Psycho.
Every day, he tells you what your stake is worth. Sometimes his idea of value seems justified by the business developments.
But often, he gets carried away by his strong emotions of greed and fear making him quote unreasonable prices.
But often, he gets carried away by his strong emotions of greed and fear making him quote unreasonable prices.
Somedays, with excessive optimism, he quotes a high price compared to the intrinsic value.
While other days, filled up with excessive pessimism, he quotes a low price.
While other days, filled up with excessive pessimism, he quotes a low price.
Now here is a question,
Should this daily communication by crazy Mr. Market determine your view of the value of $1,000 in the business?
Of course not. However, it helps only in case you agree with him or plan to trade with him.
Should this daily communication by crazy Mr. Market determine your view of the value of $1,000 in the business?
Of course not. However, it helps only in case you agree with him or plan to trade with him.
As a prudent owner, all you have to do is you can decide to sell your stake when he quotes a ridiculous price. Or buy more when he quotes a depressing price.
The term Mr. Market was first coined by Ben Graham (The father of Value investing) in his book 'The Intelligent Investor'
Mr. Market is none other than the stock market. Unlike in the parable, the real market quotes the prices of thousands of businesses daily.
Many times, the market mis-prices stocks or sectors.
And this is the crux of value investing. That is to buy mis-priced bets and earn decent returns.
And this is the crux of value investing. That is to buy mis-priced bets and earn decent returns.
A good example is the recent market crash in March 2020 where Mr. Market tumbled with fear and provided quality businesses at a reasonable value.
One notable point here is despite Mr. Market's crazy moves, millions of people base their decisions on him.
This leads to a roller coaster ride along with the market by buying high and selling low.
This leads to a roller coaster ride along with the market by buying high and selling low.
Would you willingly allow a certifiable lunatic to tell you that you should exactly feel the way he feels?
Would you ever agree to be euphoric just because he is (or) miserable just because he thinks you should be?
Of course not.
Would you ever agree to be euphoric just because he is (or) miserable just because he thinks you should be?
Of course not.
You can't control Mr. Market and his whims in the short term, but you can always control your:
•Risk
•Tax bills
•Brokerage costs
•Ownership costs
•Return expectations
•Risk
•Tax bills
•Brokerage costs
•Ownership costs
•Return expectations
So here are the takeaways from the discussion:
1. Think for yourself.
2. Control the controllable.
1. Think for yourself.
2. Control the controllable.
Let's conclude by quoting the single most powerful paragraph from the book 'The Intelligent Investor'
Read these lines million times. Let them guide you throughout your investing life.
Read these lines million times. Let them guide you throughout your investing life.
That's it, folks. Hope you enjoyed reading. Like and retweet if you find the thread value-added. Have a great day.
