Mr. Market can quote some ridiculous prices from time to time that has nothing to do with the business. You can get caught up in his mood swings, take advantage of him, or ignore him. Mr. Market doesn’t care.
The nice thing about this story is it gets retold all time – usually around market lows – by great investors who add their own twist, which gives you some reflection on the times. So anytime I run across it, I save it.
Seth Klarman told his version in the 2000 Baupost letter following the Dotcom crash:
Value investors frequently invoke the explanatory device of Mr. Market, a disembodied character who establishes securities prices in the short run despite knowing nothing about investing. A manic fellow, Mr. Market will sometimes become exuberant, other times depressed. Investors who look to Mr. Market for advice will inevitably do the wrong thing at the wrong time. Investors who attempt to profit from Mr. Market’s manic depressive nature will be successful over the long run. These days, Mr. Market has run completely amuck, often manifesting manic and depressive behavior at the same time in different securities.
How should Mr. Market’s increasingly volatile behavior influence investors? In our view, investors should, more than ever, act on the assumption that any stock or bond can trade, for a time, at any price. Margin debt (which we do not utilize) should be considered extremely dangerous; investors should never enable Mr. Market’s mood swings to result in a margin call which could necessitate forced selling. Investors should prepare themselves for a greater degree of portfolio volatility, because it is impossible to tell how wild Mr. Market’s mood swings may become. It is of paramount importance that investors brace themselves for a stern test of their investment will. Avoiding overpriced speculations and maintaining a strict value discipline are more important than ever because the overpricings are so egregious and the bargains so pronounced. Yet the price swings are so severe and swift, and not always in the desired direction, that investors must be braced for mark to market losses. Those sufficiently disciplined and unwavering will be generously rewarded.
This year, Mr. Market has been less moody than usual. Low volatility has been the big talking point the second half of this year.
Don’t get too used to it though. The parable is a nice reminder that Mr. Market won’t always be this way. Just because Mr. Market has been mellow, it doesn’t mean he’s changed.
- It’s Not ETFs That Need Testing, It’s Investors – E. Balchunas
- Two Myths that Deserve to Die – L. Hamtil
- Lou Simpson Explains His Portfolio Strategy – Kellogg Insight
- Bill Miller Q&A: What’s Luck Got to Do with It? – J. Zweig
- The Emerging-Market Rally Is Really Just About Tech Shares – BloombergView
- FAANG SCHMAANG: Don’t Blame Over-valuation of the S&P on Information Technology (pdf) – GMO
- A Reality Check on Stock-Market ‘Anomalies’ – W. Gray
- Never Do That Again – M. Housel
- The Constant Reminder – Of Dollars and Data
- Power Laws: How Nonlinear Relationships Amplify Results – Farnam Street
- The 7 Megatrends that Could Beat Global Warming – Guardian
- The State of AI (video) – EmTech 2017
- Waymo Makes History Testing on Public Roads with No One at the Wheel – Ars Technica