Remembering Mr. Market

Value investing

During these days of market volatility, it’s worth reminding ourselves of why we invest. If you’re a true investor and have done your homework, then the following parable from Chapter 8 of the will help you keep some perspective (emphasis mine):

Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or fears run away with him, and the value he proposes seems to you a little short of silly.

If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

I was really struck by this metaphor when I first read it. If I were a business owner, would I let someone from the outside tell me how much my company was worth? Who better to determine the value of my business than myself? In value investing, presumably, if you’ve done your homework, you’ve invested in a company’s stock because you believe the company is worth putting you money into, and not because it’s a way to win big fast, like playing roulette or Deal or No Deal. If so, then your ability to resist what others think your shares are worth should be easier to do.

For some reason, I always picture Mr. Market as from the Harry Potter series. O0bsequious, and easily abashed and led toward adulation or despair. I don’t know why.


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