Bespoke on the Bull

Generally, I do not spend any time thinking about markets...bull, bear or whatever. My focus is on buying shares of great businesses at the right price. To allow growth in intrinsic value of the businesses themselves over time to do the heavy lifting...not some special ability to trade or time the market.

I've always found Ben Graham's Mr. Market allegory to be useful. I think it's as relevant as ever.

Ben's Mr. Market allegory may seem out-of-date in today's investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising 'Take two aspirins'? - Warren Buffett in the 1987 Berkshire Hathaway Shareholder Letter

It's a simple but useful idea. Mr. Market experiences extreme mood swings and, as a result, often wants to sell/buy businesses well above or below intrinsic value.

Graham's favorite allegory is that of Mr. Market, an obliging fellow who turns up every day at the shareholder's door offering to buy or sell his shares at a different price. Often, the price quoted by Mr. Market seems plausible, but sometimes it is ridiculous. The investor is free to either agree with his quoted price and trade with him, or ignore him completely. Mr. Market doesn't mind this, and will be back the following day to quote another price.

The point of this anecdote is that the investor should not regard the whims of Mr. Market as a determining factor in the value of the shares the investor owns. He should profit from market folly rather than participate in it. The investor is advised to concentrate on the real life performance of his companies and receiving dividends, rather than be too concerned with Mr. Market's often irrational behaviour. - Wikipedia

I cannot have an opinion on every stock every day. The market is a psychotic, drunk, manic-depressive who buys and sells 4,000 companies every day. In one year, the [average stock's] high can be double its low. These businesses are no more volatile than a farm or an apartment building, whose values do not swing so wildly. - Warren Buffett at Wharton

So not a new idea but still just as useful today as ever if you are a long-term investor. Certainly more useful than the myriad technical approaches that are so popular (traders probably have a different view...I can't speak to that).

Having said that, Bespoke Investment Group does provide some great statistics on markets for those that are more interested in this stuff than I. Here is one of their posts from this morning comparing the current bull market to past ones going back to the 1920's.

Adam

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Bespoke on the Bull

Reviewed by jembe
Published : 2009-08-24T06:36:00-07:00
Rating : 4.5