Warren Buffett - The Mr. Market Concept

A Primer to Ben Graham's Mr. Market (Video)

Interview With Mr Market

by THE GRAHAM INVESTOR on OCTOBER 3, 2011

Exclusive! The Graham Investor has staged an amazing interview with Mr Market. Never before has anyone managed to interview this elusive fellow. The interview gives us a new insight into what goes on in the mind of one of the most enigmatic figures of history. Still going strong, and still beguiling investors, traders, and journalists, Mr Market pulls no punches in this amazing interview.

TGI: Thank you for agreeing to this interview. Benjamin Graham once attempted to explain your behavior in a nutshell, suggesting that you came along each day and set a ridiculously high price or a ridiculously low price for an equity or a group of equities, and that the average investor would be well-placed to ignore you and seek his own counsel regarding valuations. What do you feel about that?

Mr Market:  Yes, I heard about that. I can’t speak for Mr Graham – he is dead, after all – but I am still going strong. I’ve been doing this for a few centuries now….I mean, back in 1637 when people were pretty much gambling on tulip bulbs, they were trying to pin it on me even back then. It has been ever thus: every time some bubble/bust or other comes along, they say Mr Market is up to his usual crazy tricks again, setting ridiculous prices. I tell you, one of these days I need to get myself a teflon coat.

TGI: But you do appear to be the one setting prices. Are you denying this?

Read more here:

http://www.grahaminvestor.com/2011/10/03/interview-with-mr-market/

Value Investing - Mr. Market

Mr. Market  


Benjamin Graham used an imaginary investor called Mr. Market to demonstrate his point that a wise investor chooses investments on their fundamental value rather than on the opinions of others or the direction of the markets.

Let's say you own a business and have a partner. His name is "Mr. Market." Your business is a good one. It has given you a high return on what you have invested in the business. The only problem is that your partner, Mr. Market, is kind of a strange dude. He's very emotional. Some days he's on a very euphoric high and other days he's very depressed.

Mr. Market has a curious habit. Every day he comes into the office and offers to sell you his share of the business or buy yours. However, because he is so moody, if he happens to be euphoric on a particular day, he wants a very high price for his share. On the other hand, if he's in one of his down moods, he's willing to sell out for a pittance.

The interesting thing about Mr. Market is that he doesn't seem to care whether or not you choose to buy his interest or sell yours. He doesn't get his feelings hurt. You can do whatever you want. It's completely up to you. He just keeps coming in the office every day, offering to buy or sell at wildly different prices. It's always the same good business it has always been. That doesn't change. It's just that, depending on his mood, some days Mr. Market is enthusiastic about the business and other days he's very pessimistic.

Since you know what the business is worth, you can just listen to Mr. Market's offer every day and decide if his offer is a good one or one you want to turn down. Even though Mr. Market's moods might be difficult to get used to, he's actually a great business partner to have.

That's exactly the way you should view the stock market. Choose your favorite business that happens to be one of the 10,000 or so publicly traded stocks. Look at the stock tables in the paper and notice the yearly high and low price for that stock. You'll find that there can be a dramatic difference between the high and the low during a single year. The business hasn't changed. It's just the mood of Mr. Market that changes.

http://www.trade4rich.com/Market.html

Mr. Market

Stock prices are quotes from an emotionally unstable business partner.

Use or ignore them as you see fit.

The stock market's obsession with the short term gives private investors an advantage.

Why The Stock Market Is Failing Britain

Published in Investing on 5 March 2012

A new report highlights fundamental failings.

Last year John Kay, a very accomplished economist who is a director of several companies, was asked by the government to see if the stock market is serving the needs of Britain's investors and companies. His interim findings were published last week and they make interesting reading.

Kay argues that today's stock market primarily serves the interests of the fund management industry, rather than those of companies and investors. He goes on to say that a culture of chasing short-term performance targets has developed, which is damaging the British economy and also harms investors' returns.

Secondary markets are good

The London Stock Exchange (LSE: LSE) consists of two markets. Companies come to the primary market to raise capital by selling shares and bonds through initial public offerings, but afterwards these are traded on the secondary market, which is where most of the action occurs.

Many investors would be reluctant to invest in the first place if they didn't have an easy way out via the secondary market. Since they do, this encourages them to buy shares and bonds, and it allows companies to charge a higher price for their shares and bonds in the primary market.

You can always sell your shares in BP (LSE: BP), HSBC (LSE: HSBA), or indeed most other quoted companies when the market is open, but if you couldn't access the secondary market, you'd have to find a willing buyer, which could take quite some time and would greatly increase your transaction costs.

Another well-known secondary market, one which has revolutionised the trade in second-hand goods, is the auction website eBay (NASDAQ: EBAY.US). Before eBay you had to rely on word-of-mouth, classified newspaper adverts and/or specialist dealers -- today eBay gives you access to a global marketplace.

Obsessed with the short-term

Kay and his team say that the stock market tail now wags the economic dog to such an extent that it damages Britain's interests. Many contributors to the report consider that the combination of quarterly reporting and institutional fund management has caused the investing community to obsess about the next set of figures at the expense of everything else.

As a result, many companies focus on meeting the institutions' short-term expectations, often by "managing" their quarterly earnings, to such an extent that they take their eye off the long term.

Another problem is that chasing short-term targets and concentrating on beating the forecasts can encourage excessive risk-taking. This can reduce your long-term returns, as well as having some serious consequences for the economy.

We saw this happen in a big way several years ago when Royal Bank of Scotland (LSE: RBS) collapsed during the credit crunch, due to a reckless expansion programme, and it had to be bailed out by the long-suffering taxpayer.

Take advantage of the short termers

I believe that the stock market's obsession with the short term gives private investors an advantage. Unlike the typical fund manager, you won't be sacked if you have a bad quarter, so you should be able to take a long-term view.

This can pay off handsomely when the stock market is having one of its hissy fits, because when this happens, there are bargains to be had. Benjamin Graham summed this up nicely when he said; "In the short run, the market is a voting machine, but in the long run it is a weighing machine."

Separation of owner and manager

Another of Kay's concerns is that because most people nowadays invest through funds, rather than by directly owning shares, the economic interest of share ownership has been separated from the decision-making process. The choice of whether to buy, sell and exercise the voting rights attaching to shares is now overwhelmingly concentrated in the hands of the institutions.

This is nothing new; separating the control over property from its ownership has been a cornerstone of English trust law ever since the 11th century, when the King's Knights left their lands under stewardship before they went off to fight in the Crusades.

But it has mushroomed with the growth of the fund management industry during the last few decades, and the result is that most shareholders are absentee landlords with little interest in how their companies are run. The industry encourages this by offering nominee accounts, and making it very hard (and often expensive) for shareholders to exercise their votes.

The paradox of voting your shares

The difficulty that private investors have in voting shares held in nominee accounts is a bone of contention for some people. Personally I couldn't care less about exercising my voting rights unless my stake is large enough that that it might actually have an effect. If I don't like what I see, I "vote" by selling my shares.

When it comes to voting I'm a big fan of Downs Paradox, named after the public policy expert Anthony Downs who described it in his 1957 book An Economic Theory of Democracy. Downs says that if a rational self-interested person has just one vote in a very large electorate, then they should not bother to vote because this will not influence the outcome.

So, if you own 1% of the company, your vote is substantial and is thus worth exercising. The same goes if you are a constituent in a parliamentary election, which was won last time by just a few hundred votes. In both of these instances, your vote is very valuable.

But if you own 0.0005% of a company's shares, Downs Paradox says that a much better use of your time is to do something else, such as reading its report and accounts! Even though I attended Diageo's (LSE: DGE) annual general meeting last October, I didn't bother to vote -- my stake, whilst fairly substantial, is but one vote amongst more than a million others.

Kay's full report will be published this summer along with his recommendations. If you want to read his interim report you can find it at this webpage.

http://www.fool.co.uk/news/investing/2012/03/05/why-the-stock-market-is-failing-britain.aspx?source=ufwflwlnk0000001

The Investor and Market Fluctuations: Price fluctuations have only one significant meaning for true investor (8)

The true investor when he owns a listed common stock, can take advantage of the daily market price or leave it alone, as dictated by his own judgment and inclination.

• He must take cognizance of important price movements, for otherwise his judgment will have nothing to work on. 
• Conceivably they may give him a warning signal which he will do well to heed—this in plain English means that he is to sell his shares because the price has gone down, foreboding worse things to come. 
• In our view such signals are misleading at least as often as they are helpful. 

Basically, price fluctuations have only one significant meaning for the true investor. 

• They provide him with an opportunity to buy wisely when prices fall sharply and 
• to sell wisely when they advance a great deal. 
• At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies

The Investor and Market Fluctuations: Mr. Market Parable (7)

Mr.Market Parable.

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 his 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.