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Mr. Market: A Parable


In the previous blog post, I shared a parable about the Gotrocks family taken from Jack Bogle's book, "The Little Book of Common Sense Investing." We learned just how unhelpful the "Helpers" in the stock market can be. In fact, by hiring more and more of them in an effort to beat the stock market's return, the overall wealth of the Gotrocks family diminished.


Often times, we believe that we have to be in constant motion in order to be successful, however, when it comes to investing (particularly in Index Funds) the less we do the better. Buy it, keep it, and periodically invest more money in an index fund. That's it. The beauty of index funds is that they take the emotions out of the game and for any investor, particularly the layman investor, that is a very important thing.


Investor emotions are one of the biggest costs in the investment game. It's when we let our emotions get the best of us that we end up making costly decisions that eat up most of our profits, OR even worse, we lose all our money. WE DON'T WANT THAT!


In this blog post, I want to share another parable explaining how the noise of the market can be a great distraction in making sound investment choices. The parable of "Mr. Market" is taken from Benjamin Graham's famous book, "The Intelligent Investor," and helps to illuminate the costs of being too emotional when investing. Benjamin Graham discusses this parable in Chapter 8 of his book:


"Let's close this section with something in the nature of a parable. Imagine that in some private business you own a small share that costs you $1000. 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 $1000 interest in the enterprise? Only in the 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.


The true investor is in that very position when he owns a listed common stock. He can take advantage of the daily market price or leave it alone, as dictated by his own judgement 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. The provide him with an opportunity to buy wisely when prices fall sharply and 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 the company."


Mr. Market is constantly knocking on your door with new stories everyday. They are all driven by what he believes or feels, and not by real economic fundamentals. He doesn't care for the science of long term growth. He only holds short term perspectives, which, to the layman investor, holds no value. Mr. Market is purely an emotional creature.


Now, Benjamin Graham discusses Mr. Market within the context of an investor buying and selling individual stocks, which doesn't really apply to what we are trying to accomplish, since we are looking to buy and keep index funds, but Graham's explanation of the noisy, emotional Mr. Market is something the layman investor must pay attention to. We must not yield to the hooting and hollering of Mr. Market. Once we buy into the American Economy as a whole (through Index Funds) we simply tune out the noise and emotions of the market.


I know tuning out may sound scary and counter-intuitive, but remember the bet we are taking. We are not betting on any one individual company, we are betting on America as a whole. We are buying into the resiliency of American business. Once we've decided on that and invest our money through index funds, then we simply run on autopilot. Periodically, from there on out, we invest more money into the fund. That's it. Keep it simple!! Remember, we're not here to SPECULATE!!




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