Why Investors Must Understand Value

Preamble – Parody never seems to work on the Internet. People do not want help in thinking. They want conclusions. They also do not have the patience to read to the end. Despite these facts, it is a powerful tool and I urge you to stick with me to the conclusion. Apologies to Mr. Graham and Mr. Buffett.

Introducing Mr. Market

Imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his. Even though you might think the business that the two of you own is stable, you are wrong. Mr. Market’s quotations vary widely and reflect ultimate truth. At times he feels euphoric because of his deep insight into the favorable factors affecting the business. In those times, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is acutely aware of trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him. On both cases, he sees the recent trend in prices as solid evidence about what will happen next.

Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option, but you are foolish to ignore his wisdom. He comes armed with charts and moving averages and golden crosses and omens. The “message of the market” is part of his message to you. Listen up!!

 

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to guide you. His wisdom is available to you, but not to others. It is not yet reflected in current prices. Only through his special interpretation of the message can you determine the true value of your business. Mr. Market helps you profit from reading the newspaper and stock quotes, even though it is the same information widely known to everyone, including professional investors. If it were a poker game, this information would be crucial in helping you beat the alleged experts at the table.

 

This is a world in which markets know more than you do, but are still not efficient. You just need to know how to jump in front of the news in your market timing.

The Real Mr. Market

And now, let us compare my version with the actual words of Warren Buffett from his investment letter of 1987.

Imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his. Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

 

Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.

 

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”

My take?

Misguided Market Timing

Following the emotional Mr. Market is the biggest reason that investors go wrong in their timing. The current market is a typical example. The big news is that markets have declined. Every journalist must produce a story explaining why. They all produce the laundry list of well-known worries. Investors see this as fresh information.

Mr. Buffett also explains why you get this information:

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”?

 

Investment Implications

 

There is no substitute for knowledge about your investments. If you think that loaning money to the US government for ten years at 2% is a great deal, then go for it! Make sure you have a concept of value.

 

If you think that Ebola represents a long-term threat to airline and recreation stocks, then the current prices might seem just right. If you see the chance of a reduction in panic, you might find an opportunity or two.

 

If you think that the large populations of China and India will be completely satisfied with current energy consumption, then you might agree with the stories about “glut” and the fire sale of energy stocks. If not, you might find some opportunity.

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9 comments

  • jeanpy October 17, 2014  

    thanks for the great insight as always.

    I was very interested to learn the investment horizon of the sample of fund managers in the merrill survey.
    1/3 has less than a 3-month horizon.
    Only 1/3 has a more than 12-month horizon.
    No surprise to see such swings in the stock market then .

  • Jay Jackson October 17, 2014  

    Just finished Martin Wolf’s The Shifts and the Shocks. Talk about required reading for the details!

  • Gerry O’Brien October 18, 2014  

    Hi Jeff Miller:

    I am trying to understand your decision to move your web site “A Dash” to a new platform, but I do not see the advantages in the new platform.

    New platform
    https://www.dashofinsight.com/

    First, the super-size font in the new website is not necessary nor is it appreciated. The presentation of your articles takes up the width of the web page. This is not necessary. Moreover all the former group of items originally presented in the third column of your old website are now at the bottom of your new website. This is clumsy. Moreover, one group of items, Recommended Blogs, is gone, and other groups of items are much shorter than before.

    Second, the format of presentation in the old website, which presented your information in three columns made everything easy to read, follow and search at one glance. Importantly, the font size in the old website was easy to read and appreciate.

    Third, I am not sure of the integrity of the new website as one recent article I noted in the old website does not appear in the new website. Are there other missing articles in the new website ??? Note from the old website which is not in the new website:

    September 27, 2014
    Weighing the Week Ahead: What will be the Lesson from the Impending Data Avalanche?

    https://dashofinsight.com/a_dash_of_insight/2014/09/weighing-the-week-ahead-what-will-be-the-lesson-from-the-impending-data-avalanche.html

    I am not blind nor do am I visually impaired as could be suggested by the super-size font in the new website, but I much preferred the format used in the old website.

    Love to read your articles. But the new website leaves me very frustrated as it is difficult to read, work with and find things.

    Gerry O’Brien
    Ottawa, Canada

    • oldprof October 19, 2014  

      Gerry — My reason in moving included erratic performance at the old site because of denial-of-service attacks that did not involve me. This sometimes happened at the worst times. There was also little flexibility to adapt and charts were not displaying well.

      I knew that the transition would involve some problems, but it has been a little rockier than I hoped. I now have a top-flight expert on this platform who is helping me fix various problems. We have addressed several reader concerns, and we’ll do the same for the point you mentioned.

      One article was apparently missed in the site migration, but we’ll fix that as well. I think that is the only missing entry.

      Thanks for your comments, and for your patience.

      Jeff

  • Gerry O’Brien October 20, 2014  

    Hi Jeff Miller:

    Thanks for your reply and comments on the migration to the new website.

    I present some additional points:

    First, your “comments” section following your articles needs improvement. My original note appeared as two entries or it is broken up into two parts and a part of the comment is missing … maybe that was due to a goof-up on part due to my unfamiliarity with the new format for submitting comments.

    Second: Your comment overlaps with my comment and it also has a missing segment … it is difficult to read.

    Third, also while this article notes that there are “7 Comments,” I only see part of one comment above mine, my comment in two parts (dunno what is going on here) and your comment overlapping with mine … and I see no other comments !!! Where are they ???

    Fourth, in the comments section get rid of the black background, and get rid of the grey box for my comment (I suspect that this is the convention used for persons viewing their comments) … the point is that reading black text on a dark grey background makes things difficult to read.

    I hope you do not mind my feedback and comments to improve your new website.

    Gerry O’Brien
    Ottawa, Canada