When to ignore or take advantage of Mr. Market

Benjamin Graham wrote that investors should mostly ignore the stock market. They should buy only bargain stocks that the market greatly undervalues. And sell only shares that the market has over-inflated. But it’s very difficult to successfully put this into practice.

Bargain_StocksBenjamin Graham is recognized as the father of modern fundamental security analysis. In his definitive book on value investing, The Intelligent Investor, Mr. Graham says that investors should ignore the stock market except for big price movements. More important, investors should focus on the operations and dividends of the companies they own. The chairman of our Investment Planning Committee recently suggested we read Mr. Graham’s book again given the market’s ongoing uncertainty.

In The Intelligent Investor Mr. Graham writes: “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.

Make money off of Mr. Market

“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.

“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 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.”

Too often we see speculators (as opposed to what Mr. Graham calls “the true investor”) glued to a screen. They agonize every time a twitch in the market causes their share prices to move by a nickel or a dime. It’s a mistake to pay such close attention to the market. Speculators with itchy fingers buy and sell too much. Over time, brokerage fees, the bid-ask spreads (the difference between the most a potential buyer will pay and the least a potential seller will accept) and capital gains taxes will erode any trading profits. A friend who works as a broker told us he’s seen it many times. Speculators end up losing money while enriching him in the short run. Meanwhile, in the long run he makes more off his patient buy-and-hold investors—who survive and prosper.

We recommend you ignore Mr. Market most of the time—except to take advantage of him.

Do you have the discipline to be a disciple?

Most people would agree that Mr. Graham’s advice is wise. The trouble is, it’s hard to put wisdom into practice. Many people who know better still pay too much attention to Mr. Market.

We usually recommend you let your broker hold your shares. However, one exception to this rule applies to trigger-happy speculators, who listen to Mr. Market. We recommend they register their shares in their names. Then the time it takes to get to your safe-deposit box and hand over your certificates to your broker gives you a cooling off period. That is, you have time to reflect on the wisdom of selling after all.

This is an edited version of an article that was originally published for subscribers in the September 22, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

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