A few years back, I read Benjamin Graham’s The Intelligent Investor. Ben Graham, if you don’t know, is the man who taught Warren Buffett how to invest. This of course tells us two things about the book:
- It’s rather old. (Graham himself passed away over 3 decades ago: 1976.)
- It’s absolutely fantastic.
The book is rather long–my copy is just under 600 pages–so I wouldn’t necessarily expect that many people to go out, pick it up, and read it cover to cover (though it’s worth your time if you’re sufficiently ambitious/patient!). However, after reading Trent’s recent reviews of The Intelligent Investor, I was inspired to share one of my favorite messages from the book: Mr. Market
Who is Mr. Market?
Mr. Market is the name of an allegorical character Graham uses to make a point. The story goes something like this:
Imagine that you own a small share in a private business, which you purchased for $1,000. One of the other owners of the business, named Mr. Market, approaches you to tell you what he thinks your share of the business is worth. And everyday, he offers to either buy your share of the business for that price, or, to sell you an additional share of the business for that price.
Each day, however, he quotes you a different price from the day before. Sometimes the price he quotes sounds about fair. Sometimes it’s high. Sometimes it’s low.
Graham explains:
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.
Of course, the point Graham is making is that fluctuations in the market value for a given security don’t really affect the fundamental value of that security. If you own a share of a company, the real value of that share is a function of the company’s overall profitability, not a function of whatever price the market happens to be quoting on any given day.
As such, we can happily stay Oblivious to the current market prices of our shares. (The only exception occurs when we need to sell our shares in the near future, in which case the market value becomes of essential importance.)
What if you own mutual funds/index funds?
Naturally, it’s a practical impossibility to stay up to date on the fundamentals of each of the companies in your portfolio of diversified funds. (And even if it were possible, it would ruin the point of owning mutual funds anyway.)
The good news is that the same thing holds true for funds. For example, let’s say that your investment time frame is 30 years, and that you own an index fund that tracks the Wilshire 5000 index (an index designed to track the return of the U.S. economy as a whole).
For you, the real value of your fund is a function of the overall profitability of the U.S. economy over the next 30 years (your investment time frame). At the moment–as a result of all the recent financial/economic turmoil–Mr. Market’s offer for your fund is only 65% of what it was at the beginning of this year. But you tell me: Does that make sense? Do we really have reason to believe that, over the next 30 years, our economy is only going to earn 65% of what we would have estimated at the beginning of the year?
I suspect that Mr. Market is letting his fear get the better of him. Let’s not let Mr. Market get the better of us.