Mr. Market

I’ve heard Warren Buffett say that chapter 8 of “The Intelligent Investor” is among most important things he has ever read about investing. Chapter 8 introduces Mr. Market. For those of you unfamiliar with him, Mr. Market is supposed to be thought of as a manic-depressive business partner that is willing to sell you his shares of the business with prices being affected by his crazy moods. We are supposed to think of the market this way and buy when Mr. Market is sad.

I disagree. I think it is dangerous to think of the market as some mentally ill business partner that you can take advantage of. Certain areas of the market function like that, and at very rare times the entire market functions like that, but on average the market is very, very smart.

The market is composed of millions of people, many of them with IQs that God should have more evenly distributed, and they are all competing to make money. Buffett has also said that “like the lord, the market helps those who help themselves, but unlike the lord, the market does not forgive those who know not what they do.” To try and compete with the 200 plus analysts and thousands of money managers who are looking at Apple is just stupid. It’s like trying to beat the average scores of the PGA tour. Even the pros don’t beat the pros.

But you may be thinking, “well I had a friend who bought microsoft or walmart in 1992 and they did it because they could see that those were winning companies.” Your friend got lucky. That’s it. The future is unknowable for the most part. 99% of the time the market gets prices correct and future price fluctuations are determined by what happens in the future.

Michael Mauboussin writes about group experiments where everybody is asked to guess how many marbles are in a jar, or how much a cow weighs. For the most part the individuals are way off but the average of the guesses tends to be very close to the real answer. I hate to say it but the market is just like this. Trying to compete with the average of wallstreet’s best is a dumb way to try and make money. Just go to vegas instead.

That doesn’t mean that I think the market is unbeatable but you have to look at things realistically. When you buy a stock, there is someone else selling it. What makes you think that you are on the right side of that trade? Really think about the person on the other side of that trade. If there is any chance that it is Seth Klarman or Ted Weschler, you had better look elsewhere.



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