MR. MARKET AND HIS MADNESS

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MR. MARKET is a concept first introduced by BENJAMIN GRAHAM IN his book Intelligent Investor (in chapter 8). He is also known as the father of value investing and the teacher of Warren Buffett.

This is an important tool for investing in stock for beginners as it establishes a mindset.

Most of the time the price of the stock is accurate to its objective value. But sometimes prices are not right, they are indeed wrong.  MR.MARKET does not always price stocks in a way an appraiser or a private buyer would value a business.

Instead, when stock is going up he happily pays more than their objective value & when they are going down he is desperate to dump them for less than their future true worth.

  The most prominent example of this is the tech bubble of MR. MARKET. 

The valuation of many companies went from nothing to a billion. Some of these companies never had earned a dollar/rupee or in some cases, the revenues were also no there yet.

Microsoft Revenue By Year.

https://dazeinfo.com/2019/11/11/microsoft-revenue-worldwide-by-year-graphfarm/

 The best example of these is the MICROSOFT CORPORATION, one of the best companies in the world. The average revenue growth given by the company from 1990 to 2019 was approx.  14% CAGR.

During the euphoric period of the Dotcom bubble, the revenue was approx. 22000 million-25000 million  (in dollars) but the market capitalization went to 600 billion. The valuation of almost all internet companies was insane.

MR. MARKET was happy to buy Microsoft Corporation stock at any price what so ever. The stock went down 50% in 3 years(2000-2003) because of the DOTCOM BUBBLE burst. It took 14-15 years for MICROSOFT STOCK to break even, but sales were growing on a YoY basis

 Microsoft Corporation share price chart.

Would you be willing to allow a certifiable lunatic to come by at least five times a week to tell you that you should feel exactly the way he feels?

Would you ever agree to be euphoric just because he is- or miserable just because he thinks you should be?

Of course not.

You’d insist on your right to take control of your own.

But when it comes to financial lives, MR. MARKET tells you how to feel & what to feel despite the obvious facts, from time to time, it can get nuttier than fruitcake(crazy).

MR. MARKET’S only job is to provide you with prices; it’s our job is to decide whether it is to take advantage of it or to act on them. We do not have to trade with him just because he constantly begs you to.

By refusing to let MR. MARKET be your master, you transform him into your servant.

  One of Graham’s most powerful insights on MR. MARKET.

“The investor who permits herself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage”

Basic advantage means the investor has the luxury of being able to think for himself & not follow MR. MARKET blindly.

When asked what keeps most individuals from succeeding Graham had a concise answer

“the primary cause of failure is that they pay too much attention to what the stock market is doing currently”

If we own a house, other real estate properties, or farmland do we call our broker every two hours to find a quote on it “NO”; we don’t do that.

But in the case of the stock market where we can check the quote every minute, we surely do that WHY?

Does in an hour the value of the company change “NO”. Do the company’s sales change ?“NO” Does its profit change “NO”, “NO”, “NO”; then why do we do so?

STOCK MARKET is a long term game do people in general flip real estate regularly “NO”. Then why on earth people think they can flip stock or share & earn a profit.

Shares are just small pieces of business ownership, it’s the most important thing to understand for beginner investors.

One of the present examples of the insanity of MR. MARKET 

There’s a company listed on NYSE call SERVICE CORPORATION INTERNATIONAL they are in the business of providing funeral goods and services as well as cemetery property and services.

The business has a huge moat. But due to the coronavirus crash with all other stocks Service Corporation International also went down.

Which actually doesn’t make any logic. If coronavirus was going to kill a huge number of people the stock should have gone up.

Service Corporation International share price chart   

One of the ways to make big money in the market is to, come over the psychological effects on the brain which MR. MARKET puts.

One of the ways to neutralize psychological effects is to consider profit & losses as the same.

Because psychological studies show that the pain of a financial loss is more than twice as intense as the pleasure of an equivalent gain.

SO DO READ THE BOOK.

INTELLIGENT INVESTOR

Disclaimer:

The information provided is for general information purposes only and is not intended to be personalized investment or financial advice.

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