Mr. Market's Manic Moods
By: John Petrides
Date: 12/8/2008
In his book, The Intelligent Investor, Ben Graham, often considered the "Father of Value Investing," famously writes about "Mr. Market." Mr. Market is a manic-depressive. When stocks go up, Mr. Market is happy and investors want to join in this happiness and continue to buy, even as stocks become ever more expensive. Then, when Mr. Market becomes depressed, investors get sad and sell, even as stocks get cheaper. Graham proposes that investors use Mr. Market as a tool to help them make investment decisions, and not allow Mr. Market to manipulate their emotions.
As investment managers, our main job is to figure out what a business is worth despite the market's moods. If an investor thinks a business is worth $1, but Mr. Market is in bad mood that day, and says the business is worth $.50, we should consider that stock attractively priced and we should be buyers, as long as we remain disciplined to a process and philosophy. We should be careful to prevent being manipulated by Mr. Market's antics.
Mr. Market loves stories. And when he tells a story the world listens. However, problems arise when the world extrapolates Mr. Market's stories as 100% true, rational, and lasting. For example, remember during the first half of 2007 when it appeared as if the entire market would be taken out by private equity firms, liquidity was sloshing around everywhere, and price-to-earnings multiples were high? In response, investors piled into small-mid cap stocks. Or during the second half of 2007, when the US had begun to slow down, and that China and emerging markets would decouple, and be able to grow without the developed economy's help? Investors piled into emerging market funds. What about from January 2008, until July 14, 2008, when oil was suppose to go to $250/barrel, and we would be paying $5/gallon of gas for the rest of our lives? Investors piled into commodity & energy stocks. Now we are in a global recession, the media hints at a depression, and sentiment is Mr. Market will continue to be sad forever. So now, investors are piling into cash, treasuries and annuities.
Our job as investment managers is to analyze what a stock is worth and to weigh that valuation against how Mr. Market feels and prices that stock each day. Do current expectations reflect our judgment of how the economy and the company will perform in the future? Is the stock priced for one of Mr. Market's manic depressive moods? We cannot and should not simply extrapolate today's world as the future. Management, central banks, and governments adjust. The current environment has allowed for some very interesting long term investment opportunities. Not every stock will perform the same. Not every business will survive, but by doing our due diligence, and sticking with our process and philosophy, Mr. Market has provided us with some very attractive investment opportunities. Still, these investments will not pay off until Mr. Market's mood swings more positively, which should occur once the policy actions being taken by the government begin to improve the economic outlook. The Government and Federal Reserve are now very focused on addressing the economy's problems. Unprecedented, major initiatives are being undertaken, with more forthcoming in the next few months, but some patience is still required for these policies to improve the situation. When Mr. Market's manic mood is more to the upside, some investors may realize they have foregone a lot of yield while selling into his depressive behaviors.
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