Jason Zweig wrote a wonderful article in the Wall Street Journal this week about Mr. Market.
It’s possible most folks who need to read this article probably missed it. That’s because the article was buried beneath many many other sensational headlines.
If you are a headline-only reader, or if you are a news scanner, the news today looks bad. The current spreading virus has everyone alarmed. And many are frightened. You can thank the media for that.
I’m not here to tell you (or predict) what damage this virus might do; no one knows with certainty. And while authorities are trying to tell everyone remain calm, Mr. Market has sent a different message.
Who is Mr. Market?
Mr. Market is a name Ben Graham (perhaps the greatest investment analyst) gave to the stock market. Ben Graham was Warren Buffett’s professor at Columbia and also his mentor. In his book “The Intelligent Investor,” written back in 1949, Graham invites you to consider Mr. Market as your business partner.
You have invested in the market and this new partner of yours (Mr. Market) frequently offers to sell his share of the business to you.
But on other days he offers to buy your share.
What you need to keep in mind ALWAYS is Mr. Market is manic-depressive! His estimate of your joint venture’s value swings from “very pessimistic” to “wildly optimistic.” As his partner, you can always decline Mr. Market’s offer, and that’s completely OK. That’s because tomorrow he will be back with an entirely different offer.
Just remember one thing about your partner: Mr. Market always wants to trade. But you are under no obligation to do the same.
Zweig added several gems that Graham shared over the years. A few quotes need to be repeated, shared and committed to memory. Graham said (in 1972): “The primary reason many individuals fail as long-term investors, is that they pay too much attention to what the stock market is doing currently.”
Graham also wrote, “you should reconcile yourself – to the probability, rather than the mere possibility – that stocks will fall by 33% or more, at least once every five years.
“The investor who permits himself to be stampeded or unduly worried by unjustified market declines is perversely transforming his basic advantage into a basic disadvantage,” warned Graham. He “would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.” (The italics are Graham’s.)
Other person’s mistakes of judgment show up in the stock prices listed every day. People make uninformed (and usually rushed, panicked) decisions about long-term investments. This is especially true in volatile markets. Stock prices moving up and down is a FEATURE, not a bug. It’s difficult to see on a day-to-day level, but long term results get created this way.
The hardest part is “hanging in there” while others are making mistakes (selling).
Money needed to cover living expenses in the next year or two should not be exposed to swings of the market. Some will argue greater amounts need to be quarantined to avoid market movements. Only you can decide what’s the right amount for you.
Let other people make panicked decisions. Let other folks rip up their scripted out plans in haste. Selling in the midst of a tornado will ultimately be a mistake. The panicked seller may feel relief for a day, or a week, sometimes even for a few months. But eventually this could prove to be a bad trade. You see, the seller “locks in” the loss permanently.
When getting back into the market, the seller now has a smaller base (to re-invest) as a starting point. But what many overlook is selling also requires a second – and very important – decision. That is, when and where to re-engage?
The seller usually feels good that particular day sales were made. It’s a relief. If selling in a panic and selling due to fear, who is to say that fear will subside when it is the appropriate time to get back in? How will the seller feel at that point? How does the fear subside? How does the confidence return to say, “this” is the right time to return?
One thing is certain. You shouldn’t ask Mr. Market whether it’s the right time to buy back in.
Remember, Mr. Market always wants to trade.