Taking advantage of Mr. Market
Mr. Market is an invention of the famous investor Benjamin Graham, the father of value investing. Graham used an imaginary entity called Mr. Market, a very obliging fellow who turns up every day willing to buy and sell any number of shares in any company. You as a market participant can trade with Mr. Market or ignore him completely, he will not be offended and will be back the following day with new price quotes.
Mr. Market represents the stock market in this metaphor and has some serious psychological problems. Often the price quoted by Mr. Market seems plausible, but at times it is ridiculous. Sometimes he is very depressed, everything goes downwards and his prices are low. But then his mood changes and suddenly he gets very enthusiastic and everything is alright again, prices get high.
Markets are irrational
Wise investors take advantage of the fact that markets are irrational. If Mr. Markets price is unreasonably high, then intelligent investors have the opportunity to sell. On the other hand, if prices are unreasonably low, then you have the opportunity to buy a good company for a cheap price.
Wise investors should always know the real value of an investment first. You should buy and sell accordingly and not allow Mr. Market to make a fool of yourself by getting emotional and taking him up on his offer at the wrong prices.
Price is not equal to value
Price and value of an asset are two different things. As an intelligent investor it is our job to value an asset before buying it. Without the prior knowledge how much an asset is worth, it is not possible to buy at the right price. Valuation always comes first.
There are different methods of valuing an asset and depending on the situation, some are more appropriate than others. But that’s not the point, the important thing is to actually get to a valuation you trust. This gives you the confidence to deal with Mr. Market in an intelligent way.
Getting a good deal from Mr. Market
Once you conclude the valuation process of an asset and decide on owning it, it’s time to bargain with Mr. Market. As a value investor, you want to pay a price that is below your valuation. This mean that you have to wait until Mr. Market presents you with an attractive opportunity.
There is no need to force a buy since markets fluctuate and someday your buy price will be available. Patience is very important in investing and waiting for the right price to buy is a crucial part of the game.
A lot of investors are under the influence of Mr. Market, we call them speculators. They look up their stocks all the time, are shocked when prices move up or down 5% and buy at unreasonable levels without any regards for valuations. However, by knowing the real value of an asset, we can escape the speculators game, take advantage of Mr. Market at opportune times and grow our portfolio over the long-term.
Disclaimer
The information provided is for educational and general information purposes only and is not intended to be personalized investment or financial advice. We make no promises as to the accuracy or usefulness of the information presented. Please read our full disclaimer.