Mr. Market

Mr. Market

 

I’m convinced that there is much inefficiency in the market. When the price of a stock can be influenced by a ‘herd’ on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices things rationally. In fact, market prices are frequently nonsensical.

Warren Buffett

Suppose your house traded on a market like a stock trades on the stock market. Everyday the value of your house would gyrate wildly up and down like a cork floating on the sea during a storm. The underlying value of your home hasn’t changed at all but the perception of what it is worth on the market will be buffeted up and down by the short term emotions of all the market participants. This should give you a good idea of what happens on a day by day basis in the stock market. The underlying intrinsic value of a company is pretty stable but what it is perceived to be worth by the schizophrenic market is something else again. Yet almost everybody judges their stock holdings by what the market says they are worth in the short term. I do it myself. Such is the herd like nature of the market.

You can take advantage of this market phenomenon by stepping in and buying stocks when they offered up at low prices (relative to their intrinsic value) and maybe selling or at least lightening up on your positions when they are offered up at overvalued prices. In other words Make Mr. Market work for you. To stand apart from the crowd and have the courage of your convictions it really helps to have an idea of what your stocks are actually worth. It doesn't have to be an exact figure but a ballpark figure on what the intrinsic value of your holdings actually are.

If you can separate yourself from the madness of the crowds, especially during times of extreme market behavior, you can gain and exploit an edge on your competitors. and make some money in the process.