Thursday, January 24, 2008

Mr Market gets his Groove on

I have commented over the last week or so on the irrational selling of most of the stocks on global sharemarkets. Stocks have gotten cheaper and yet people still continue to dump good stocks for no other reason than because others have sold and presumably because they might be lonely so they join the flock.

I found this reasoning strange. Why would you sell a company that was providing a good financial return, cheaply simply because your neighbour was selling his?

Dumb right?!

I would have to answer yes and then add further elucidation regarding the "spectacular" 180 degree turn in the US markets Wednesday 23 and say that I find the US market rise and frenzied buying as even more bizarre than the selling frenzy of the weeks and days before.

Why would you buy today as stocks are going up in price, while you were selling yesterday as stock prices slumped?

What has actually changed in one day to turn the market around?

Nothing folks!!

The reason the Dow did an impression of a roller coaster was simply talk of a bailout of US sub prime bond insurers, nothing really material at all except on the negative side.

With this latest depression and irrational exuberance of global markets I am reminded instantly of Benjamin Graham's "Mr Market" parable:

Think of yourself as owning a share in a business in partners with others. One of your partners, say Mr Market, is somewhat of a neurotic who on any given day will offer to buy your share or sell you his at a specific price. His moods can fluctuate anywhere between incredible optimism and overwhelming depression. One day he will nominate a higher price to buy or sell, the next day he might increase it, lower it, or even appear uninterested in whether he buys or sells.

Ben Graham, The Intelligent Investor

The point that Graham makes is that Mr Market’s judgment is formed more by mood swings that by rational thought and that this gives the wise investor buying and selling opportunities. If Mr Market’s price is unreasonably high, then wise investors have the opportunity to sell. On the other hand, if it is unreasonably low, then they have the opportunity to buy.

Right now Mr Market is in a schizophrenic mood and his intentions are not necessarily to be trusted. The important thing is that a successful and careful investor makes her or his own decision, based on their own ideas of the worth of the investment.

I'm still amazed at the utter stupidity of some people who ignore what they have bought when they buy a share in a company. You are buying part or a business, that you own.

You don't buy and sell your business on a day to day basis otherwise you would drive yourself mental and you certainly don't sell it because there are outside negative influences (like the subprime mess and associated credit crunch) that are beyond your control and wont impact on the business to any large effect.

It is time to start thinking clearly before pushing that button.

Related Share Investor Reading

"Mr Market" gets his groove on
A sensible approach to global market volatility
Global Market's dropping and your portfolio
Research, research, research
Watch for dead cats bouncing

From - Buy Toughen Up: What I've Learned About Surviving Tough Times

Toughen Up: What I've Learned About Surviving Tough Times

Toughen Up -

Share Investor 2008

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