Mr. Market has been all over the map over the last few days, huh?
For those of you unaware, Mr. Market is the fictional character first coined by iconic value investor Benjamin Graham, mentor to Warren Buffett as well as many other value investors. Mr. Market is the person who, everyday, sets a value for every stock traded on the stock markets. If you want, you can use Mr. Market’s price for buying or selling an equity, or you can choose to ignore Mr. Market altogether. If you’re a long term investor Graham argues that you should buy companies that you feel are worth more than Mr. Market thinks they are and sell them when Mr. Market overvalues them.
Hear that, efficient market theorists? Benjamin Graham does not care for your opinions.
Over the last week, Mr. Market has been all over the place. Last week, he was super bearish, mostly because of the whole Greek debt crisis. The IMF and EU decided to give Greece the money they need to avert the crisis and suddenly he was in a great mood again, lifting the whole market back up from its lows.
Here’s the deal: Mr. Market is all over the place. He’s more up and down than your local neighborhood meth head. (Your neighborhood doesn’t have meth heads? I guess I need to move) Stocks that have absolutely nothing to do with Greece will move violently based on something that has absolutely nothing to do with their long term business outlook. Proctor and Gamble will still be in business if Greece goes down. Their dividend will still be safe. Their long term prospects are pretty much the same as before. There are a thousand other stocks that Mr. Market punished as well, for really no reason.
Saying all that, just because the market has sold off, doesn’t mean stocks are on sale. Perhaps you as an investor feel that you’d buy Proctor and Gamble at any point under $50. You feel that $50 is a fair value for P&G. If that’s the case, load up on the stock when it dips below that magical level. It’s the same thing with the index. The market has risen over 50% from its lows, it sells off 5% and it’s on sale? There is no other evidence to say the market is on sale.
It’s like going to a store. You notice a bottle of water, which the store sold for $1 the last time you were there, now has a regular price of $1.50. The store has discounted the water to a $1.40. Would you really load up on water because it’s on sale? I doubt it. So please stop telling people to do the same with stocks.
Mr. Market is crazy. It’s best not to pay attention to him. Rather, just try to exploit his craziness into profit. He doesn’t mind, really.