Tuesday, October 08, 2013

Ms. Market

This post is rehashed from an old post written many, many years ago.

The father of value investing, Ben Graham, likes to describe the market as a person who is always ready to buy or sell you a part of his business, but the problem with him is that he is very emotional. And when I say emotional, I don't mean that Taiwanese actress Liu Xue Hua shedding one teardrop from her left eye over some bloke. (kudos to you if you actually know who is Liu Xue Hua).

So what's very emotional? Picture yourself sitting in a roller coaster with some Ah Lian yelling her head off one second and cuddling up to you the next. That kind of emotional. Anyway, let's calls this person Mr. Market. That's how Ben Graham and Warren Buffett calls him. But I think maybe it's more appropriate to call her Ms. Market.

On some days when Ms. Market is very happy, she sees everything in an optimistic light and she will offer to sell you a part of her business at a very high price. Like Singtel for $5. Or SIA for $20. On other days, she will be all depressed and can see only doom and gloom, and she offer to sell you the same business at a very low price. Lay-Long Lay-Long! Singtel for $2.50, or SIA for $7.50. So as you can tell, Ms. Market is that Ah Lian in a roller coaster, regardless whether anyone is beside her. Screaming her head off. Every day.

You are free to transact with Ms. Market on any particular day, or not transact at all. She will always come back tomorrow and quote you a different price. Depending on her mood, the prices will be all over the place. You are free to take advantage of her, and buy a good business cheaply from her on her down days, or sell back to her a bad business at a dear price when she is feeling on the top of the world.

However, you should never be influenced by her mood, i.e. you too, start feeling super happy on days when she is on a high (i.e. you imagine yourself sitting on that emotional roller coaster with her), and buy a lousy business from her at a high price. Millions of individual investors never understood this, so they never took advantage to buy a good business at a cheap price from Ms. Market when she is feeling sad, but instead, only buy from her when she is bright and sunny and offers to sell Singtel at $15 and SIA at $20.

PS: Singtel trades at $3.50 and SIA trades at $10 currently (in late 2013).

See Lemmings and herd mentality

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