What are stocks? They’re nothing…
…without the marketplace.
We at BrokenBroker.com would be remiss to write article upon article about the stock market if we did not mention one of our favorite teachers, Benjamin Graham. He was known as “The Dean of Wall Street”, but living in our times, it’s much easier to think of him as a spectacular writer who penned “The Intelligent Investor” (not the most exciting read, but a compelling manual on how to invest).
Graham’s famous analogy is that of “Mr. Market”. As Graham described it, Mr. Market is a fictitious character representing all buyers and sellers in the stock market (and all smaller markets). The reason he personifies the market like this is because it becomes much much easier to visualize someone directly offering you money for the stocks that you hold. On any given day, the story goes, Mr. Market comes to your door and offers you money for the stocks that you hold; in a more modern sense of the word, Mr. Market sends you an IM every time you hit the refresh button while viewing an online stock trading page…
The idea is that some days, Mr. Market comes by and offers you wildly outrageous sums of money for what you have. Other days, he offers you very little. The worst thing though, is that he’s moody. The amount from one day to the next can change rapidly, and for very silly reasons. Perhaps one of the board members is selling some of their shares to help pay for a new home. They must report this thanks to the SEC, and a simple piece of news such as this can start a frenzy for no good reason.
So how do we suggest using the analogy here at BrokenBroker.com? In two ways:
- Use this as a psychological reference for how you look at stocks. Many people have trouble stomaching big swings in the market, both up and down. Once you realize it’s Mr. Market having a rough day–offering you wildly outrageous sums or mere pittances for your personal holdings–it often eases the mind and gastrointestinal tract. The idea that Benjamin Graham consistently stresses is that Mr. Market be damned, you should be interested in the overall value of a company, an idea we love at BrokenBroker.com. For instance, Mr. Graham never would have invested in the internet bubble sensation Pets.com, but on certain days in the late 90s, Mr. Market loved it!
- Thinking about Mr. Market in terms of a salesman, in addition to being a buyer, is not only helpful, it’s profitable. Remember, Mr. Market is going around to every other door in your neighborhood and offering those good people money for their stocks too. And on days when those people are spooked by housing woes or hedge fund mishaps, sometimes people will offer up their personal holdings for a bargain. These are the days when we swoop in and decide to buy some of our favorite companies from Mr. Market…but only the ones with great growth opportunities and solid fundamentals.
So hopefully Mr. Market gives you some great opportunities when he comes knocking on your door. Remember, in volatile markets, listen to him if you’re looking to add to your positions, ignore him if you’re holding stocks through the good times and bad (you should be). And if your Broker comes knocking, be sure to tell him he’s fired…