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Everyone knows that change creates opportunity. But as investors we need to have a complete understanding of what is often referred to as “as investor’s best friend.” Since The Intelligent Investor was first published back in 1949 by Benjamin Graham, the term Mr. Market has become very important in knowing the behavior of the stock market and how a value investor should use it to their advantage.
If you are not familiar with the term, let us address it. The allegory created by Benjamin Graham tells a story of two business owners. One business partner is Graham and the other business partner is Mr. Market. The other business partner frequently offers to sell his share of the business or to buy the others partners share and the price keeps changing from day to day. He estimates the business’s value based on his modes. Some days his estimates are very pessimistic while other days his estimates are very optimistic. In short, most people would think of him as a manic-depressive. The other partner is free to decline his offers because he will most likely come back with a totally different estimate on any given day.
Graham uses Mr. Market as a way to explain why the stock market tends to change or fluctuate on a regular basis without regard to any kind of rational logic. It clearly indicates that the change in the price of a given stock is solely based on the emotions of Mr. Market. Mr. Market displays moody and often irrational actions. This is compared to a rational person that would sell his part of the business if the price was high and buy if the price was low.
So as an investor, Graham believed it is more important to focus on the stock valuation of the company rather than focusing on the price of the stock going up or down. The stock values should be based on calculations using fundamental analysis. This approach is much more rational, objective and logical than focusing on the stock price. Before you invest in any stock, you should estimate what the value of the stock is. It is not intended to be a specific figure down to two decimal places. But, rather an estimated figure or range as to the value of the company. Warren Buffett thinks that The Intelligent Investor is "by far the best book on investing ever written." And Buffett thinks that the chapter about Mr. Market is the best part of the book.
The key to understanding the concept behind Mr. Market is that Mr. Market is always in the stock market and he is there to serve you. Some folks think he is there to guide you. But he is not. You decide if and when you wish to take advantage of Mr. Markets offers. Specifically, you want to take his offer when you can buy a stock that is below its value and sell it when it is above its value. As an example, using fundamental analysis you determine a stock is valued at say $40/share. But, Mr. Market is offering it at say $20/share. Then you would want to buy it at the discount. In contract, if a stock is valued at $15/share and Mr. Market is offering it at say $50/share. Then you would want to pass on buying it since it is over priced and just wait for a better offer. Thus, being patience is a must when you are a value investor.
One of the many benefits of our investing service is we seek higher returns using individual stocks to invest our on capital. Plus we can help you with the research. Our research is designed to give you the information on which stock to buy and at what price and when to sell it and at what price to obtain higher returns. We find specific investment opportunities using security analysis research to find undervalued opportunities for our subscribers in our PWC STOCK REPORTSSM membership. And you too can reap the rewards.
At Port Wren Capital, LLC, we specialize in picking specific undervalued U.S. stocks using fundamental analysis developed by Benjamin Graham using a five step process. We have beaten the S&P500, DJIA and NASDAQ benchmarks since we started 5 years ago on our own investments. Discover the difference for yourself. To learn more contact us today.
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