The New Buffettology: Book Review: Part 2

Another short anecdote from the book ‘The New Buffettology’ which I liked is about Warren’s view about Market – he views investing in market as a deal between you (the investor) and Mr. Market.

Here is the extract about Mr. Market:


When Benjamin Graham (Warren’s mentor) was teaching Warren about the shortsightedness of the stock market, he asked Warren to imagine that he owned and operated a wonderful and stable little business with an equal partner by the name of Mr. Market.


Mr. Market had an interesting personality trait that some days allowed him to see only the wonderful things about the business. This, of course, made him wildly enthusiastic about the world and the business’s prospects on the other day, he couldn’t see past negative aspects of the business, which, of course, made him overly pessimistic about the world and the immediate future of the business.


Mr. Market also had another quirk. Every morning he tried to sell you his interest in the business. On days he was wildly enthusiastic about the immediate future of the business, he asked for a high selling price. On doom-and-gloom days, when he was overly pessimistic about the immediate future of the business, he quoted you a low selling price hoping that you would be foolish enough to take the troubled company off his hands.


One other thing, Mr. Market doesn’t mind if you don’t pay any attention to him. He shows up to work every day – rain, sleet, or snow – ready and willing to sell you his half of the business, the price depending entirely on his mind. You are free to ignore him or take him up on his offer. Regardless of what you do, he will be back tomorrow with a new quote.


If you think that the long-term prospects for the business are good and would like to own the entire business, when do you take Mr. Market up on his offer? When he is wildly enthusiastic and quoting you a really high price? Or when he feels pessimistic and quotes you a very low price? Obviously you buy when Mr. Market is feeling pessimistic about the immediate future of the business, because that’s when you would get the best price.


Graham added one more twist. He taught Warren that Mr. Market was there to benefit him, not to guide him. You should be interested only in the price that Mr. Market is quoting you, not in his thoughts on what the business is worth. In fact, listening to his erratic thinking could be financially disastrous to you. Either you will become overly enthusiastic about the business and pay too much for it, or you become overly pessimistic and miss taking advantage of Mr. Market’s insanely low selling price.


Warren says that, to this day, he still likes to imagine himself being in business with Mr. Market. To his delight he has found that Mr. Market still has his eye on the short term and is still manic-depressive about what businesses are worth.


<span class="Apple-style-span" style="font
-family:verdana;”>What I liked a
bout this book is the language, the lingo used to explain simple concepts and Warren’s way of thinking.


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