Just read a piece by howard marks talking about Ben Graham’s concept of “Mr. Market”.

Imagine having paid $1000 for shares in a company. And Mr Market is sitting next to you, telling you each day what your shares are worth.

Here is the quote:

“Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.”

So obviously, logically we know we shouldn’t listen to Mr Market every day, and should not expect him to know any better than ourselves what the shares are really worth.

And we can profit by selling to him when he’s euphoric and wants to pay us ridiculously high price; and buy from him when he’s pessimistic and wants to sell at a very low price.

On paper that sounds great and all, but after reading it I contemplated – the biggest questions is, what is the REAL worth of my shares?

Understanding Mr Market by studying him

One thing I realized is, there is no REAL worth of my shares.

In fact, at some point eventually, I will need to sell my shares to Mr Market (maybe unless I just want to hold some dividend stock and collect payments forever).

And he does get too emotional – too excited at times and too fearful at other times.

However, what I cannot do is predict if he’ll gets excited or fearful next.

He might be excited now, but he can get down quickly. On the other hand, when he’s down, he can get excited again as well quickly.

Also it’s impossible to predict the length. He might be excited for a long time, or get down for a long time, longer than you’d expect.

So one thing I’ve gotten very interested in doing is, studying how he behaves and why.

Having a strong enough understanding of past behaviors and reasoning behind, we can kind of start to make some predictions to how he’ll behave in the future.

It’s certainly no guarantee though because he’s a selfish, egocentric little kid that throws tantrum and behave irrationally.

Quick profit from Mr. Market

There are 2 main ways to profit from him based on his irrational mood swings.

First is trying to catch him before he swings or while he’s going one way.

Buy when it looks like he’s getting excited, and sell back to him when his excitement peaks.

Same on the other way, sell to him when he starts getting fearful, and buy from him when his fear peaks.

Unfortunately that’s a very difficult game to play, because his mood swings are almost completely unpredictable, and I’ll guess wrong often.

It’s possible to be profitable if you are right enough times, but that doesn’t seem like a good game for myself to play.

In any case, the advantage of this strategy is being able to make quick profits as his mood swings quickly.

Slow profit from Mr. Market

The other way is the opposite – buy from him when he’s fearful, and sell to him when he’s excited.

This way makes much more sense because you know whichever way he feels now, he’ll swing back to the other side eventually.

There are 2 difficulties with this strategy though.

One is as mentioned, the swings can be long. He can stay excited or fearful for months – although mixing in some smaller swings along the way.

Two is also as mentioned, at some point in time you do have to sell it back to him.

So the way I see it is, I won’t go overboard with either buying or selling from him even when the mood swings – because I don’t know how long it will last.

And I’ll be more reluctant to sell than buy, because in the long-term the fundamental value should go up and in general, Mr. Market is a positive person that is happy on average.

Summary

Beside clearing up the strategy from this analogy, it’s also good having this visual moving forward.

So when Mr Market throws tantrums or have big mood swings, I can sit back and remember how moody he is, and not get led or dragged by him.

Maybe even think about profiting from him when he’s moody – but if not at least sit back and relax.

I’m also very interested in starting some platform that focuses on studying him and teaching other investors the right mindset in thinking about him and the right relationship to have with him.

Maybe will start devoting some time to “stephen investment diary” channel after getting back to 60-80k/mo profit and back in the black.