Turning Market Mood Swings into Opportunity
In his classic book The Intelligent Investor, Benjamin Graham introduced the "Mr. Market" analogy, a way to describe the emotional and unpredictable nature of financial markets. Graham personified the market as someone prone to mood swings, alternating between excessive optimism and unwarranted pessimism. This analogy underscores the importance of a steady, long-term investing approach, resisting short-term market fluctuations.
“Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is The Investor and Market Fluctuations 205 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. If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.”
The relevant portion of the video runs from 23:34 onwards.
At InvestSense, we apply this principle through a valuation-driven investment philosophy. We believe markets are not always efficient, and opportunities arise when asset prices differ significantly from their intrinsic value. Our approach focuses on avoiding overvalued markets and allocating resources to areas where returns justify the risks involved.
Caution in Today's Market
Today, the U.S. economy shows strong fundamentals, such as high corporate profits and favourable credit conditions. However, valuations in some market segments are stretched, leaving little room for error. When markets are priced for perfection, even small disappointments can lead to sharp corrections. This is where Graham’s analogy is most relevant—reminding us of the importance of discipline and patience in investing. Much of the time you don't need to do very much or fight the market. Sometimes though you do need to do something and it will most likely involve doing something uncomfortable and contrarian. At these times it is helpful to think of Mr. Market and his vicissitudes in order to translate FOMO into something more constructive.
Our Approach
1. Maintaining Balance: We are keeping our portfolios diversified and prepared for potential volatility. Given the current momentum in markets we remain cautiously long.
2. Exploring Value: We’re looking beyond the U.S. to international markets, particularly emerging economies, where growth prospects are strong, and valuations are more reasonable. Within the U.S., we are targeting sectors that have lagged but show potential for recovery.
3. Flexibility and Adaptability: Our team monitors market conditions closely and adjusts allocations as risk-reward dynamics shift. This includes reducing exposure to overheated markets and reallocating to areas with higher return potential.
Ben Graham’s Mr. Market analogy is a timeless reminder to stay disciplined and focus on value. We embrace this philosophy in our valuation-driven approach, focusing on opportunities that offer strong risk-adjusted returns. By maintaining flexibility and preparing for market shifts, we aim to deliver sustainable long-term value for our clients. That said, for now at least, US market exceptionalism is a real thing and we are keeping some of our relative asset allocation powder dry - watch this space.
