One of the greatest parables about the Stock Market was told by Benjamin Graham. It goes like this. Imagine that you own a $10,000 share in Proctor and Gamble. Everything is good but let’s not forget you have a partner in this deal. Let’s call this partner Mr. Market. Mr. Market’s moods swing on a daily basis and sometimes his idea for your share value is very realistic, and sometimes he let’s his enthusiasm take him away and the value he proposes to you is short of ridiculous.
You are certainly more than happy to sell your shares of P & G when Mr. Market is offering you a high price for your shares, or buy from him when his prices are low. In the mean time, no one is forcing to trade with him. You are ought to form your own ideas of what your shares are worth based on company’s financial reports (Form 10K). Here is what a conversation between Mr.Market and a fellow investor could look like:
Would you allow a raging lunatic to tell you how you should feel based on how he is feeling at the moment? Would you agree to be depressed with Mr. Market because oil prices plummeted a few weeks ago? Would you like to be euphoric for a week because the Federal Government is cutting down interest rates? That would be nonsense and you should back off and try take control of your own emotional life, right? Logically you would say YES, of course. In reality Mr. Market is dictating the emotional stability of millions of investors with his lunatic proposals.
What can you do about it?
The solution is rather simple. You need to listen to Mr. Market’s proposals and do business with him, as long as it serves your interests. Mr. Market’s job is to provide you with prices and your job is to decide if those prices are fairly valued. You want to make a good, sound business decision that will serve you well in the future and add value to your portfolio in the years to come. By refusing to let Mr. Market be your master, you can transform him into your servant.