Ben Graham’s Parable of Mr. Market is a simple story that gets to the heart of how the stock market works and how investors should work the stock market. Proof of its importance lies in just how often it gets retold. The thing about each retelling is that while the story is roughly the same, each storyteller adds their own spin, often focusing on a unique thing.
Joel Greenblatt’s version focuses on the one thing that is easily overlooked — the choice to do nothing. In every market situation, you have three options: buy, sell, or do nothing. A massive amount of digital ink is spilled on the first two. The market news and commentary revolve around it.
Yet, the last choice — the most important one — gets little attention. The ability to do nothing, to sit on your hands, and not react every time Mr. Market rattles off a crazy number for a piece of paper fits with the fortitude, patience, and discipline needed to succeed.
Rarely do investment opportunities vanish seconds after they appear. At least, not the Graham or Greenblatt-style opportunities. Those linger around longer because sentiment rarely turns quickly on out-of-favor companies.
Greenblatt knows this first hand, as he said in a Talks at Google, “Almost never have I bottom-ticked a stock — bought it at the absolute bottom. So 99.9% of the time, a stock is down after I’ve bought it.”
Some investors might see it as being wrong. Greenblatt sees it as just being early. He knows that perfect timing is impossible without a ton of luck, the initial feedback from investments is often muddy, and time arbitrage requires a key element called time. Mr. Market will get it right…eventually.
That choice to do nothing is a powerful one as Greenblatt explains in his version of Mr. Market:
One of the greatest stock market writers and thinkers, Benjamin Graham, put it this way. Imagine that you are partners in the ownership of a business with a crazy guy named Mr. Market. Mr. Market is subject to wild mood swings. Each day he offers to buy your share of the business or sell you his share of the business at a particular price. Mr. Market always leaves the decision completely to you, and every day you have three choices. You can sell your shares to Mr. Market at his stated price, you can buy Mr. Market’s shares at that same price, or you can do nothing.
Sometimes Mr. Market is in such a good mood that he names a price that is much higher than the true worth of the business. On those days, it would probably make sense for you to sell Mr. Market your share of the business. On other days, he is in such a poor mood that he names a very low price for the business. On this days, you might want to take advantage of Mr. Market’s crazy offer to sell you shares at such a low price and to buy Mr. Market’s share of the business. If the price named by Mr. Market is neither very high nor extraordinarily low relative to the value of the business, you might very logically choose to do nothing.
In the world of the stock market, that’s exactly how it works. The stock market is Mr. Market! If, according to the daily newspaper, General Motors is selling for $37 each, you have three choices: You can buy shares in General Motors for $37 each, you can sell you shares in General Motors and receive $37 each, or you can do nothing. If you think GM is really worth $70 per share, then you might consider $37 a ridiculously low price and decide to buy some shares. If you think GM is really worth only $30 or $35 per share (and you happen to own some shares), you might decide to sell to “Mr. Market” at $37. If you think each share of General Motors is worth between $40 and $45 per share, you may decide to do nothing. At $37 per share, the price is not at a big enough discount for you to buy, nor is $37 a generous enough offer to make you want to sell.
In short, you are never required to act. You alone can choose to act only when the price offered by Mr. Market appears very low (when you might decide to buy some shares) or extremely high (when you might consider selling any shares you own to Mr. Market).
- Draft Day – Epsilon Theory
- I Remember When – Irrelevant Investor
- When Things Get Wild – M. Housel
- What’s Staying the Same – Farnam Street
- Buffett’s Underrated Investment Attribute – Base Hit Investing
- All It Takes is One – MicroCapClub
- Sometimes It’s Bonds For the Long Run – J. Zweig
- Alpha Within Factors – OSAM
- Additional Insights into the Value Factor’s Inner Workings – OSAM
- Making Sense Of Multiples: Mauboussin On EV/EBITDA – Forbes
- Transcript: Robert Cialdini on Masters in Business Podcast – MiB
- Why Doctors Hate Their Computers – A. Gawande