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How many times have we heard this question, "Market kya lag raha hai"
Loosely translating to What is your opinion of the market?
This is the typical screen of a Stock Market Trader (Bolt)
For a layman who is looking at the screen for the first time, he shall be overwhelmed by the sheer numbers present on the screen plus it keeps on changing every second every minute.
How does a layman cope up with this?
Today's blog will be fun with learning as we shall be learning some snippets about Mr Market which we may not have heard of.
Table of contents
- Introduction
- The Fickle Nature of Mr Market
- The Daily Price Offers by Mr Market
- Question for readers - Part 1
- Advantages of being a Retail Investor Vs Institutional Investors/Mutual Funds
- Karm Karo Fal ki Chinta Na Karo or Controlling the Controllable!
- Approach to Investing!
- Purpose of Money (The Most important question)
- Question for Readers - Part 2
Introduction:
"The Intelligent Investor" by Benjamin Graham is a timeless classic that has guided generations of investors with its invaluable wisdom.
The book's name is so famous amongst anybody interested in finance. However, the sheer size of the book generally does not allow most people to pick up the book. Most people buy the book, start to read it and very few have finished the same. I am also in the same boat.
Chapter 8, titled "The Investor and Market Fluctuations," introduces the concept of "Mr Market" a fictional character that represents the behaviour of the stock market.
In this blog post, we will delve into the key insights from this chapter and understand how Mr Market can teach us valuable lessons about investing, but with an Indian tadka.
The Fickle Nature of Mr Market
Graham has beautifully portrayed the stock market as a character and named it Mr Market.
At most times, Mr Market is a rational person however, there are times both in bull and bear markets when he is not rational in his thinking.
When there is a bull run, Mr Market shall be happy paying higher and higher prices even at the cost of ignoring the fundamentals eg. Take the Dotcom Bubble in 2000 or the Real Estate Bubble in 2008 as an example. Stocks at times were trading at a PE Ratio of more than 400-500 which is almost impossible to recover from the future earnings.
Similarly, when there is a bear market like the one we saw during Covid in 2020 or just after the 2008 crash, Mr market shall fear holding the best of the blue-chip stocks as well and sell at whatever price they get again ignoring the fundamentals like intrinsic value of a share.
In short, Mr Market is rational for most periods of time, however, they present an opportunity for an ordinary investor just by the fickle nature of Mr Market from time to time.
This is what presents an opportunity for an ordinary investor.
In "The Intelligent Investor," Graham states that Mr Market has three primary characteristics:
a) He is Emotional
b) He is Erratic in decision making
c) He Frequently offers investment opportunities.
The Daily Price Offers by Mr Market
Mr Market visits every investor several times daily and offers to buy or sell stocks at various prices.
His mood swings wildly, and he can quote prices that are significantly above or below a stock's intrinsic value.
The question is would you willingly allow a certifiable lunatic to come by at least five times a week to tell you that you should feel exactly the way he feels? Would you ever agree to be euphoric just because he is—or miserable just because he thinks you should be? Of course not. You’d insist on your right to take control of your own emotional life, based on your experiences and your beliefs.
The intelligent investor shouldn’t ignore Mr Market entirely. Instead, you should do business with him—but only to the extent that it serves your interests.
Mr Market’s job is to provide you with prices, your job is to decide whether it is to your advantage or not. You do not have to trade with him just because he constantly begs you to.
By refusing to let Mr Market be your master, you transform him into your servant.
Graham recommends adopting a contrarian approach to investing.
"BUY WHEN THERE IS FEAR, SELL WHEN THERE IS GREED!"
Just think if we have bought when there was chaos in March 2020 due to covid, markets just doubled in a year approximately.
However, we can look for selling opportunities in the euphoria like 2007 when the investors were bullish on anything and everything.
Question for readers - Part 1?
If, after checking the value of your stock portfolio at 09:15 A.M., you feel compelled to check it all over again at 9:57 A.M., ask yourself these questions:
- Did I call a real estate agent to check the market price of my house at 9:15 A.M.? Did I call back at 9:57 A.M.?
- If I had, would the price have changed? If it did, would I have rushed to sell my house?
- By not checking, or even knowing, the market price of my house from minute to minute, do I prevent its value from rising over time?
The typical investor “would be better off if his stocks had no market quotation at all".
The intelligent investor should be perfectly comfortable owning a stock or mutual fund even if the stock market stopped supplying daily prices for the next 10 years.
Warren Buffet says that suppose every student who passes out of college received a punch card with 20 slot punch cards. All the students get to make only 20 investment decisions in life. Whenever they make a decision they have to punch one of the holes.
He quotes that most people would be fine in their financial life if their 4-5 investments go right. The need is to think through each investment and continue to hold for long periods of time.
Are Humans pattern-seeking animals?
Think of the example,
a) We tend to form an opinion of who shall win the IPL even before the start of the season.
b) We predict that Interest rates shall start reducing from next year.
c) We predict the stock market shall reach X levels in the Y time period.
Most of the time we are not even asked to predict. However, humans have a tendency to predict even if told not to!
When the prediction is proven right, a chemical called dopamine (Happy Hormone) is released, flooding your brain with a soft euphoria.
Thus, if you have been predicting a stock to go up and it goes up a few times in a row, it gives you a "natural high”. You effectively become addicted to your own predictions.
That feeling - "Kabhi Kabhi lagta hain apun hi Bhagwan hain :)"
When asked what keeps most individual investors from succeeding, Graham had a concise answer: “The primary cause of failure is that they pay too much attention to what the stock market is doing currently.”
We would be much better off knowing that we are not in control of almost everything that happens around us.
Advantages of being a Retail Investor Vs Institutional Investors/Mutual Funds
To understand the advantages of a retail investor, we shall have to understand the disadvantage of Institutional Investors/Mutual Funds.
- With thousands of crores under management, fund managers tend to lean towards buying bigger stocks i.e. large caps because they are the ones they can buy in lakhs and crores in quantity they need to fill their portfolios. Thus many funds end up owning the same few overpriced giants.
- Investors pour money when the market rises or there is a bull run. The fund managers use that funds to buy more of the stocks they already own, driving prices to even more dangerous heights. This is in spite of the fact that fund managers are aware that this is not a good time to buy.
- Inversely in a bear market, investors come knocking at the door of the fund managers to ask for their money back, the managers have no option but to sell stocks to pay their investors. The Fund managers knowing everything that this could be a golden opportunity to buy like in Covid Fall during 2020 can do nothing but are forced to sell the stocks in a bear market.
- "It is fine to fail conventionally than to succeed unconventionally"
The performance of portfolio managers is benchmarked against the index like Nifty/Sensex etc. so they obsessively measure their returns against these benchmarks. If a company gets added to an index, hundreds of funds rush to buy it. If they don’t, and that stock then does well, the managers look foolish; on the other hand, if they buy it and it does poorly, no one will blame them. - Funds have exposure limits eg. They cannot purchase more than 10% of their portfolio in one stock. However, a retail investor can put his entire net worth in one stock. Eg. Mukesh Ambani in Reliance.
- If a company gets too big or too small or too cheap or a little bit too expensive, the fund has to sell it - even if the fund manager loves the stock.
The typical fund manager has no choice but to mimic Mr Market’s every move—buying high, selling low, marching almost mindlessly in his erratic footsteps.
A typical investor has no exposure limits, no time limits, no index to beat, and no quarterly/yearly numbers to report. He can very well invest his entire wealth in one company and chill on a beach.
At times, the fund managers/institutions become a slave to the market, however, an ordinary investor has the option to choose his own path.
“The investor who permits himself to be unduly worried by wild swings in markets is transforming his basic advantage into a basic disadvantage." Just don't do this.
Buy Right, Sit tight! (Yes it still works more often than not)
Karm Karo Fal ki Chinta Na Karo or Controlling the Controllable!
An ordinary investor can only do what is in his control i.e. His Karma and can not worry about Fal i.e. Results.
What are the things that the investor can control?
- Brokerage costs - by trading rarely, patiently, and cheaply
- Ownership costs - by refusing to buy mutual funds with excessive annual expenses
- Expectations - by using realism, not fantasy, to forecast your returns
- Risk - by deciding how much of your total assets to put at hazard in the stock market, by diversifying, and by rebalancing.
- Tax bills - by holding stocks for at least one year to lower capital gains tax liability.
- Behaviour - Not being erratic or emotional and not falling prey to Mr Market's gimmicks.
Investing isn’t about beating others at their game. It’s about controlling yourself in your own game.
Approach to Investing:
If your investment horizon is long—at least 25 or 30 years—there is only one sensible approach:
Buy every month, automatically, and whenever else you can spare some money. (Read Twice)
Treat Investment like a test match and not like a T20 Game.
No one’s gravestone reads “HE/SHE BEAT THE MARKET.”
Purpose of Money (The Most important question)
After all, the whole point of investing is not to earn more money than average, but to earn enough money to meet your own needs.
The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go.
In the end, what matters isn’t crossing the finish line before anybody else but just making sure that you do cross it.
Question for Readers - Part 2
Question 1: How many of us would be willing to Buy in a SALE? Just Look into the below headlines.
- End of Reason Sale - Myntra
- Buy 1 Get Free - Pantaloons
- Buy anything @ 50 % off - Stock Market Correction in Covid 2020.
We hear the first two almost daily.
However Stock Market presents SALE only once every few years. Still, most investors fail to take advantage of the same. Worse, they lose both the money and the opportunity.
Question 2: Which emotion is stronger?
- Gain of Rs. 10,000 or
- Loss of Rs. 10,000
More often than not, a loss of Rs. 10,000 gives more pain than happiness given by a gain of Rs. 10,000.
Both questions present the behavioural biases of investors. The reason to bring this out is to recognize those biases and be better at the same time.
Ever thought, what would be the thought process of Mr Graham if he envisaged Mr Market as Ms Markets?
Remember this dialogue from Dangal Movie? "Hamari choriyan choro se kam he ke:)"
What is your take on the matter? Do let me know your feedback through WhatsApp here.
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The writer is a passionate student of finance and markets.
CA Parth Shah
You can read all my previous blogs here:
Thanks for reading!
Until next time, keep learning.
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