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Does Mr Market tell you where is he headed? - Views on News from Equitymaster
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  • Sep 20, 2011

    Does Mr Market tell you where is he headed?

    We completely agree with Ben Graham's description of Mr Market being a 'remarkably accommodating fellow'. Especially given the fact despite his 'incurable emotional problems' the gentleman most often gives clear indications as to where stock prices are headed. Mr Market's euphoric sentiments arise when he sees only the favorable factors affecting the business. The resultant high price that he agrees to pay for stocks builds up the risk in them. At other times, when he is depressed and can see nothing but trouble ahead he agrees to sell stocks at a huge discount creating opportunities in the market.

    Thus if one carefully takes cues from Mr Market's sentiments to judge where the stock prices are headed, chances of going wrong in investing decisions are very little. Moreover, Mr. Market has an endearing characteristic of being a loner. He doesn't mind being ignored. Hence choosing to react or not to react to his moods is a decision that is left to us.

    Indeed, if one plots stock valuations in the same way as Mr Market's sentiments, finding out where he is headed is rather predictable game.

    Take the Price to Earnings (P/E) multiple of the broader BSE 200 index for instance. A premium or discount to the average P/E multiple over the past 5 years is sufficient to spot the risk or the opportunity as the case may be. However, a word of caution here. Waiting for Mr Market to take you to a point where the risk or the opportunity is maximum can be a foolish decision. One must remember that he or she is not the only one following Mr Market's sentiments. Hence waiting for stock valuations to touch their peak before selling them or touch their bottom before buying is not advisable as it is nearly impossible to identify these till it is too late. For before you know it, other investors may have reacted Mr Market's sentiments causing it to change.

    Data source: BSE website

    But the catch here is that investors need to also pre-empt Mr Market's next move. Judging whether lower earnings prospects or dull macro scenario will make the gentleman cringe holds the key to your buying decisions. In the same way, answer the question - can bigger orders and lower interest rates make the man euphoric -before deciding when to sell your stock.

    We owe the basis of value investing to Graham's allegory of Mr Market. But investors cannot always hope for Mr Market's sentiments to help them with investing decisions. It is for them to keep their own emotions distinct and ensure that they do not overlook the facts that Mr Market has.



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