Meet MR. Market - Your Servant Not Your Guide

"Mr. Market" was a character invented by Ben Graham to illuminate his students minds regarding market behavior.  The stock market should be view as an emotionally disturbed business partner, Graham said.  The partner, Mr. Market, shows up each day offering price at which he will buy your share of the business or sell you his share.  No matter how wild his offer is or how often you reject it, Mr. Market returns with a new offer the next day and each day thereafter.  Buffett says the moral of the story is this:  Mr. Market is your servant, not your guide.

In March 1989, as the stock market soared, Buffett wrote:
"We have no idea how long the excesses will last, nor do we know what will change the attitudes of the government, lender and buyer that fuel them.  But we know that the less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs."

In the last years of the twentieth century, Berkshire's price nose-dived, kicked off the diving boards by investors irrational exuberance over anything technology or Internet related, problems with the General Re acquisition, rumors of Buffett's ill health and his inability to live up to his past brilliance.  In mid-1998, Berkshire was selling at a high of $80,000; by March 2000, it was selling for almost half that much.  Buffett wrote in the 2001 annual report:

"Here's one for those who enjoy an odd coincidence:  The Great Bubble ended on March 10, 2000 (though we didn't realize that fact until some months later).  On that day, the NASDAQ (recently 1,731) hit its all-time high of 5,132.  That same day, Berkshire shares traded at $40,800, their lowest price since mid-1997."

Nevertheless, during the dark days, Berkshire's book value increased, albeit by a small amount.  And by 2005, Berkshire's share price had more than recovered.  Buffett, however, lamented that he had not captured more profits when some of his permanent holdings were wildly overpriced.

"I made a big mistaked in not selling several of our larger holdings during the Great Bubble.  If these stocks are fully priced now, you must wonder what I was thinking four years ago when their intrinsic value was lower and their prices far higher:  So do I."

When conditions are reversed, how can an investor be sure that a stock that is undervalued by the market eventually will rise?

"When I worked for Graham-Newman, I asked Ben Graham, who then was my boss about that.  He just shrugged and replied that the market always eventually does.  He was right:  In the short run. [the market is] a voting machine, in the long run, it's a weighing machine."

"The fact that people will be full of greed, fear or fully is predictable.  The sequence is not predictable."

"The market, like the Lord, helps those who help themselves."

Written by:
Warren Buffett Speaks - Wit and Wisdom from the World's Greatest Investor : Janet Lowe

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