A Primer to Ben Graham's Mr. Market (Video)

Warren Buffett - The Mr. Market Concept

Interview With Mr Market

by THE GRAHAM INVESTOR on OCTOBER 3, 2011

Exclusive! The Graham Investor has staged an amazing interview with Mr Market. Never before has anyone managed to interview this elusive fellow. The interview gives us a new insight into what goes on in the mind of one of the most enigmatic figures of history. Still going strong, and still beguiling investors, traders, and journalists, Mr Market pulls no punches in this amazing interview.

TGI: Thank you for agreeing to this interview. Benjamin Graham once attempted to explain your behavior in a nutshell, suggesting that you came along each day and set a ridiculously high price or a ridiculously low price for an equity or a group of equities, and that the average investor would be well-placed to ignore you and seek his own counsel regarding valuations. What do you feel about that?

Mr Market:  Yes, I heard about that. I can’t speak for Mr Graham – he is dead, after all – but I am still going strong. I’ve been doing this for a few centuries now….I mean, back in 1637 when people were pretty much gambling on tulip bulbs, they were trying to pin it on me even back then. It has been ever thus: every time some bubble/bust or other comes along, they say Mr Market is up to his usual crazy tricks again, setting ridiculous prices. I tell you, one of these days I need to get myself a teflon coat.

TGI: But you do appear to be the one setting prices. Are you denying this?

Read more here:

http://www.grahaminvestor.com/2011/10/03/interview-with-mr-market/

Value Investing - Mr. Market

Mr. Market  


Benjamin Graham used an imaginary investor called Mr. Market to demonstrate his point that a wise investor chooses investments on their fundamental value rather than on the opinions of others or the direction of the markets.

Let's say you own a business and have a partner. His name is "Mr. Market." Your business is a good one. It has given you a high return on what you have invested in the business. The only problem is that your partner, Mr. Market, is kind of a strange dude. He's very emotional. Some days he's on a very euphoric high and other days he's very depressed.

Mr. Market has a curious habit. Every day he comes into the office and offers to sell you his share of the business or buy yours. However, because he is so moody, if he happens to be euphoric on a particular day, he wants a very high price for his share. On the other hand, if he's in one of his down moods, he's willing to sell out for a pittance.

The interesting thing about Mr. Market is that he doesn't seem to care whether or not you choose to buy his interest or sell yours. He doesn't get his feelings hurt. You can do whatever you want. It's completely up to you. He just keeps coming in the office every day, offering to buy or sell at wildly different prices. It's always the same good business it has always been. That doesn't change. It's just that, depending on his mood, some days Mr. Market is enthusiastic about the business and other days he's very pessimistic.

Since you know what the business is worth, you can just listen to Mr. Market's offer every day and decide if his offer is a good one or one you want to turn down. Even though Mr. Market's moods might be difficult to get used to, he's actually a great business partner to have.

That's exactly the way you should view the stock market. Choose your favorite business that happens to be one of the 10,000 or so publicly traded stocks. Look at the stock tables in the paper and notice the yearly high and low price for that stock. You'll find that there can be a dramatic difference between the high and the low during a single year. The business hasn't changed. It's just the mood of Mr. Market that changes.

http://www.trade4rich.com/Market.html

Mr. Market

Stock prices are quotes from an emotionally unstable business partner.

Use or ignore them as you see fit.

The stock market's obsession with the short term gives private investors an advantage.

Why The Stock Market Is Failing Britain

Published in Investing on 5 March 2012

A new report highlights fundamental failings.

Last year John Kay, a very accomplished economist who is a director of several companies, was asked by the government to see if the stock market is serving the needs of Britain's investors and companies. His interim findings were published last week and they make interesting reading.

Kay argues that today's stock market primarily serves the interests of the fund management industry, rather than those of companies and investors. He goes on to say that a culture of chasing short-term performance targets has developed, which is damaging the British economy and also harms investors' returns.

Secondary markets are good

The London Stock Exchange (LSE: LSE) consists of two markets. Companies come to the primary market to raise capital by selling shares and bonds through initial public offerings, but afterwards these are traded on the secondary market, which is where most of the action occurs.

Many investors would be reluctant to invest in the first place if they didn't have an easy way out via the secondary market. Since they do, this encourages them to buy shares and bonds, and it allows companies to charge a higher price for their shares and bonds in the primary market.

You can always sell your shares in BP (LSE: BP), HSBC (LSE: HSBA), or indeed most other quoted companies when the market is open, but if you couldn't access the secondary market, you'd have to find a willing buyer, which could take quite some time and would greatly increase your transaction costs.

Another well-known secondary market, one which has revolutionised the trade in second-hand goods, is the auction website eBay (NASDAQ: EBAY.US). Before eBay you had to rely on word-of-mouth, classified newspaper adverts and/or specialist dealers -- today eBay gives you access to a global marketplace.

Obsessed with the short-term

Kay and his team say that the stock market tail now wags the economic dog to such an extent that it damages Britain's interests. Many contributors to the report consider that the combination of quarterly reporting and institutional fund management has caused the investing community to obsess about the next set of figures at the expense of everything else.

As a result, many companies focus on meeting the institutions' short-term expectations, often by "managing" their quarterly earnings, to such an extent that they take their eye off the long term.

Another problem is that chasing short-term targets and concentrating on beating the forecasts can encourage excessive risk-taking. This can reduce your long-term returns, as well as having some serious consequences for the economy.

We saw this happen in a big way several years ago when Royal Bank of Scotland (LSE: RBS) collapsed during the credit crunch, due to a reckless expansion programme, and it had to be bailed out by the long-suffering taxpayer.

Take advantage of the short termers

I believe that the stock market's obsession with the short term gives private investors an advantage. Unlike the typical fund manager, you won't be sacked if you have a bad quarter, so you should be able to take a long-term view.

This can pay off handsomely when the stock market is having one of its hissy fits, because when this happens, there are bargains to be had. Benjamin Graham summed this up nicely when he said; "In the short run, the market is a voting machine, but in the long run it is a weighing machine."

Separation of owner and manager

Another of Kay's concerns is that because most people nowadays invest through funds, rather than by directly owning shares, the economic interest of share ownership has been separated from the decision-making process. The choice of whether to buy, sell and exercise the voting rights attaching to shares is now overwhelmingly concentrated in the hands of the institutions.

This is nothing new; separating the control over property from its ownership has been a cornerstone of English trust law ever since the 11th century, when the King's Knights left their lands under stewardship before they went off to fight in the Crusades.

But it has mushroomed with the growth of the fund management industry during the last few decades, and the result is that most shareholders are absentee landlords with little interest in how their companies are run. The industry encourages this by offering nominee accounts, and making it very hard (and often expensive) for shareholders to exercise their votes.

The paradox of voting your shares

The difficulty that private investors have in voting shares held in nominee accounts is a bone of contention for some people. Personally I couldn't care less about exercising my voting rights unless my stake is large enough that that it might actually have an effect. If I don't like what I see, I "vote" by selling my shares.

When it comes to voting I'm a big fan of Downs Paradox, named after the public policy expert Anthony Downs who described it in his 1957 book An Economic Theory of Democracy. Downs says that if a rational self-interested person has just one vote in a very large electorate, then they should not bother to vote because this will not influence the outcome.

So, if you own 1% of the company, your vote is substantial and is thus worth exercising. The same goes if you are a constituent in a parliamentary election, which was won last time by just a few hundred votes. In both of these instances, your vote is very valuable.

But if you own 0.0005% of a company's shares, Downs Paradox says that a much better use of your time is to do something else, such as reading its report and accounts! Even though I attended Diageo's (LSE: DGE) annual general meeting last October, I didn't bother to vote -- my stake, whilst fairly substantial, is but one vote amongst more than a million others.

Kay's full report will be published this summer along with his recommendations. If you want to read his interim report you can find it at this webpage.

http://www.fool.co.uk/news/investing/2012/03/05/why-the-stock-market-is-failing-britain.aspx?source=ufwflwlnk0000001

The Investor and Market Fluctuations: Price fluctuations have only one significant meaning for true investor (8)

The true investor when he owns a listed common stock, can take advantage of the daily market price or leave it alone, as dictated by his own judgment and inclination.

• He must take cognizance of important price movements, for otherwise his judgment will have nothing to work on. 
• Conceivably they may give him a warning signal which he will do well to heed—this in plain English means that he is to sell his shares because the price has gone down, foreboding worse things to come. 
• In our view such signals are misleading at least as often as they are helpful. 

Basically, price fluctuations have only one significant meaning for the true investor. 

• They provide him with an opportunity to buy wisely when prices fall sharply and 
• to sell wisely when they advance a great deal. 
• At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies

The Investor and Market Fluctuations: Mr. Market Parable (7)

Mr.Market Parable.

Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed.

• Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. 
• Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. 
• Often, on the other hand, Mr.Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. 

• You may be happy to sell out to him when he quotes you a ridiculously high price, and 
• equally happy to buy from him when his price is low. 
• But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

You must think for yourself and not allow the market to direct you.

Be warned.  Do not confuse the real success of an investment with its mirror of success in the stock market .

• The fact that a stock price rises does not ensure that the underlying business is doing well or that the price increase is justified by a corresponding increase in underlying value. 
• Likewise, a price fall in and of itself does not necessarily reflect adverse business developments or value deterioration.
• I t is vitally important for investors to distinguish stock price fluctuations from underlying business reality. 
• If the general tendency is for buying to beget more buying and selling to precipitate more selling, investors must fight the tendency to capitulate to market forces. 

You cannot ignore the market - ignoring a source of investment opportunities would obviously be a mistake -but you must think for yourself and not allow the market to direct you. 

• Value in relation to price, not price alone, must determine your investment decisions. 
• If you look to Mr. Market as a creator of investment opportunities (where price departs from underlying value), you have the makings of a value investor.  
• If you insist on looking to Mr. Market for investment guidance, however, you are probably best advised to hire someone else to manage your money.

Buffett: My job is to take advantage of the craziness of Mr. Market; whacking him when he gets way out of line

March 31, 2008

Question: What are your thoughts about the Chinese Stock market?



Buffett:


The Chinese stock market? I don’t know what markets are going to do.  When I was over in China they were bombarding me with questions about the market and of course you have these A shares, including Petro China, which was going public in China.  Petro China and others were trading at twice the price within China (at that time Chinese people were not permitted to buy shares in Hong Kong or in the United States) than outside China.  This was really extraordinary.  If you knew these restrictions were going to break down it would have been great to short the stocks in China and buy them elsewhere around the world.


But the Chinese stock market has 1.2 billion people waking up to the stock markets and having an investing or gambling urge.  The stock market was becoming wildly popular as we know in China.  Petro China at one time, based on the Chinese prices, was the most valuable company in the world, and was selling for over 1 trillion dollars, whereas Exxon was only worth 500 billion.  This made Petro China twice as valuable as the largest company in the world. 


I have no idea why and where that many people were relatively new to the market and were very excited about stocks.  You do know in the end you have to buy things on a basis of when you get a value for what you pay.  This seemed to lose relevance in a market like China.  They had a situation like that in Kuwait 20 years ago.  When a whole society, and a rich society, (certainly far richer than 15 years ago), a huge market opened up for them.  I have no idea whether the people get friendlier or crazier.  That is not my game.


My game is simply to buy something worth a dollar for 50 cents.  Then if they go crazy in the right direction it helps me and if they go crazy in the other direction I  just buy more.  


My job is to take advantage of craziness.  And that goes back to Ben Graham’s Intelligent Investor chapter 8.  If you are going to invest based on value with a partner (lets say Mr. Market) - let’s say you each own half of a McDonalds stand.  Every day he quotes a price at which he either wants to buy me out or sell me his interest.  If he hears a bad rumour he low-balls it, so I buy.  Other days he is all excited about some Burger King burning down and seeing some line ups and decides to give a high offer, so I sell.

If I’m going to have a partner like that what kind of partner do I want?  I want a psycho.  The stupider he gets the better I am going to do.  I don’t want some cool, calm rational partner.  I want somebody with huge ups and downs - a manic depressive.  Basically that’s what you get in the stock market some times.  As long as you realize he is there to serve you, and not to instruct you, you can make a lot of money.  You can’t listen to Mr. Market and think he must be right.  Only listen to what he says in the context of: when this guy gets way out of line I am going to whack him.  And basically that’s what you get in the stock market.

In China you can’t tell how far the markets will go to extremes.  You can’t tell that, I have no idea where the markets are going to go tomorrow or the next day or the next month or the next year.  I do know that in the end stocks tend to sell for what they are worth.  At least in the range of what they are worth.   They go all over the place in between - but tend to true value in the end.




A Discussion of Mr. Warren Buffett with Dr. George Athanassakos and
Ivey MBA and HBA students
Omaha, NB, March 31, 2008, 10:00 am - 12:00 pm

http://www.bengrahaminvesting.ca/Resources/Interviews_Notes/Buffett_March_31_2008.pdf

Invest intelligently by following these three principles of value investing

PRINCIPLES OF OPERATION 

Invest INTELLIGENTLY through adhering to the following three principles of value investing.

First, we think of stocks in the same way that a business person would think of a business.

Second, we do not follow, but instead try to take advantage of the manic depressive Mr. Market.

Third, we always look for a margin of safety.

Mr. Market

MR. MARKET

“Common stocks have one important investment characteristic and one important speculative characteristic. 

Their investment value and average market price tend to increase irregularly but persistently over the decades, as their net worth builds up through the reinvestment of undistributed earnings. 

However, most of the time common stocks are subject to irrational and excessive price fluctuations in both directions, as the consequence of the ingrained tendency of most people to speculate or gamble”.

- Benjamin Graham

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

http://www.sap-basis-abap.com/shares/meet-mr-market-your-servant-not-your-guide.htm

Why should I need to sell if my investment horizon is 50 years and above?

My friend asked me on the current market view. My answer to him is 'Why should I sell if my investment horizon is 50 years and above?'

Consider the following scenarios:

You are the business owner of a small business that co-own with Mr. Market. Everyday, Mr. Market will ask you to sell or buy according to his mood. Sometime, he is very optimistic of the future, and he is willing to buy at a higher price for your stake. Sometime, he is very pessimistic of the future, and he is willing to sell you at lower price for his stake.

We should always make use of Mr. Market's mood to gain the arbitrage profit from there.


http://www.jackphanginvestment.com/2011/07/why-should-i-need-to-sell-if-my.html

Why I lost money in some stocks in the stock market?

Why I lost money in some stocks in the stock market?

Buy low, sell high = GAIN
Buy high, sell low = LOSS

Factors to consider:
Price
Company

Price
If you can have the intellect and the emotional control to buy low, you have already WON most of the time, with a high probability. (I often quote, "many a sin is forgiven when you manage to buy at a low price.)

To be able to buy a share at a low price, means you have the ability to value this share. Valuation maybe based on assets, cash flow or multiples of earnings, book etc. Do not over-project growth in your valuation. You can only be approximately right in your valuation. This is alright, as long as you are not absolutely wrong in your valuation. There are also many qualitative factors that cannot be quantified in the valuation.

At a certain price, the stock is undervalued, at another it is fairly priced or overvalued. The ability to value a stock is the most important knowledge of a value investor.


Company
Choosing the right company to invest into is very important for someone who has the buy and hold for the long term philosophy. Choose the company in a business with durable competitive advantage. Its business moat is so huge and deep, that competitors find hard to erode their growth and profits over the long haul. Therefore, looking at the quality of the company's business and the management (integrity, intelligence and hard working) are important here.

Even the best company can fail. Look at the Dow Jones Index of 30 companies over the century. The index is made up of the best companies of each period. Many have faded or disappeared into oblivion. Of the 30 original companies at the start of the last century, only 1 or 2 of these are still in the Dow Jones index.

So, you may lose money when your high quality company with good management that you bought at undervalued price deteriorated in its business fundamentals permanently. In this situation, you will need to sell urgently to minimise your loss.


Conclusion
If you have done the hard work in selecting good quality company and valuing this company, the chances of losing money are few. From the above discussion, essentially, these are: (1) buying a poor quality company with no durable competitive advantage, and (2) paying a high price for your purchase.

This approach essentially means focusing on valuation and the company, and is not influenced by the market or herd mentality. The market is there to be taken advantage of, when the prices are right to buy or to sell, and otherwise for most of the time, can be ignored.

If you find a good company at a good price, who cares what "the market" is doing?"

When buying a great wonderful company, also ensure that the stock was reasonably priced.

Even a great company can be a bad investment if you pay too much for it. 

In the case of Lubrizol, Mr. Buffett is paying $135 a share. That's less than 13 times last year's earnings, and 12 times forecasts for 2011. 

If you find a good company at a good price, who cares what "the market" is doing?

Value Investing: Intrinsic Values versus Emotional Values (Market Prices)

Value investing works if stock prices fluctuate around business value.  ONLY then can stocks be bought at discounts to business value (or sold at premiums to business value).

Value investors believe that markets price stocks in ways that produce such gaps.

Graham's metaphor described this behaviour as Mr. Market, viewing market action as the collective psychological behaviour of human beings prone to periods of excessive optimism and pessimism.  The conception yields several insights for what value investing is.

Numerous complex factors influence stock market prices.  The idea that anyone can predict the outcome of this process (market timers), or that it works in a way that yields prices just equal to value (efficient market hypothesis followers), is far-fetched.  Value investing considers trying to measure market sentiment a waste of time.  Value investing focuses primarily on business value (intrinsic value), not market price (emotional value placed by the market.).

Emphasizing businesses over prices enables value investors to know that owning stock means owning an interest in a going concern.

• That mental quality promotes the discipline necessary to define a circle of competence, do financial analysis, and assess value-price (intrinsic value-emotional value) relationships.  
• Pervasive market price data makes it harder for equity investors to appreciate that they are part owners of a business, making disciplined analysis elusive.

The only reason to consider market sentiment is because in times of general economic despair and market malaise, the odds of successful stock picking rise.  Three factors contribute:

1. there are more companies likely to be priced below value,
2. there are fewer investment competitors likely to wade into the thicket, and,
3. the media and regulatory pressure tend to promote quality management and conservative accounting.

For traders: Always keep in mind that the company and its stocks are distinct

A company may reach new heights of prosperity while you as individual stockholder own a bit of it, but you still can lose money.  Why?  You and other temporary owners have bought merely rights to cash in on whatever changing level of perception other people (taken as a whole, the market) may hold about that company.

1.  They may like it less tomorrow

• because of buying in too late (too high), 
• because interest rates are rising (making all equities less attractive relative to bonds or Treasury bills); 
• because of adverse public opinion about its products or industry;
• because of press publicity over high executive salaries; 
• because general corporate reputation might deteriorate; 
• because investment tastes shift in favour of other industries; or 
• because of a rising fear of recession.

2.  Or the overall stock market may be declining from a too-high prior level.

3.  Other investors collectively may be right or wrong about the company over the short to medium term.  And you as an individual may prove correct, while the majority are incorrect, about fundamentals.


To determine whether now is the time to hold or to sell, focus on changes in perception rather than on long term fundamentals.  An investor can be dead-on right about fundamentals, but if the market collectively decides that it no longer is willing to pay as much for this company's reputation or earnings, its share price heads south.  Eventually, an individual's logic may be vindicated again as value reasserts itself and other investors resume their willingness to pay for it.  But in that interim, the individual is going to suffer a loss for fighting the tape.

As Benjamin Graham noted in The Intelligent Investor, markets act as voting machines in the short term but in the long run function as weighing machines.  Thus, actions and opinions of the crowd determine share price in the short to medium term, which is the most important factor because that share price determines whether you have a gain or a loss, and when.  So buy and sell not just on personal judgment of a company behind a stock but on your studied assessment of what other investors think of the company and how that thinking seems to change.  A great company can be a bad stock (for trading or investing) if bought at just any price without regard to reasonable value.

Prices on the tape reflect people's reactions and perceptions and beliefs translated into buying and selling decisions; they do not reflect the truth about a company's fundamentals.  So keep in mind that the company and its stock are distinct.  

Being able to keep a company and its stock strictly separate in your mind has become ever more critical in recent years.  Excellent companies may suffer single-quarter earnings shortfalls against analyst estimates or might even experience actual interim declines in earnings.  Such minor stumbles usually call down immediate and massive institutional selling.  While such selling may be vastly disproportionate to any long-term true fundamental meaning of the triggering event, it does signal a coming period of more cautious appraisal by major investors.

If you maintain the mental agility to view a stock as merely an opinion barometer because you have separated it from the company's fundamentals, you will be able to sell without costly hesitation.  Fail to differentiate a company and its stock in your mind and you will have great difficulty over separation and loyalty issues and will be less successful in your investment moves.  Unless you plan on holding forever, which will produce merely average or even sub-par returns, you need to buy and sell.

Swings in market psychology drive prices to fluctuate around true long-term value (if only the latter could ever be known accurately today!).  Another way of viewing these price swings is to think of them as changes in the consensus of esteem given to a company by all investors taken together.  When esteem runs up above reasonable valuation of fundamentals, price will eventually correct downward to redress that temporary mistake.  Above-average profits accrue to those who capture such positive differentials of esteem minus reality.  (Similarly, on the buying side of the equation, handsome profit opportunities can be captured when reality minus esteem is a positive number, meaning that the stock in more common terms is temporarily undervalued by the market of opinion.)

Recognise Your Emotions: Irrational Behaviour and Stock Market Investing

"You have great skill with your bow, but little control of your mind", said the master to his young archer.

This is also applicable in investing.  You can know everything about valuing companies, but it'll come to nothing if you can't apply it rationally when the heat is on.

Human behaviour is directed by a combination of evolutionary hardwiring and development programming, and you can see both in everything we do.

The trouble is that in stock market investing, a very recent phenomenon in human evolution, we haven't developed behaviours appropriate to it.

The usual range of other behaviour responses that we picked up in our early life are often completely inappropriate.


Recognise your emotions


These problems are all tied up with human nature, so it is impossible to eradicate them.   But that's the fundamental irony of investing:  irrational human behaviour creates the opportunities, but to take advantage of them you have to be rational and inhuman!


Whenever you try to put a curb on a natural process, there's a danger you'll overshoot.  If you worry too much about your crowd following tendencies, for example, you could end up going against the consensus opinion just for the sake of it - which might itself be a mistake.

Probably the best way to deal with your emotions is to learn to recognise them, so you get a feeling for when they might be getting the better of you.  If you feel yourself getting a bit overexcited, then put it all to one side and go and do something else.  In the stock market it's best to favour inaction over action.



Read:  Rational Thinking about Irrational Pricing

http://myinvestingnotes.blogspot.com/2009/01/rational-thinking-about-irrational.html

Famous Mr. Market Parable

Stocks will fluctuate substantially in value. For a true investor, the only significant meaning of price fluctuations is that they offer ". . . an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal." 

Using his famous Mr. Market parable, Graham suggests the attitude one should adopt toward fluctuations in prices. Imagine owning a $1,000 interest in a business along with a partner, Mr. Market. 

Every day the accommodating Mr. Market offers either to buy your interest or to sell you a larger interest. Sometimes his price is ridiculously high, allowing you a good opportunity to sell. At other times his price is ridiculously low, allowing you a good opportunity to buy. Still at other times, his quotes are roughly justified by the business outlook, and you can ignore them. 

The point is that the market is there for your convenience and profit. And market valuations are often wrong. Price fluctuations, Graham believes ". . . bear no relationship to underlying conditions and values." It is a mistake, he argued, to let the market determine what stocks are worth. Generally an investor will be wiser to form independent stock valuations, and then to exploit divergences between those valuations and the market's prices.

Graham's Mr. Market parable is related to his view of technical analysis. According to Graham, nearly all of technical analysis is based on buying stock when prices have risen and selling when they have fallen. Based on over 50 years' experience, he had ". . . not known a single person who had consistently or lastingly made money by thus 'following the market.'" This approach, he declared, ". . . is as fallacious as it is popular."