On Market Fluctuations

Yesterday was an extremely volatile day at the markets, and while I often remind myself that it is the nature of markets to surprise you, I can never fully take that advice myself, and am always surprised by some of these crazy movements.

I don’t think there was a single person who could have predicted the 400 point up-move that took place yesterday, and while surprising in its own right, it is no more surprising than what the market has consistently done since it existed.

I’m currently reading all of Warren Buffett’s letters to shareholders in a sequence, and I just happened to read the ’87 letter today, which had this great bit of advice about fluctuations in it.

Ben Graham, my friend and teacher, long ago described the 
mental attitude toward market fluctuations that I believe to be 
most conducive to investment success.  He said that you should 
imagine market quotations as coming from a remarkably 
accommodating fellow named Mr. Market who is your partner in a 
private business.  Without fail, Mr. Market appears daily and 
names a price at which he will either buy your interest or sell 
you his. 

     Even though the business that the two of you own may have 
economic characteristics that are stable, Mr. Market's quotations 
will be anything but.  For, sad to say, the poor fellow has 
incurable emotional problems.  At times he feels euphoric and can 
see only the favorable factors affecting the business.  When in 
that mood, he names a very high buy-sell price because he fears 
that you will snap up his interest and rob him of imminent gains.  
At other times he is depressed and can see nothing but trouble 
ahead for both the business and the world.  On these occasions he 
will name a very low price, since he is terrified that you will 
unload your interest on him. 

     Mr. Market has another endearing characteristic: He doesn't 
mind being ignored.  If his quotation is uninteresting to you 
today, he will be back with a new one tomorrow.  Transactions are 
strictly at your option.  Under these conditions, the more manic-
depressive his behavior, the better for you. 

     But, like Cinderella at the ball, you must heed one warning 
or everything will turn into pumpkins and mice: Mr. Market is 
there to serve you, not to guide you.  It is his pocketbook, not 
his wisdom, that you will find useful.  If he shows up some day 
in a particularly foolish mood, you are free to either ignore him 
or to take advantage of him, but it will be disastrous if you 
fall under his influence.  Indeed, if you aren't certain that you 
understand and can value your business far better than Mr. 
Market, you don't belong in the game.  As they say in poker, "If 
you've been in the game 30 minutes and you don't know who the 
patsy is, you're the patsy."

I’ve been buying stocks myself during the past few days and will continue to buy them in the coming days and add more with every little crash, and it is useful to keep these things in mind.

This is a useful reminder as the most recent quarterly results are not exactly sanguine but not very depressing either. If I can hold on to my shares for a very long period of time, then if nothing else, inflation would help boost nominal values.

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