Keep an eye on Mr. Market

Everybody loves a sale — except in diving stocks

‘Those who do not remember the past are condemned to it.” — George Santayana. repeat

There are many theories in economics and financial analysis. Here’s a law: Most participants in the stock markets love higher prices and loathe lower prices. And, in observing the history of market behaviour over the years, this law appears to consistently hold true. In my humble opinion, we’re starting to see this scenario play out yet again.

It was J.K. Galbraith who said that the old investors must die off, so a new set of idiots can show up to repeat the mistakes of the previous generation. In other words, historical experience has no meaning to investors today, the same as it meant nothing to those buying dot-com stocks back at the turn of this century, those buying tulip bulbs in the 17th century or, most recently, those buying cannabis companies. The circumstances change but human nature doesn’t.

We all have watched stock prices plummet in October and November. Let’s look at the popular FAANG stocks since the market (or their stocks) turned south. Facebook: down 38 per cent from its July highs; Apple: off almost 24 per cent; Amazon: decline of 25.5 per cent; Netflix: tumble of about 37 per cent; and finally, Google (Alphabet): decline of 18 per cent. Substantial corrections indeed. A simple average decline of 28.4 per cent in a very short period of time. How are investors reacting? Generally, I’d bet people are terrified.

In Winnipeg, prices for unleaded regular gas have declined from highs of $1.30 a litre in May to below a buck in the last few days. Now, when making a stop at the gas station, I’ll wager practically everyone in Winnipeg (and likely everywhere across Canada) has a smile on their face as the price for this product has plummeted by over 25 per cent. No doubt, there are always lineups at retail stores on Black Friday as bargain hunters descend to snap up products they want at discounted prices. Many consumers will wait for this day or Boxing Day to be able to get these bargains. In the case of any product or service people are willing or have to pay for, lower sticker prices are recognized as better and higher prices are negatively perceived. It’s just logical and those responses are rational.

Not so in the oftenirrational world of stock prices. Here, it’s the complete opposite. Higher prices are cheered, lower prices are booed and often, feared. The stock consumer is elated at the prospect of paying more for portions (shares) of businesses and their future cash flows. And when the quotational value of these partial ownership pieces drop, they are dismayed, often angry and sometimes downright terrified. Why do people see buying shares in companies from the opposite viewpoint?

Now of course one difference is that many investors are already owners of shares, and do not like to see the perceived value of their holdings decline. But unless you have no plans to ever buy another share again, that doesn’t explain the reluctance to buy when prices are depressed.

Another difference may be that there are no advertisements when a stock is trading at a huge discount price. In my 40 years in the investment industry, I’ve never seen an ad proclaiming that a stock is on sale. Have you ever seen an advertisement screaming that, say Berkshire Hathaway is a bargain today and you should call your broker to buy a few shares? It just doesn’t occur in that world.

Perhaps it comes from a short-term media where the focus is on the daily, gyrations in prices of everything from stocks to commodities. Rarely do the media spend time on the benefits of owning a great company for the long term.

This sad condition might be best understood by going back to Benjamin Graham, the father of value investing. Graham introduced us to an interesting fellow in his classic book, The Intelligent Investor, (originally published in 1949) that he named “Mr. Market.”

Warren Buffett, Mr. Graham’s most famous and richest student, wrote about this fictitious fellow back in 1987: Graham, “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.”

Buffett concluded in the 1987 letter to Berkshire Hathaway shareholders that, “an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.”

Mr. Market doesn’t exist in the world of purchasing food, gasoline or cellphones. But he certainly is present in the world of stock markets and in great numbers. So, here’s the uncomfortable question: are you Mr. Market when you invest or are you waiting for Boxing Day?