Tuesday, August 09, 2005

Uncommon man & common thoughts

(Here the uncommon man refers to value seekers and those who can manage to sleep well)
(By nature, Mr. Value never gets tempted whereas Mr. Market is very enthusiastic)
Today, Mr. Market is negatively enthusiastic and offers to Mr. Value a Rs. 100 worth of note for Rs. 60. Mr. Value picks it up and goes into deep slumber. Meanwhile Mr. Market consults a doctor. He advises him to take anti-depressant. Being an enthusiastic person by nature Mr. Market takes over dose of that and now he is singing in the rain.
He is excited about everything. So he goes on a buying spree. He goes back to Mr. Value and wakes him up from his slumber. Mr. Market offers Rs.120 for the same Rs. 100 note. Mr. Value being a good fellow keeps his friend happy, by selling the note to him. And goes back into sleep just having doubled his wealth.

The complexity about ‘value investing’ lies in understanding the simplicity of the same. The scene above only highlights the simple idea behind the whole concept of value investing and using markets to seek value. But there are few complexities that make this simplistic approach very hard to implement.

I shall divide the complexities into 2:
i) Competence
ii) Human Behavior

i) Competence:
Mr. Value might suffer from bad eyesight. He may get duped by believing that the note is worth Rs. 100 just because Mr. Market promised it to be. What I mean to say is that the meaning of value is subjective. What may be considered as value now, might turn out to be self-delusion in hindsight. Just because Mr. Market throws a business at throwaway prices does not make it cheap and similarly just because Mr. Market quotes high price does not make it expensive. Value as such is not related to price and as an investor one has to have that competence to understand that.
ii) Human behavior:
Mr. Value might end up being awake and asleep at wrong times. On a more serious note, we often mistake Mr. Market irrationalities (or) sporadic movements for values. And anybody who tries to rationalize the irrationalities will be caught napping. I personally feel that human behavior is the hardest nut man will ever, if at all, crack.

At various times, the frenzied behavior of Mr. Market makes business quote below (or) above its ‘intrinsic value’. I don’t see any other reason as to what makes a stock rise or fall. If we can manage to buy good business for less than what it is worth and hold on until Mr. Market gets enthusiastic, we can manage profits. I all together avoided discussing economic and geo-political factors, but in short this provides the foundation for the type of mood Mr. Market gets in. (Just the foundation which at times is very weak).
The purpose of this write up was to touch upon the things that I think can help one understand the mood of the markets. I also wanted to touch upon that it pays to being able to sleep well (i.e.) to be patient. I shall like to end the write up using Ben Graham’s Immortal words,

"Enthusiasm can be an advantage in any activity but not in investing"


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