TJS Partners, Inc.

Ben Graham wrote many years ago, “You are neither right nor wrong because people agree with you or disagree with you.  You will be right if your facts and reasoning are correct.”  Graham also said, “In the short term the market is a voting machine.  But in the long term it is a weighing machine.”

Seth Klarman has said, “Investing is the intersection of economics and psychology.”  That is an important and true observation.  Valuing a business or security is the (relatively) easy part.  The hard part is knowing when to buy, how much to buy, what to do if it declines or goes up after you buy it, what if it seems like the world might be coming to an end, those sorts of things.  It's reading the psychological and emotional te leaves and exercising appropriate discipline.

If you buy a stock that quickly orunexpectedly goes up a lot, maybe you start thinking it is worth more than you thought before and so you may not sell or you may start thinking it must be worth more, as you surrender your independent thinking to Mr. Market.  Similarly, if you buy a stock and it subsequently goes down, maybe you become concerned or worry that Mr. Market knows more than you do and so you sell it.  But if it was a good bargain when you originally bought it, after it goes down further it could very well have been an even greater bargain. 

Assuming you choose to be an investor (a wise choice) you have another choice, this time between two views of financial markets.  One widely held view (particularly among institutional investors) is that the markets are efficiently priced and trying to outperform the market averages is futile.  The best you can hope for is to match the market average.  And even if you do this, you will incur high transactions costs and taxes, and so you will underperform in any event. 

The other view is that some securities are inefficiently priced, creating opportunities for well above average profit with well below average risk.  This view was perhaps best expressed by Benjamin Graham, who described a “Mr. Market”.  As Ben Graham wrote, “An ever helpful fellow, Mr. Market stands ready every business day to buy or sell a vast array of securities in virtually limitless quantities at prices that he sets.  He provides this valuable service free of charge.  Most of the time Mr. Market sets prices at which you would neither want to buy nor sell.  But often enough he becomes irrational.  Sometimes he is very optimistic and will pay far more than securities are worth.  Other times he is very pessimistic, offering to sell securities for considerably less than underlying worth.  Value investors – who buy only at a discount from underlying value – are in a position to take advantage of Mr. Market’s irrationality.”

Some investors – really speculators – look to Mr. Market for guidance.  If they observe him lowering prices, they rush to sell too, ignoring their own view of underlying value (which, as speculators, they are mostly ignorant of anyway).  Other times, when they see Mr. Market raising prices, they assume he knows more than they do and, trusting his lead, rush to buy as well.  But the truth is that Mr. Market knows nothing – he is just the collective actions of thousands of market participants that very frequently make trading decisions that have nothing to do with business fundamentals.  (Again, over 70% of daily U.S. stock trading activity is computer driven, high frequency or program day trading.)

Unsuccessful investors are dominated by the collective actions of others, as well as their own emotions.  As an investor you mustn’t allow Mr. Market to influence your judgment.  You must take advantage of him when you can, and when you cannot, you must remain patient – knowing that he hasn’t yet been cured of his manic-depressive behavior. 

Look to Mr. Market as the source of investment opportunities - whenever he allows price to depart from underlying value.