Learn to invest with Buffett

Chapter 94

Chapter 15 Section 6 Don't be fooled by the false appearance of the market
"Markets" don't exist, and if there is, it's just a place for us to see who's doing stupid things.

--Warren Buffett
Forming investor psychology is a process of preparing for the inevitable ups and downs in the market both financially and psychologically.Not only do you know intellectually that a market downturn is imminent, but you respond emotionally with the same poise and poise that an entrepreneur does when faced with an unattractive offer: ignore it."A true investor is rarely forced to sell his stock. And at any other time he has a reason to ignore current market quotes," Graham said.

To further clarify his point, Graham created an allegorical figure he called "Mr. Market."

Suppose you and Mr. Market are partners in a private enterprise.Every day, Mr. Market quotes you without exception.He either quotes the price at which he is willing to buy the stock from you or the price at which he sells the stock to you.The business you jointly own is very fortunate to have a very stable economy.But Mr. Market's quotation is not stable at all, because Mr. Market's mood is unstable.Sometimes when he is in high spirits and his eyes are bright, he will quote a high price.At other times, Mr. Market was hit, his eyes were dark, and he was facing difficulties. At this time, the price he quoted was extremely low.

Mr. Market also has an endearing feature, says Graham, who doesn't mind being left out.If what Mr. Market says is ignored, he will be back tomorrow with his new offer.In this process, Mr. Market will always make mistakes.

Buffett also believes that, according to the above theory, since the market price reflects all information, at any given time, the price in the stock price list is the correct price, and there is no dispute.

In this shady arena, Buffett's investments thrive, and he takes advantage of the market's panic and uncertainty to carry out his experimental work, especially when other investors panic-sell stocks.This is why Buffett can become the second richest man in the world.Buffett thinks that the efficient market theory is absurd, and it is better to change the starting point of this theory and believe that the market may be inefficient, subject to people's fear, greed, mania and bandwagon behavior - in short, subject to temporary crazy.

Buffett believes that the market is sometimes wrong and sometimes right, and when it is terribly wrong, the lie will be exposed.

Why does Mr. Market make mistakes sometimes?

1. Investors are not always sane.Due to the lack of relevant knowledge and investment experience, they are not rational enough to understand investment, and often regard investment as a game.They do not have rational expectations for the ups and downs of the market.

2. Investors' analysis of information is incorrect.They are often used to relying on shortcuts to determine stock prices, rather than relying on the most basic method of reflecting the company's intrinsic value.

3. Performance measurement leverage emphasizes short-term performance, which makes it impossible to beat the market in the long run.

Although Buffett put forward different views on the efficient market theory, and proved himself correct with facts.Yet efficient market theory is still considered a classic in business schools.This fact brings endless "satisfaction" to Warren Buffett.Buffett said sarcastically: "Obviously, this irresponsible attitude towards students and gullible investment professionals is the greatest help to us and others who follow Graham. Because they swallowed the essence of efficient market theory. Bitter fruit. In any kind of contest—financial, mental or physical—we have a huge advantage. Our opponents are told about the uncontrollability of the market, and they don't even have to try. From a selfish point of view In other words, we should perhaps donate some chairs to ensure that efficient market theory is taught permanently."

In reality, Mr. Market is your servant, not your guide.Sooner or later you will find that it is its wallet, not its wit, that is of use to you.If one day it acts out to be utterly stupid, you can either ignore it or take advantage of it.But if you make mistakes under its influence, the results will be very tragic.

In fact, if you are not sure that you understand your target company far better than Mr. Market and can correctly value it, then you might as well not play the stock investing game.Like they say in a game of poker: if you've been playing for 30 minutes and don't know who the idiot is, you're the idiot.

In fact, price fluctuations are of great significance to real investors.Investors can decide whether to buy and sell based on price fluctuations.When the price falls sharply, investors can consider buying opportunities; when prices rise sharply, investors can consider selling opportunities.In this particular environment, it is imperative to maintain good judgment and control, and keep a certain distance from "Mr. Market".

When the quotation of "Mr. Market" is reasonable, investors can take advantage of it; if his performance is abnormal, investors can ignore him or use him, and must not be controlled by him, otherwise the consequences will be disastrous.

In today's investing world, where most professional investors and academics talk about efficient markets, momentum hedging, and betas, Ben Graham's parable of "Mr. Market" may seem dated.It's understandable that they're more interested in that stuff, since investment techniques shrouded in mystery are obviously more lucrative and therefore more valuable to a guy who makes a living giving investment advice.After all, quack doctors have garnered much fame and fortune just by advising you to take two aspirin.

But for investors who invest according to investment advice, market cheats may not be of any value.An investor must not only have good company analysis skills, but the most important thing is to "persist in doing business you know".When making a decision, you should look at yourself in the mirror, ask yourself whether this purchase is rational, and be responsible for your purchase.

At the same time, investors looking at the market properly should regard it as a friend-a friend who does not talk in the way we usually understand.This friend cannot sit on a chair and tell us that it wants to interrupt its own plan of smooth movement.It cannot say what it intends to initiate a sharp, unexpected decline.All it can do is warn us through action.The market uses the language of failure to spread its gospel.Those traders who are vigilant and shrewd enough to accept this information early (easier said than done) will survive, or at least be the ones that get the most out of it.So the next time the market outright refuses to do what it "should" do, consider that it could be a friendly sign of fatigue and get out of the market.

Investment motto:

"Mr. Market" is changeable, and no one can accurately predict its changing trend, so investors must control their emotions, and when buying a certain stock, they must ask a few more reasons, and don't be confused by the illusion of the market , so as to make rational investment decisions.

(End of this chapter)