Chapter 8: The Investor and Market Fluctuations
This chapter in Benjamin Graham's book The Intelligent Investor is revered as one of the most important chapters for any investor to read.
Key Takeaways
Do enough research until you feel comfortable and confident that you've placed a value and a price point, on what the company is reasonably worth.
Don’t time the market. You can’t.
The book, The Intelligent Investor written by Benjamin Graham in 1949 is considered one of the greatest investing books of all time. Warren Buffett mentions Graham being a mentor to him and the book, specifically, being a direct influence on his investing style.
In chapter 8, The Investor and Market Fluctuations, Graham talks about how trying to time the market is pretty much a fool's game. If you do go down that route, then you're no longer considered to be an “intelligent investor” but rather, a “speculator.” This is because there's really no way you can time the market.
The Intelligent Investor
According to the book, what real investors do is they try to place a value on the company based on what they determine is its intrinsic worth. If you do enough research on the company, then you can basically put a price on it.
Remember, all the homework that you do is something that you can control. This homework includes a lot of fundamental analysis, like:
How much sales are growing
Book value
Profit margins
Reputation of the company
Etc.
Graham's point is that you should do enough research until you feel comfortable and confident that you've placed a value and a price point, on what the company is reasonably worth. And then from there, you take that price you think it’s worth. and you compare it to its actual stock market price.
This is how you determine whether the company is undervalued or overvalued. If you think that it's undervalued, then as an intelligent investor, you would buy some of that stock.
And, you would also have the patience to keep waiting and keep looking for the right opportunities to buy.
The Speculator
Simply put, Speculators are just impatient. They're worried about time and they're not even looking for value. Essentially, their only focus is on how to time that stock or how to time the market. Again, Graham says you can’t time the market, because you have little control over it. He also mentions in how raging bull markets will sort of trick you into thinking that you can actually predict these things.
Basically investors often move away from the business mindset that's needed to be an intelligent investor.
As an investor, if you don’t ask the right questions to get the true value of the company, then you become a speculator. Speculators allow the constant changing of the stock market price change their view on what the company is really worth as a sound business.
The overall point that Graham's making is:
If you did your homework, placed a good price on it, and feel confident with it, then even if the market crashes, you're not worried about selling. By not selling, you wouldn't actually lose any money because you're okay with waiting for it to recover. Meanwhile, it's still paying you dividends and you're going to reevaluate your valuations at that point. You may even see that the company is even more at a bargained price during this crash. And so at that point, you buy more shares while it's crashing.
What causes these price fluctuations?
Your business partner, Mr. Market causes these price fluctuations. He is the representation of the entire stock market and your partner Mr. Market, is a very moody man. On some days, he appears to be overly optimistic and some days he just seems to be very pessimistic. You just never know what mood Mr. Market is going to be in on any given day. And again, imagine that this man is one of your business partners in a company that you own. And pretty much every day he's got an opinion on what he thinks your part of the company is worth. He's constantly making new offers every day on either buying your half or selling you more of the company. And it's all simply based on his opinion and his mood. Sometimes, he seems to be offering you a really good value and other times he just seems to be ripping you off. He's so damn moody that his emotions are always dictating his actions. It's this irrational behavior that makes him very fearful and very scared at times.
And when he's in one of those states, he seems to offer you super cheap prices for his shares. But other times, he's overly enthusiastic, irrational, and excited that he offers you wildly high prices (which you certainly can pass on if you want to). But at the same time, he may just want to sell them at those irrational highs because you want to take a profit.
But you're not like Mr. Market
You don't want to be like him because you're an intelligent investor. And so by being an intelligent investor, you come to understand that you're not trying to beat Mr. Market, you're just trying to take advantage of his moodiness.
He's going to underestimate the value of his shares in the business, just as much as he's going to overestimate his shares in that same business. And so, you realize that in order for you to work effectively with Mr. Market, you have to come up with some sound strategies and principles that’s going to help you deal with him for the long term. If you don't, he's more than likely going to take advantage of you.
So, don't ever be like Mr. Market. Remember, that there's a real business behind those fluctuating moving prices every day. There's real people working there, and there's real people that are trying to make that company grow (…or not). When you keep that in mind and you ask the right questions, you're going to be an intelligent investor.