Ben Graham, the legendary father in value investing, taught Warren Buffett and many after him about the stock market and what smart investors should do to in order to profit from the market is… to imagine a character called Mr. Market.
Mr. Market is one of the investors of our company. He is someone who has a hard time dealing with his emotions. On good days, everything is all well and wonderful. On bad days, though, it’s as if the world has come to an end. Everyday, Mr. Market will visit us, either offering to sell or buy stocks, depending on his mood on that particular day. If he’s in a really good mood, Mr. Market will see a bright future for the firm, and will ask to buy stocks from us at especially high prices. But on days that Mr. Market feels depressed, only sees the bad side of things, he will want to sell all of his stocks of the company. So he will offer his stocks to us at incredibly low prices. What we need to do is do not let Mr. Market’s opinions and emotions influence our own. We have to be able to read Mr. Market’s emotions, and take advantage of his miscalculations when we have the chance. In addition, we mustn’t fall prey and take him up on his offer if it does not benefit us.
Of course, the character of Mr. Market is the stock market itself. Everyday, there will be investment offers for us to choose. As investors, we must know the quality of that asset (Jitta Score) and its reasonable price (Jitta Line). From this understanding, we would not be influenced by what Mr. Market has calculated based on his emotions in each day. And we would then make profit. GMCR is a good example of the fluctuations of the market’s emotions. The price that the market offers swings greatly in each year, from top to bottom, even though the business still continues in the same manner; and its quality and reasonable price gradually increase incrementally.
Therefore, if we know the true quality and the price GMCR should have, and we understand the temperaments of Mr. Market, we will be able to make profit from Mr. Market’s bad days, when he is too pessimistic and sells his stocks, and on his good days, when he is too optimistic.