Mr. Market

The Intelligent Investor, a book Warren Buffet said was ”by far the best book on investing ever written,” introduces us to an interesting character.

That character is Mr. Market, and he is an allegory to help us understand the irrationality of the markets and the mistakes they can cause individual investors.

In my own interpretation of the character, let’s imagine you are buying a home.

This is going to be your home for the next 30 years, so you inspect it and make sure it has good bones – ready for the long haul.

You buy it for $300,000.

With some maintenance and updates along the way, you believe you’ll be able to sell it for more than you paid 30 years from now.

But the first day after moving in, a strange man knocks at the door. He’s disheveled and speaks to you franticly. He offers to buy the home for $280,000.

You decline of course.

The next day, he comes back with a price of $275,000.

The man seems crazy, but you can’t help but begin to question whether he’s right. Did I buy a lemon of a home? Was this a mistake?

You shut the door.

The next day, he comes back dressed nicely and in a much better mood. He offers to buy your house for $310,000.

That makes you feel better about your purchase, but you’re just a few weeks into a house you’re planning to live in for decades, so you decline.

Now imagine if this happened every day for the next 30 years. It might drive you mad. One day, with your emotions high or low, you might make a decision that goes against your 30-year plan. A decision you might come to regret.

This obviously seems insane. This isn’t going to happen to any homeowner and you’re better off for it.

But this is what happens every single day as a stock investor. Every day, you are getting signals in the form of positive or negative returns. Seemingly, these are reminders that you made a bad choice or a good choice.

But it’d be better to view these day-to-day swings as visits from the irrational man, Mr. Market.

The crazy guy who comes shouting almost random prices based on the mood he’s in that day.

A carefully crafted portfolio is like your forever home.

A diversified basket of investments that’s built for the long term.

Regular maintenance and updating will surely be required along the way.

But those regular visits from Mr. Market shouldn’t cause you to rip up the foundation and start over.

If the house still fits your needs, shut the door and ignore him.

If your portfolio is still designed in a way that meets your goals and objectives, tune out whatever panic or manic episode the market is having that day.

We believe shutting that door gives you the best possible chance of investment success and the ability to enjoy your day-to-day life.

That seems like a pretty good combination to me.

Should you want to do a review of your own long-term investment portfolio, I’m always available to meet.