Mr. Market and Stoicism (I)
Dear Mr. Market,
The goal of these letters is threefold:
- Present new ideas to the readers
- Engage in interesting discussions (hopefully)
- Help refine my thinking process/ideas by writing
If the title did not give it away, I am a huge proponent of Stoicism, especially the works by Seneca (Letters from a Stoic is a collection of letters that Seneca wrote to his friend Lucilius on how to become a better Stoic), as well as a fan of Richard Feynman, a prominent American theoretical physicist who worked on the Manhattan Project, won the Nobel Prize for his work in quantum mechanics, and was a curious character with an insatiable appetite for finding things out. It is his 1985 memoirs and , Surely You’re Joking, Mr. Feynman!, that inspired the title of this publication.
Stoicism (along with temperament and philosophy) will have its own dedicated post later on, but for now, we can think of Stoicism as a philosophy that helps guide our thoughts and actions in an unpredictable world by not worrying about things outside our control and focusing on how we control ourselves and our reactions.
Or to put it another way, if we have the essentials and virtues (consisting of temperance, courage, justice, and wisdom), we can endure whatever the unpredictable universe throws at us.
Stoicism provides a powerful mental framework for investing. The markets are inherently unpredictable and we never know what the market (or Mr. Market from now on) will throw at us. An investor who is not mentally prepared will get decimated. They will constantly check the prices of his/her investments, sell at the wrong time, and probably develop some stress-related problem along the way.
Many of the great value investors either embraced Stoicism or exhibited some Stoic traits, such as Benjamin Graham (confirmed a Stoic), Warren Buffet, and Charlie Munger (fan of Epictetus)
By no means is Stoicism a necessity to become a successful investor, just like how you don’t need an overhead in tennis. However, it is a great tool to have in your toolkit- a mental edge, if you will, to help you stay calm while other investors are losing their heads. I believe that a mental edge can put you miles ahead of your competition- whether it be in sports, investing, or even war. For example, if you asked me what percentage of tennis was physical and mental, I would say 80% mental and 20% physical.
So who is Mr. Market? Let’s let Warren Buffet explain in his 1987 letter to Berkshire Hathaway shareholders:
Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
In other words, Mr. Market is a mental model on how to view the market. Mr. Market is an imaginary investor who is driven by panic, euphoria, and apathy (on any given day), and approaches his investing as a reaction to his mood, rather than through rational analysis.
- Some days when he is euphoric about the future, he presents to you prices that are very high.
- Other days when he is depressed about the future, he presents to you prices that are very low.
Of course, you don’t have to do business with him- you can ignore him until tomorrow and only accept his prices when they are favorable for you.
Mr. Market, if you think about it, is quite a Stoic view. We cannot predict or control what mood Mr. Market will be in tomorrow, thus we should not worry about him. We should only worry about how we react to and if we are getting a good bargain.
So that’s it for now. We’ve explained the reasoning behind the title, but we will soon touch upon the real topics of discussions. Just to hopefully pique your interest, some topics that will be discussed include (in no particular order):
- On Why Value Investing Works
- On Risk vs. Uncertainty
- On Avoiding Glamour
- On Value-Weighted Indices
- On Special Situations (Spin-Offs, Recapitalizations, Restructurings, Bankruptcies)
- On Catalysts and Partial Catalysts
- On the Madness of Crowds
- On Margin of Safety
- On Market Cycles
- On Games
- On Fermi-Style Thinking
- On Thinking in Bets/Probabilistically
- On Mental Models
- On Competitive Advantages, Network Effects, and Economies of Scale
- On the Most Important Thing
- And more…
Did you enjoy this?
You might also like the other posts in this series…
- Why Value Investing Works (II)
- How to Intelligently Search for Value Investing Opportunities (III)
- Crisis Investing (IV)
- A Mean-Reverting Walk Down Wall Street (V)
Or some of my other musings…
