Don't Fall Under the Influence of Mr. Market

May 2, 2022

“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.”

“The stock market is a device for transferring money from the impatient to the patient.”

-Warren Buffett

The importance of wealth management cannot be understated. Many of life’s most important goals are achieved through the accumulation of wealth – buying a house, paying for our children’s or grandchildren’s education, retiring comfortably, and many other big goals. The times we are going through now, then, can give us a lot of stress when we perceive these goals at risk of not being achievable. Market volatility is here, and there is a good chance that it is here to stay for some time. In this type of environment, it is important to remember what influences success in investing the most:

1. Prudent investor behavior

2. Following a disciplined investment process

I believe that investor behavior is far and away the most important of the two. There are countless instances where investors with immense financial knowledge have had extremely poor outcomes. This is because their behavior, rather than their financial acumen, is what got the better of them. With how much influence our financial status has on our lives, it is hard to separate our emotions from our investments, but emotions can be extremely detrimental to success in investing. When markets go down, we’ll often feel a sense of dread as it seems like everything we worked so hard for is going up in smoke. On the flip side, when markets go up, we feel confident about the future, and we can picture our goals becoming achievable. Typically, these emotions aren’t an issue in the good times, but the emotions we feel in the bad times can influence us into making poor decisions.

These are times when you can’t let yourself be fooled by Mr. Market. As a rule of thumb, it’s usually not a good idea to make a decision that’s driven by emotions. That rule is as true in life as it is in investing. When it comes to your investments, a poor decision at the wrong time can have long-term consequences.

In times of turbulence, we can feel like we must preserve what we have before it gets any worse. The media becomes solely focused on how bad things are and how much worse they are going to get. Additionally, many market crashes coincide some large existential event that is taking place at the same time, like in 2008, when everyone thought our whole financial system would collapse, or in 2020, when we all feared a disease would kill us and our family. It’s hard, but managing our emotions is critical in these times when a bad decision can be so detrimental in the long-term. The performance of the average investor over the last 20 years is a testament to this folly. You can see in the chart below that the average investor underperformed almost every asset class over the last 20 years. The only explanation for this is that they let their emotions get the better of them. They sold out of fear and bought out of greed rather than making objective assessments of their investments. To give you an idea of the impact in dollar terms, if we take two investors that would have started with $100,000, a person invested in a 60/40 portfolio would have ended up with about $346,000 at the end of this 20-year period. Meanwhile, an average investor chasing the highs and lows would have ended up with only $177,000. That’s almost half of what the person who just stuck their money in a 60/40 portfolio and forgot about it would have ended up with. That’s a difference that can have a notable impact on your livelihood.

Source: JPMorgan Asset Management, Dalbar Inc, MSCI, NAREIT, Russell.

The best investors recognize that the market going through periods of highs and periods of lows is a feature, rather than an anomaly of markets. We must be prepared to assess whatever situation we’re in objectively, limiting emotional involvement. It can be counterintuitive, but often in investing the best thing to do is simply to do nothing. For those that have the patience and expertise, these periods of turbulence can even present an opportunity to go against the current and buy on sale. One thing that’s unique about financial markets is that they are the only place where everyone heads for the exit when everything goes on sale. Smart investors know these environments often present the best opportunities for those that have patience. Don’t let Mr. Market get the better of you.

I’ll conclude with two quotes from George Soros, now a controversial figure, but, nonetheless, one of the best investors ever.

"If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring."

"To be in the game, you have to endure the pain."

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