Is Mr. Market Off His Meds?
Wall Street legend Benjamin Graham invented an allegory for market behavior whom he called “Mr. Market” – a manic-depressive who shares equity in a business with you.
Each day, Mr. Market offers to buy shares from you or sell his own. But he also suffers from an either manic or depressive episode that impacts his valuation of the business.
If he’s in a manic mood, he becomes eager to increase his stake for a higher price. And if he’s in a depressive mood, he becomes desperate to unload his shares at bargain prices.
The challenge is to ignore Mr. Market’s unstable moodiness, and to maintain a stable and reasonable view of the business’ value.
But there’s a catch…
Since you’re always looking for a good deal, you may exploit Mr. Market’s instability to either sell shares at an above-average price or load up on shares at a discount.
In either case, you’ll be in a position to profit on the instability created by his emotions.
With that in mind, consider this…
Does the stock market’s current behavior reflect reasonable thinking… or could this be another one of Mr. Market’s depressive episodes?
Before you answer, let’s consider some facts:
- U.S. corporate profits reached an all-time high of $2.1 trillion last quarter thanks to better-than-expected growth.
- S&P 500 companies are expected to clock in their highest annual earnings growth since 2010.
- Every major sector is projected to deliver positive earnings growth this year, with nine out of 11 sectors expected to see double-digit growth.
The market even broke a few records this year…
- A record 77% of S&P 500 companies beat revenue estimates in the first quarter of this year (since FactSet began tracking this data).
- A record 80% of S&P 500 companies beat earnings estimates in the second quarter of this year.
- These companies also saw their highest year-over-year earnings growth (26%) since 2010, as well as their highest quarterly revenue growth of 10.5%.
- Even net profit margins reached a record high of 12% last quarter.
Given these facts, something’s quite clear: Mr. Market’s off his meds!
What’s more, the Dow Jones Industrial Average saw its worst-ever Christmas Eve performance, and the S&P 500 dipped squarely into bear market territory – a 20% drop or more from recent highs.
But while panicky investors were selling, American consumers were buying.
Holiday retail sales between November 1 and Christmas Eve saw a 5.1% increase (the best in six years), reaching more than $850 billion in spending.
Clearly, the market’s instability does not match up with the fundamental facts.
Need more evidence? Take a look…
All sectors are set to report strong annual earnings growth, but they’re also set to post losses across the board.
At the risk of sounding like a broken record, I encourage you to be greedy when others are fearful. Be opportunistic.
It’s easier said than done to set emotions aside and approach the market objectively. But you’ll never outperform the herd by behaving like the herd.
Instead of cowering at the sight of market losses, muster the courage to buy great investments at great prices.
The bottom line is this: One man’s crisis is another’s opportunity.