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How to Beat Mr. Market

Mr. Market is a well-known fictional character in the world of investing. Introduced by the father of value investing, Ben Graham, Mr. Market was described as a very obliging fellow who would give you a price for your shares every day. Unfortunately, Mr. Market is also a very emotional fellow who can be euphoric one day, and depressed on another. His emotional state can cause his price offer for your shares to swing wildly every day.

Graham coined term Mr. Market to describe the mental discipline needed to focus on the value of your shares despite the daily offers of Mr. Market. The daily offers presented is an analogy for the daily share market gyrations.

Mr. Market must be stupid  

While it can be tempting to think of Mr. Market as some daft fellow to be shoved aside, we would be better off in showing a level of humility when it comes to share market gyrations.  

To this particular point, hedge fund manager, Seth Klarman expressed his clear thoughts on this dichotomy during an interview. Klarman is the founder and president of Baupost Group, a hedge fund company that has compounded returns at an annual rate of close to 20% since 1992. He said this about buying shares:

“When you buy anything, it’s an arrogant act.  You’re saying: The markets are gyrating and somebody wants to sell this to me, and I know more than everyone else so I’m gonna stand here and buy it.  I’m gonna pay 1/8 more than the next guy wants to pay and buy it.  That’s arrogant.  And you need the humility to say: But I might be wrong. And you have to do that on everything.”

Klarman recognized that whenever he bought shares, someone else was effectively selling the shares to him. Klarman had great respect for the other smart investors out there, therefore he preferred to see buying shares as an arrogant act, rather than a courageous act. While the difference between the two attitudes may sound unimportant, he felt that the idea of seeing his share purchases as an arrogant act would induce him to to be more cautious of his own decisions. In this way, he would spend more time to thinking about how things could go wrong. And more crucially, Klarman was also willing to show humility in admitting to his errors — if new information presents itself to be contrary to his original buy thesis.

Foolish take away

With a track record like Klarman’s, his words are worth reflecting upon to improve our own mental attitude towards Mr. Market. There will come moments when Mr. Market is proven to be right, just as there will be many moments where Mr. Market gets it wrong.

If Foolish investors would like to beat the SPDR STI ETF (SGX: ES3), an indicator for the market barometer, the Straits Times Index (SGX: ^STI), we have to be open to being wrong occasionally. This means we should constantly question the buy thesis for our own shares, and not assume that Mr. Market is always and definitely wrong.

Our job, as Foolish investors would be to figure out the times when Mr. Market might be wrong – and do it more often than not. Read more about investing and get more investing tips and tricks, FREE! Sign up here to The Motley Fool Singapore’s weekly investing newsletter, Take Stock Singapore. Or Like us on Facebook to follow our latest hot articles.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.