The Short Version

Greetings! I know you're busy, so I'm going to summarize this post for you:

1. Calm down.
2. Markets go up and down. It's normal.
3. Stop watching and/or listening to what passes for financial news on networks such as Bloomberg, CNBC, Fox Business, etc.
4. No one knows why markets rise and fall. Anyone who claims to know is a liar.
5. Stick to your financial plan. Don't have one? Get one. You don't have to be rich to work with a financial planner.

The Parable of Mr. Market

The recent ups and downs in financial markets have seriously rattled investors. Well, the downs rattled investors because no one likes the downs. It's not fun watching one's retirement savings or other investments drop in value. Unfortunately, we're stuck with declines because markets don't always go up. Markets are made by people and people are irrational, greedy, and prone to panic.

The market fluctuations and the subsequent flurry of news, analyses, and pundit-speak made me recall the parable of Mr. Market, which Waren Buffett shared with investors in his 1987 letter to shareholders of Berkshire Hathaway. Below, you'll find an excerpt of that letter, which includes the parable of Mr. Market. I used bold text to emphasize what I believe to be the most important takeaway of Mr. Buffet's story. Have at it.

"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 in 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.”

Ben's Mr. Market allegory may seem out-of-date in today's investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging, and betas. Their interest in such matters is understandable since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”?

The value of market esoterica to the consumer of investment advice is a different story. In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben's Mr. Market concept firmly in mind."

Perspective

Last week, after the markets started bouncing around, I shared a chart of the Dow Jones Industrial Average index on my personal Facebook feed. I believe it's worth sharing again.

The Dow Jones Industrial Average index over the last 10 years.

I don't want to come across as cold and uncaring. Fluctuations in markets can have serious financial consequences depending on how much you have saved as well as the stage of life you're in. The best thing you can do is create - and stick to - a financial plan because no one can predict why or when markets will rise and fall.

Listening / Playing / Reading / Watching

Here's what has my attention right now:

1. Neverwhere, by Neil Gaiman. In a previous post, I mentioned how much I enjoyed listening to Gaiman's American Gods. I highly recommend Neverwhere, too. Bonus: Gaiman narrates the audiobook edition and his performance is fantastic. I would listen to him narrate the phone book. If phone books were still a thing.
2. Morning Star, by Pierce Brown. I'm pretty sure Brown's series is considered YA (young adult) literature and I don't care. Morning Star, which is book three in the Red Rising trilogy, is just plain fun. If Greek mythology, The Hunger Games, the Harry Potter series, and Game of Thrones had a baby, it would be the Red Rising trilogy.