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Benjamin Graham on Market Volatility

Benjamin Graham on Market Volatility

Wild market volatility in the last couple of weeks has noticeably enhanced investor emotions.  So I thought it timely to review Benjamin Graham’s view on market volatility, especially as it pertains to “true” investors.  Remembering that, from Graham’s point of view, a “true” investor is one who is prepared not just financially, but emotionally, so that they can not be “stampeded” out of their allocations.

First of all, no one wants to see their investments drop 15 to 20% in a short period.  Certainly, I don’t enjoy my personal net worth dropping that fast.  But those are emotional statements and, although we can not stop ourselves from having emotional reactions, it is critical that we don’t let those emotions drive our investment process.

Second, from the bloodless perspective of logic, this kind of volatility is our friend!  If we are prepared financially for market gyrations, meaning our time horizon is that of a business owner and not a Wall Streeter, then these are opportunities to snatch up companies we want to own over the next five to seven years at significant discounts.  However, it doesn’t mean we always will buy – but it is to our advantage to have these opportunities.

Just yesterday, I saw a headline in SmartMoney.com that read “Why the Stock Market Has Turned Bipolar.”  Sorry, the truth is the market has always been bipolar and it is sound thinking to assume it always will be.

This manic-depressive disorder is precisely what Benjamin Graham was talking about in his famous Mr. Market parable.  Knowing that Mr. Market is bipolar encourages you to do business with him only when it suits your needs.  Summarizing the principle at the end of his parable, Graham said, “At other times he [the investor] will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”  The last part is what I do for you.

So, when the talking heads in the media use their inflammatory language and your gut starts screaming at you, remember your plan and process.  If I were allowed to channel Graham for a moment, I believe he would tell you today that Mr. Market is to be pitied and not followed.

For more on Benjamin Graham’s Mr. Market parable and what it means to be a true investor, see chapter 8 in The Intelligent Investor 1973.  I promise you it’s a good read even if you haven’t read anything else by Graham (for you purists, that would be chapter II in the 1949 version). 


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