In my previous articles (Part I, Part II), I have described some of our thought processes and mind sets when we are buying or selling a stock. We discussed our fear of losing, our cravings to be liked, and our need to act now. We also discussed how overconfidence and commitments to previous decisions or information can impact our investment decision process.
My intention in this article is to introduce you to Mr. Market, the manic-depressive figure that was created in the mind of the brilliant professor Benjamin Graham. I will also provide a different point of view for investing in the stock market.
Before we start talking about Mr. Market, let me ask a very simple question:
What is a stock?
Easy question isn’t it? Before continuing reading, give yourself 30 seconds to answer this question. Well, here are some answers that I got when I asked other people, “A stock is a sure way to make (lose) money”, “A stock is a company”, “A stock is the price of a company”, “A stock is this really annoying 3 letter words that run on the bottom of my CNBC screen and makes me dizzy”
A stock represents a partial ownership of a business/company. For example, think of a media company, let’s call the company MyMediaCompany. The company has 1 million shares (stocks) outstanding, which means that by buying one share of MyMediaCompany you really own one millionth of MyMediaCompany. This is a very important concept. A stock is not just a ticker or a 3 letter word, a stock represent a partial ownership in a business, which means that as a partial owner of MyMediaCompany you partially own its web site, movie studios, TV channels, book publishing, theme parks cruise lines, hotels, media stores etc’. You get my point; by owning a stock of MyMediaCompany you are a partial owner of all that MyMediaCompany owns.
Why is this so important to understand this concept?
Let’s explore some of the answers that I received about why a person bought a stock of a company (or shares of a company):

All of these answers focus on the one piece of information that is the easiest to get – the stock price and ignore the most important question that we should ask ourselves – What is the value of the business behind the ticker, the business that this stock represent?
Just by understanding the value of the company you can tell if the price of the stock is cheap or expansive.
Valuing a company is not an easy task, but it is the first and most important step that needs to happen before you purchase a stock, Peter Lynch once said “Spend at least as much time researching a stock as you would choosing a refrigerator”. I will write more about why companies issue stocks, ways of valuing stocks, research and refrigerators in my next article.
Now that we know that a stock represents a partial ownership of a company, and that the most important activity is first to value the company and only then to look at its price, it is easy to conclude that only once you know the value of the company and the offering price you will be able to make a prudent investment decision. Mr. Buffet tells us “Price is what you pay, Value is what you get”. Always demand more value for your purchase price.
So, who decides the price of the companies?
Again, I went out and asked a few people. Here are some of the more interesting answers that I have received:

There is probably some truth in every answer. The real answer is that in the short term we, the investors (and all sort of other automatic software programs), decide the market price of the companies. In the long run, the company’s results impact its market price.
Where is this price being decided? Ok, that’s an easy question; it is decided in the stock exchange. But what is the stock exchange? For the sake of simplicity, let’s think about the stock exchange as a big market in which people decide how much they are willing to pay in order to buy a share of a company and at what price they are willing to sell a stock.
At last, here comes Mr. Market.
Prof. Benjamin Graham, which is known as the dean of value investing, and has written two fabulous books that are a must for any serious investor (“Security Analysis” and “The Intelligent Investor”) have used a character which he called Mr. Market to explain the above concepts.
You can think of Mr. Market as a character that has one unique characteristic; he will come every day and offer to buy or sell a fractional share in a company at a price that he sees fit. The most useful characteristic of Mr. Market is that he will not take any offence if you ignore him, he will still come the next day with another price offer.
If you are investing from a business prospective you will ignore Mr. Market until your facts (obtained by your research) will indicate that Mr. Market’s quoted price has a wide discount from the true value of the business that he tries to sell or buy from you. You can ignore him in all other cases; remember Mr. Market will always show up the next day with another offer. The important question that you should ask yourself is:
Will you let Mr. Market daily quotation determine the true value of the business, or will it be you who determine the true business value and use Mr. Market manic-depressive behavior for your advantage, buy from him when he offer you the business at a foolishly low price and sell to him when he offer to buy at an equally foolish high price.
It is you who decides if you want to let Mr. Market influence your investment decisions or if your research, facts and reasoning prevail. As Benjamin Graham said “Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom that you will find useful”.
And what should you do in all the other times?
You do nothing. Yes, remember a decision not to buy and not to sell is one of the most important decisions that an investor can make. All you need to do is to deepen your knowledge and wait for the next time in which you will be able to take advantage of dear Mr. Market.
Mr. Charlie Munger (Berkshire Hathaway Vice Chairman) likes to say that “you don’t make money when you buy stocks. And you don’t make money when you sell stocks. You make money by waiting”
What to do when you wait? Why can’t we wait? Is waiting really that simple? I will answer these questions and many more in the next article.
Amir Avitzur
Avitzur Asset Management, LLC
www.AvitzurInv.com
Amir.Avitzur@AvitzurInv.com
[box type=”bio”]Amir Avitzur has fallen in love with Metuchen in 1998 and has been a resident of Metuchen since that time. Amir is married to Sharon, a local Yoga Instructor and an author. Sharon and Amir are proud parents to two Metuchen boys that are currently on the Metuchen swimming team. Amir has founded and is the president of Avitzur Asset Management, LLC an investment advisory firm in 2004, and provides investment advisory services to Metuchen, New Jersey and New York residents.[/box]
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Avitzur Asset Management, LLC (“Avitzur Asset Management”) is a New Jersey and New York registered investment adviser with its principal place of business in the State of New Jersey. Avitzur Asset Management and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which Avitzur Asset Management maintains clients. Avitzur Asset Management may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Any information contained in this article represents Avitzur Asset Management’s opinions, and should not be construed as personalized or individualized investment advice. Avitzur Asset Management cannot assess, verify or guarantee the suitability of any particular investment to any particular situation and the reader of this article bear complete responsibility for its own investment research and should seek the advice of a qualified investment professional that provides individualized advice prior to making any investment decisions. This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this article will come to pass. Investing in the stock market involves the potential for gains and the risk of losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Any information prepared by any unaffiliated third party, whether linked to this newsletter or incorporated herein, is included for informational purposes only, and no representation is made as to the accuracy, timeliness, suitability, completeness, or relevance of that information. All opinions expressed and information and data provided therein are subject to change without notice. Avitzur Asset Management and/or Amir Avitzur, may have positions in, and may, from time-to-time make purchases or sales of the securities discussed or mentioned in the Publications. Nothing in this article is intended to constitute individualized investment advice. For additional information about Avitzur Asset Management, including fees and services, send for our disclosure statement as set forth on Form ADV from Avitzur Asset Management using the contact information herein. Please read the disclosure statement carefully before you invest or send money.

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