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PROPLAN > Meet Mr Market (Oct 22 2015)

Even though the Stock Market is made up of millions of individual buyers and sellers, it forms somewhat of a collective consciousness of its own. Ben Graham, the father of Value Investing, dubbed this character “Mr Market”.


He’s the guy on the other end of your investment trades. When you buy, your buying his shares and when you sell, you’re selling to him. Every moment of every trading day, Mr Market can be found quoting prices for shares on the ASX.


To begin to understand Mr Market, we must begin with the premise that price and value are distinct different things. On the auction that is the ASX, price is simply what you pay. What you get in return is value.


Generally, the value of a company’s stock is a function of its ability to return cash to its owner. If Mr Market were a steady and reasonable person, this price offer would reflect the future cash returns perfectly. But Mr Market is not what you’d call a steady business partner. An incurable manic depressive whose actions define the words fear and greed! Mr Market will sometimes offer ridiculously high prices for a given stock on one day, and on another day, insanely low prices. Does anyone really believe the value of a large well established and hugely profitable business like the Commonwealth Bank should change by 37% over the course of a year (CBA was $96.32 on March 20 and $70.15 on Sep 29)?????


So who’s in charge of your money, you or Mr Market? No one wants to admit being in Mr Markets spider web, but collective behaviours says otherwise. Rather than selling high and buying low, we see individuals doing the opposite. These are the ancient emotions of fear and greed in action.


Volatility in itself is not necessarily a problem, this years drop leads to next years rebound: those who hang on to investments in good companies will be fine. Indeed, the investor who has the ability to add money consistently – whether prices are high or low –will wind up with more shares, lower average purchase prices , and higher returns than a portfolio without inflows. This is dollar cost averaging and a terrific tool for growing wealth.


Mr Market is worst for retirees drawing Income Streams


If you are relying on Mr Market to generate returns for your investments in retirement, this volatility could be disastrous.  Let’s look at Sally who has $500k in Super and needs $30k pa to live on. She is invests in a simple Managed Style fund that is unitised and pays no income. Over time the fund info flyer spruiks, “You can expect with some probability to get returns of 8% per annum over the long term”.

Sally does her sums and works out, “my $500k will earn 8% or $40k each year and I draw down $30k to live and I will have a little buffer over time build up!” Sounds like a plan…….


But, what if Sally has a terrible first 2 years and markets go backwards by 10% each year?


After year 2, Sally’s capital has dropped to $348k, after her $30k pa income drawdown. It will take a year of 45% capital gain return to restore her long term return back to the 8% pa promised, but even then after taking out the $30k to live on , Sally is back below $470k in balance. Yet she should be at $530k balance if she averages 8% per annum????


Mr Market cannot be relied upon to provide dependable income. This clown will force you to sell shares at precisely when it is the worst time to sell.  Will Sally want to cancel her booked cruise, or overseas holiday, just because the ASX drops 500 points? If Sally owned just some simple high yield dividend stocks that could generate for her 6% in income, then her $30k pa income requirement would have been funded by the profits of these sound companies. Companies that are run by management who are charged to generate and distribute profits to its owners, people like Sally. If Mr Market deemed that Sally’s shares were worth 20% less than 2 years ago, Sally would just continue to harvest her dividends and wait for Mr Market to return to some exuberance and push the values back up again.


Let me finish this by asking you to ponder this little experiment.


Imagine that its noon Friday and you receive word that the Australian Government is going to close the stock markets today for 5 years. There’s nothing wrong with the economy, nobody has repealed capitalism. But whatever you own at the close of the bell today, is what you have for the next 5 years.   What would Mr Market do???? He would have a full blown seizure, investors who won shares with anticipation of capital gains and “potential” growth would flee and their prices would crash. Mr Market would stampeded into the Wesfarmers, Telstra’s and CBA’s of the world to harvest their dividends whilst waiting for the 5 years to expire.




Do not get too caught up by what Mr Market will pay for your investments from day to day. If the market ever was forced to close for a prolonged period, what you own in your Super, Pension and Investment Funds is what he would want to buy!


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