“If you want to make money on Wall Street, you must have the proper psychological attitude. You must look at things under the aspect of eternity.” —Ben Graham
A new paper is out from Mauboussin and Callahan, both currently at Credit Suisse, discussing the Mr. Market metaphor, that was once introduced by Benjamin Graham.
The content in this paper is based on a presentation at the Columbia Student Investment Management Association Conference delivered on January 30, 2015.
Click image to download PDF. Also, the Mauboussin link post will be updated to include this one to.
Here’s a summary of this discussion. First, reading chapters 8 and 20 from The Intelligent Investor, as well as chapter 12 from Keynes’s General Theory, can help shape the proper attitude an investor should have toward markets.
The other main points are as follows:
- To be an active investor, you must believe both Eugene Fama and Robert Shiller are correct, just not at the same time. You need inefficiency to get opportunities and efficiency for those opportunities to turn into returns.
- Mr. Market remains a very powerful metaphor for thinking about markets. Anthropomorphizing the market makes the story less abstract and more concrete.
- One way to animate Mr. Market is to understand the market as a complex adaptive system, or to apply the wisdom of crowds. What’s key is that crowds are wise under some conditions and mad when any of those conditions are violated.
- Diversity breakdowns, which can happen for sociological as well as technical reasons, lead to extremes and hence opportunity.
- Remember the line from Seth Klarman: You are looking for cases where uniform belief has led to a mispricing of expectations and thus a way to make money. The Triple Crown contenders show this vividly.