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Mr. Market: Your Moody Business Partner


Warren Buffett measures himself by growth in book value, not fluctuations in Berkshire's share price.


"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 remarkable accommodating fellow named Mr. Market who is your partner in 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 on 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 someday in a particularly foolish mood, you are free to either ignore him or 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.' "
-- Warren Buffett

I revisit Warren Buffet's "Mr. Market" quip this morning because of a few emails I received regarding last week's missive. Emailers were upset with the reference to Berkshire Hathaway's (BRK.A) stock performance. To wit:

I revisit Warren Buffet's "Mr. Market" quip this morning because of a few emails I received regarding . Emailers were upset with the reference to (BRK.A) stock performance. To wit:

Since 1965 the S&P 500's compounded annual gain (including dividends) was about 9.3% for a compounded return of 5,430%. Over that same time frame Berkshire's annual compounded return was 20.3%, or 434,057%. Consistency was the key to Berkshire's outperformance for over those 44 years the S&P 500 suffered 11 down years, six of which were double-digit declines. Berkshire, however, had only two negative years, neither of which were double digits. Such risk-adjusted investing has always characterized Warren Buffet for he maintains it isn't his best ideas that gave him his tremendous track record. It was having a smaller number of bad ideas that resulted in a permanent loss of capital.

Obviously, Warren Buffet doesn't measure himself according to fluctuations in Berkshire's share price. Importantly, he measures himself by growth in book value, which is admittedly less volatile than share price. To be sure, Mr. Market is manic-depressive. "At times he feels euphoric and can see only the favorable factors affecting the business. At other times he is depressed and can see nothing but trouble ahead for both the business and the world." That manic-depression surfaced in 2008 when Berkshire's shares lost an eye-popping 50% of their value. However, Berkshire's book value declined by a mere 9.6%. Still, that stock price performance brought about catcalls that the "old man" (read: Warren Buffet) had lost his touch. We recall similar cries in the late 1990s when Mr. Buffet was cast as a buffoon, who just didn't "get it," because he was hoarding cash and shunning Internet stocks. Subsequently, the S&P 500 peaked in the spring of 2000 (at 1553) and over the next seven years only gained about 0.008% (to 1565). Meanwhile, the "buffoon" grew his book value by nearly 80% and Berkshire's share price improved by 268%.

As Benjamin Graham noted, "In the short run the stock market is a voting machine, but in the long run it is a weighing machine." Ladies and gentlemen, over the long-term, the fate of every stock is ultimately driven by the operating results of the underlying business. This is determined by book value, earnings, and cash flows. Accordingly, measuring Berkshire's performance on those metrics makes more sense than measuring on its share price.

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No positions in stocks mentioned.
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