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Mr Market: Intrinsic Value vs Stock Price | Fundamental Stock Analysis
FUNDAMENTAL ANALYSIS BASICS
Introduction 0:59
Intrinsic Value 2:31
Mr Market 4:56
Lessons from Mr Market 11:24
Modern Day Mr Market 14:15
Conclusion & Wrap Up 18:00
Intrinsic Value and Investing:
* Intrinsic value is what the company is actually worth, based on it's operations and financial position.
* Price is what people are offering to buy and sell shares of ownership in that business.
* The simple rule:
- Buy when Price is less than Intrinsic Value
- Sell when Price is greater than Intrinsic Value
* Prices tend towards intrinsic value over time.
* Don't get emotional about short term swings if intrinsic value remains the same, eventually the swing will reverse (since prices tends towards intrinsic value).
Who is Mr Market:
* Parable created by Benjamin Graham
* Benjamin Graham was the father of security analysis, he helped make stock investing mainstream and was both Warren Buffett's professor at Columbia and later his employer at the Graham-Newman Partnership.
* Benjamin Graham and Mr Market underlie the value approach to stock investment, i.e. "value investing"
The Parable:
"Mr Market is your business partner. You both invested $5,000 to start the business. But each and every day, without fail, Mr Market walks into your office in the morning and has decided he now knows what your business is worth. And he's determined to give you this info. He's also determined to make you an deal each and every day. Everyday, along with that valuation he's worked out, he's ready to buy your share in the business or sell his share. He does this each day, every morning, day after day for the past 25 years. But here's the twist, some day's Mr Market can be pretty reasonable about his deal offers, the prices he offers seem kind of fair. But some other days, Mr Market is highly strung and very emotional. Half of these emotional days, he's so confident in himself and the business you two run that he values your business at extraordinary high levels. The other half of these emotional days, he's in a real funk, is very Chicken Little and just wants out of this partnership. Thus he quotes extraordinary low valuations for the business. Either way, on these extreme days, Mr Market acts rather silly with his valuations. But without fail, what mood he is in (normal, depressed or manic) he still comes into the office each and every morning with his valuation and offer to buy you out or be bought out of your partnership."
Lessons from Working with Mr Market:
* Now you invested $5,000 in this business and you've been working on it for a number of years.
* What do you think your business is worth? Is it based on the cash and assets in the business today? The dividends you can draw out in the coming years? Is it based on the business' operations and future profits and other accounting info? OR IS IT BASED ON WHAT MR MARKET SAYS its worth each morning?
* The moral is, you wouldn't care what you're emotional business partner thought each morning (unless you wanted to trade with him). You know what your business is worth
* Mr Market = The Stock Market, and His Daily Valuations = The Daily Stock Price.
For the true investor:
* Price fluctuations (Mr Market) perform only one function: To allow you the opportunity to buy when prices fall sharply and sell when prices advance a great deal.
At all other times, it's better to forget about the stock market and concentrate on the business' operating performance and any additional income returns
* The purpose of the stock market is to take advantage of it, not be pushed around by it. Use your own judgement and techniques to determine intrinsic value
* That is, sell to Mr Market when he's being fancifully optimistic and buy from him when tremendously pessimistic
* Remember, "Price is what you pay, value is what you get"
Modern Day Mr Market
* The Mr Market analogy was created in 1949, when newspapers and tickers were the only functional way that Mr Market could get to you…
* In 2018, Mr Market rants at you through the internet, phones, TV, social media, electronic billboards, public transport stations
* You need to be more in control of your emotions and reactivity to external valuations/appraisals
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