The mania of Mr Market
02 March, 2016
We revisit Warren Buffett's 2013 tale of the moody Mr Market
In the 2013 Berkshire Hathaway Annual Report, Warren Buffett told the tale of Mr Market and a parcel of farmland. The farm in question is a great asset, producing a substantial yield of corn year after year, despite the short term ravages of locusts, drought and the occasional flood. On a daily basis, the farmer from down the road – he's called Mr Market — approaches and offers to buy the farm or sell his at a quoted price. Mr Market is a moody character – a bit of a manic depressive. Some days he is euphoric and exuberant and offers a very high price. On other days though, like a flipped switch, he is quite depressed and quotes a particularly low price. We can ignore Mr Market as much as we want, but he always comes back.
Given that the fundamentals of the farm are sound – increasing revenues, a strong track record and high rates of return – we can be reasonably certain that the farm will continue to perform well into the future. We do not need to respond to our moody neighbour, and we certainly shouldn't come under the spell of his exuberant highs and his depressed lows. On down days when he offers his farm at depressed prices, we may choose to look at its intrinsic value and perhaps buy it – taking the opportunity to earn a high rate of return on a fundamentally sound asset. On his high days, should we sell our farm? Well if the price is considerably higher than its intrinsic value, we may choose to sell, though we should always relate the price to the fundamental value. A business can be held forever. Despite short term gyrations, intrinsic value will always prevail.
As a business partner, Mr Market should never be considered as having the upper hand. He is moody and if we choose to ignore him today, he'll be back tomorrow!