When I'm deciding whether to buy or sell a stock, it helps me to imagine Ben Graham and John Templeton in the room, along with Peter Lynch and Lou Rukeyser's panelists from yesteryear. What opinions might they offer about this stock? Occasionally I re-read Graham's The Intelligent Investor and Lynch's One Up on Wall Street to help me stay principle-focused.
Graham's classic "Mr. Market" character is perhaps the greatest illustrative tool in the history of investing. Graham's simple figure, Mr. Market, gives us an imaginary (though very real) "foil" to represent the person on the other side of any trade we might consider. Mr. Market reminds me of "Rich Uncle Pennybags," the man with the top hat in the Monopoly game.
Mr. Market (perhaps Ms. Market, if Graham had been born a generation or two later) is symbolically the one from whom we purchase a stock and he (or she) is symbolically the one to whom we sell a stock. Graham's fictional figure provides a great tool for teaching market basics to a new investor. Mr. Market also reminds long time market participants about the importance of maintaining a steady focus amid market fluctuations.
So, what might Mr. Market be thinking today? When we go through periods with daily 100+ point swings in the Dow Industrial, Graham's iconic Mr. Market appears uncertain, and at times, irrational. When I see a stock like Eaton (ETN) close on Friday, April 12 at $60.30, only to drop over $3 on Monday, April 15 to close at $57.22, then bounce up almost $2 to close at $59.05 on Tuesday, down almost $2 to close at $57.35 on Wednesday, down another $1.55 to close at $55.80 on Thursday, and then up $1.16 to close at $56.96 on Friday, I'm thinking, "Mr. Market's having a hard time figuring out whether to buy or sell this thing." Eaton's price range from Friday to Friday was $55.41 to $61.49. If you add Thursday, April 11 to this series, in those seven trading days the range was $55.41 to $62.88.
If Mr. (or Ms.) Market is having "mood swings" regarding whether to buy or sell a particular stock, we have an advantage over him or her if we can determine what we think an appropriate buy or sell price for that stock might be.
Continuing the Eaton example, I carry in my wallet a little card with my current "buy" price and "sell" price for the stocks in my portfolio, just in case I find myself in a location without Internet access. If Mr. Market is willing to sell ETN at $55.56, I'm ready to buy a few shares. If he changes his mind and is willing to buy ETN at $66.67, then I'll let him have some of my shares. Eaton is one of my core holdings and my goal is to maintain a position in ETN that is 3% to 4% of the portfolio.
What is Mr. Market's mood today? I never know until the market opens. And his mood may well change several times during the day. I've known other people with comparable mood swings, and when I'm with them I've found it helpful to stay alert. It's that way with Mr. Market. If I stay steady and focused, I believe I can make money doing business with Mr. Market, regardless of his mood at the moment. And, because my focus is on growing dividends, I believe I can be successful doing business with him regardless of whether he is in bull mode or bear mode.