Experts observe that the condition might be inherited, caused by innate chemistry affecting mood, appetite, and the perception of pain, which in turn could lead to dramatic weight gains followed by abrupt weight losses. There are safety nets to fall backon, such as government support, and government-approved treatments, such as mood stabilizers. But the patient lives in denial and can become angry and suspicious, sometimes not taking the medicine and precipitating more intense bouts of ups and downs.
The patient I am describing, of course, is the stockmark et. It mixes episodes of irrational fear with episodes of irrational greed. It rises with massive infusions of funds—often borrowed—then falls after the withdrawal of those funds. It bounces around like a circus clown on a pogo stick, weaving wild tales of untold riches to be made without effort. Then it pouts, plummets, and corrects, often on news that this or that company failed to meet earnings estimates by mere pennies per share.
Clear thinkers about market behavior rightly believe that this condition is incurable, with the market being prone to fat gains followed by fat losses without a nexus to business or economic reality. Nevertheless, government engines such as the Securities and Exchange Commission and private ones such as the New YorkStock Exchange monitor the extremes, imposing “circuit breakers” that shut the market down when it threatens to slip into a bout of depression (a sell-off) or raising the requirements for margin accounts, particularly those of day traders.
Yet no cure is in sight. Mr. Market, in Ben Graham’s terms, denies its manic depression. It does this in numerous studies extolling how “rational” it is. It does it in countless conversations and publications referring to its “efficiency.” Reams of “beta books” are compiled in the belief that its gyrations simply and accurately reflect precisely the measurable riskthat stocks pose for investors. Abstract advice to diversify portfolios is sold as the only way to minimize the rational riskthat this efficient system manageably presents. Denial prevents cure.
Take Ben Graham’s Mr. Market a diagnostic step deeper. Malicious microorganisms called rickettsia (named for Dr. Howard T. Ricketts, 1871–1910) cause diseases such as typhus. From the Greek word for “stupor,” signifying a state of insensibility and mental confusion, typhus is characterized by bouts of depression and delirium. It is transmitted by bloodsucking parasites called ticks. These parasites transmit a similar disease called Q fever.
To avoid Q fever, those venturing into tick-infested forests prepare themselves. Hats, gloves, long sleeves, and pants are the dress code. If bitten, prudent forest denizens remove the parasite with tweezers, wash the bite, and apply rubbing alcohol, ice, and calamine lotion. They survive to enjoy the woods.
Fools in the tick-ridden forest go bare, leaving exposed their skin and, most daringly, their heads. After they find a tick, fear drives them to irrational action, such as burning the tickinstead of tweezing it out. The kings and queens of fooldom then venture gleefully on their forest expedition, giddily unaware that they are infected with Q fever—until depression and delirium set in.
In the stock market forest, the ticks of price quotes infect the unprepared fools in the same way and with similar results. Trader obsession with price quotations spreads the Q fever epidemic, adding gas to the fire of Mr. Market’s manic depression.
When venturing into the stockmark et, defend yourself just as you would when hiking in the forest: armed to fight the wealthsucking parasite of the Q fever price tick. Ben Graham and Warren Buffett prescribe the same course for dealing with Mr. Market. They advise that just as it is foolish not to recognize his symptoms or diagnose his disease, it is equally foolish to play into them or ex pose oneself to the contagion. Instead, use Mr. Market to your advantage.
Neither Graham’s Mr. Market nor this Q fever metaphor implies anything about the psychology of market participants. Rational people acting independently can produce irrational market results. Many investors simply defer to experts or majority opinion. Following the herd may seem rational and intelligent—until it stampedes straight off the cliff.
Read More : Mr. Market's Bipolar Disorder
