by James on June 7, 2010

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A look at the greatest investors shows they all have particular trait in common the ability to have strong convictions and stick with their guns whether or not their opinions are popular.  Ben Graham, Peter Lynch. Warren Buffett, George Soros. John C Bogle. and Julian Robertson to name a few.  These are people who achieved the upper echelons of success in their respective fields by standing out and having the courage to disagree with the masses.

Benjamin Graham’s sums this concept up in his famous allegory called Mr. Market.  Imagine you own a grocery store and you own 50% and Mr. Market owns 50%.  Mr. Market comes to you every day and decides to offer sell you his shares or buy your shares at some price.  Sometimes the price may be reasonable, sometimes unreasonable.  It all really depends on what Mr. Market was out doing last night and what his current mood is.

As you can see, these mood swings have no bearing on the value of the business.  You still own the same grocery store and sell vegetables to local residents.  Remember, value is what you get, price is what you pay. In this case, Mr. Market is there for you to buy at good prices and sell at unreasonable prices.

Same holds true for the stock market.  Recall, if you own a diversified portfolio on average you can expect your portfolio return to swing between -11% and +31%. Stock market swings happen every year – sometimes widely, the SP 500 lost 37% in 2008 and gained 27% in 2009.  In many cases these annual swings do not reflect the underlying value of the stock.  It represents a manic-depressive business owner, Mr. Market, who vacillates between fear and greed.

Though all may lose their minds, be sure to keep yours.

Drastic market swings create opportunity for the intelligent investor .  When it comes to investing, you’re not right or wrong because other people tell you so.  You’re right or wrong because your analysis tells you so.  Having this mindset is the first step towards investment success.