Q4 2018


John Butters, Chief Investment Officer

In 1949, the investor Benjamin Graham published a book called The Intelligent Investor, which billionaire Warren Buffet has described as “by far the best book on investing ever written.” One of Buffet’s favourite sections is the story of Mr Market. Imagine that you own a company with a business partner, Mr Market. The company’s earnings and dividends generally increase over time, and you would be quite happy owning it but for the activity of Mr Market, who every day comes into the office and quotes a price at which he will buy your interest in the company, or sell you his. Mr Market is prone to much emotional variation. On some days he quotes prices that are near what you expect, but on others makes you a wildly high offer, or quotes a knock-down price in an attempt to offload his stake to you.

Of course this story is an allegory of the stock market, and the point is that Mr Market’s behaviour ought not to worry the genuine long-term investor. As Buffet puts it: “Mr Market is there to serve you, not to guide you... you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.”

Mr Market was in poor spirits at the end of 2018. The companies you own, which can be reasonably expected to increase their earnings and dividends over time, fell in value because of a shift in the mood. On a global basis, the stock market fell 10.7% between October and December. Since markets had risen earlier in the year, stocks ended 2018 as a whole down by 3.8%. The change in tone appeared to be the result of fears of potential economic weakness in the USA and of monetary tightening by central banks around the world, compounded by reports that Donald Trump was investigating whether he could fire the Chairman of the Federal Reserve. We note that that dangerous action now appears unlikely, and that statements by central bankers have taken on a more supportive tone so far in 2019. We make no predictions, but it would be quite in character if Mr Market has despaired too soon.


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