100 Bagger

The renowned economist, John Maynard Keynes, once said, “Markets can remain irrational longer than one remains solvent.” This shows that irrationality is a peculiar feature of the stock markets and is something most find difficult to understand.

Sir Isaac Newton and the South Sea Bubble

There is a short paragraph in the investment classic, ‘The Intelligent Investor’, which talks about the great South Sea Bubble of 1720. The South Sea Company's stock soared from 128 in January 1720 to more than 1,000 by August 1720.

In the early 1720's no other than Isaac Newton, the great physicist, himself invested and cashed out with an almost 100% profit in the South Sea company. However, the bubble continued to grow and. swept away in the rising tide of emotions and the fear of missing out on larger profits, Newton invested again.

This time he lost more than his original investment. The point here is that even the most intelligent investors cannot escape the emotional bias, which could be contagious and drive markets in either direction.

Newton was surprised with the behaviour of investors and markets.

While investing success rests on many other factors, understanding the behaviour of Mr Market (a term coined by Benjamin Graham) and how to react and act is far more important than anything.

Like Isaac Newton said,

"If I have seen further than others, it is by standing upon the shoulders of giants"

We looked at how investing gurus or legends such as Warren Buffet and others think and act in depressed markets and when there is widespread fear and scepticism among investors.

Benjamin Graham

Benjamin Graham, the father of value investing, believed that the market is your partner in trade.

Graham was probably the only guru who dwelt on the behaviour of the market and was able to successfully demonstrate what he believed. An important aspect of his thought was his observation about the cycles of market behaviour, which even today holds solid like a rock.

Charlie Munger

“Of course the best part of it all was Ben Graham’s concept of “Mr Market.” Instead of thinking the market was efficient he treated it as a manic-depressive who comes by every day. Some days he says, “I’ll sell you some of my interest for way less than you think its worth.” Other days, “Mr Market” comes by and says, “I’ll buy your interest at a price that’s way higher than you think it is worth.”

The idea of Graham was to look at the market as an individual, whose mood swings like a pendulum from extreme optimism to unjustified pessimism.

“Mr Market’s job is to provide you with prices; your job is to decide whether it is to your advantage to act on them. You do not have to trade with him just because he constantly begs you to,”

Graham knew that many behavioral and other factors have roles to play in determining what happens in the market in the short run. He suggested that markets swing for different reasons and can inflate or depress share prices beyond what the worth or intrinsic value of a security.

This is where his third important idea, margin of safety, came into the picture. Investors who buy securities when the market is depressed and stock prices are way below their intrinsic value have a huge margin of safety in terms of taking care of mistakes or of something going awry.

The idea is that sooner or later the markets will return to normal and reflect what a security is worth.

“In the short run, the market is like a voting machine. In the long run, though, it is a weighing machine.”

He believed that people’s opinion matter only for a moment. In the long run, however, the stock markets are slaves of earnings and markets will sooner or later reflect that aspect.

Warren Buffett

Warren Buffett considers himself as one of the most fortunate ones to have studied and worked under the dean (Benjamin Graham) of Wall Street’s best investors.

Like Graham, Buffett is a firm believer in the fact that in the short term it is a voting machine. This is precisely the reason why Buffett brought in a lot of long-term thinking into investing.

If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.” --Warren Buffett

But this requires loads of patience. He is also quoted as saying that the stock market is a device to transfer money from the impatient to the patient.

Apart from inculcating a long-term thinking habit, Buffett expanded and distilled Graham’s idea of Mr Market further so that investors can act right.

He simplified Graham’s idea in the greed and fear cycle for investors to act rightly. For him, the only secret and probably the biggest idea to make money in the market was “Be fearful when others are greedy, and greedy when others are fearful.”

Philip Fisher

Philip Fisher, the father of growth investing, did not care much about the markets.

People trade daily in the stock markets and know the stock price at which they are trading. But most of them do not even know the real value. They look at the screens and the quoted price and make investment decisions based on these quoted prices rather than checking what a company is worth.

He believed that the market is filled with irrational people. His focus shifted to other side of market in terms of visiting factories, meeting suppliers and employees. He would look at businesses as a private investor who would check each and everything about a company before buying it.

Fisher did not care much about market fluctuations. In fact, most of the stocks that he bought were purchased for the long term or to hold on to them forever like the owner of a business. His belief was that if you are buying an outstanding company forever, the price does not really matter; nor does market timing.

John Bogle

John Bogle, an American investor, business magnate and a philanthropist, is credited with the idea of creating the first index fund. He strongly believed that index funds are superior to actively-managed mutual funds.

Bogle, who died at the age of 90, established a very important point about investing and the markets. He was strictly against the general idea of active investing and trading. He said that the urge to react and make transactions at every tick of a stock price was not at all worth it.

“The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.” --John Bogle

Through his long experience and proven track record, he was convinced that activism was not worthy in the stocks markets.

And the reason he felt thus was because he said there were two major enemies of investors: emotions and expenses related to transections.

“Owning the stock market over the long term is a winner’s game, but attempting to beat the market is a loser’s game,” he stated.

Peter Lynch

The author of the famous book One Up On Wall Street, Peter Lynch was one of the greatest investors of all time and has often been described as a “chameleon” as he is known to have switched his investment strategy depending upon the situation and timing of the markets.

What is outstanding about Lynch is his ability to sit tight and hold on to his conviction in falling markets.

“I’ve found that when the market’s going down and you buy funds wisely, at some point in the future, you will be happy.” -- Peter Lynch

He really did not count too much on market timing and would buy stocks cheap. Peter Lynch bought stocks, which fell 60% to 70% after he bought them and then surged some 700% to 800%.

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” -- Peter Lynch

Correction, Peter Lynch believed, is the part of the nature of the stock market and investors should not fear them. He also said that when you sell in desperation, you always sell cheap.

These are the words of a person who spent several decades on the Wall-Street, setting the record for one of the most consistent and longest out performance.

How Warren Buffett and Other Investors Think And Act When Mr Market Is In Depressed Mood