10 ms·

The Timeless Parable of Mr. Market

93 points by ensocode 3y ago

markisus 3y ago
Except some firms have made extraordinary profits by statistical analysis of Mr Market, eg Renaissance
- H8crilA 3y ago
  They're not contradictory - markets are both short term and long term inefficient. Or at least they had been up to this point. Note though that in both cases there's a rather convincing story that explains where the edge is coming from. In Buffett's case it's treating securities for what they literally are, in Renaissance it's having a whole lot of detected small inefficiencies and a model that can merge them intelligently, including estimates on how far each inefficiency can be exploited before your own actions price it out of the market. There are even widely known edges that cannot be exploited, for example buying and holding real estate in a major city for the next 200 years is a guaranteed trade. But nobody who starts this trade will be able to live to complete it. Insurance is another one, one of the Bernoullis wrote a paper about it a long time ago. Given a sufficient wealth inequality / lack of competition one can exploit it forever.
- danielmarkbruce 3y ago
  All indications are that Renaissance is ~ market neutral, and are making money by predicting vol of buckets of individual securities based on statistical analysis and buying/selling baskets of options based on that.
WJW 3y ago
It works outside of investing too: Almost all of us will constantly be confronted with offers to buy things, take out loans, join clubs or companies, etc etc etc. Some of these offers will be worth it and some won't be. But it's still your right to take up or refuse such offers at any moment (unless you are literally dealing with the mafia I guess). Both accepting all offers and rejecting all offers is a mental error, and deciding what is worth it is part of being an adult in society.
- actionfromafar 3y ago
  The rate of offers has changed dramatically in the past decade or two though. We are bombarded with "opportunities" now. I believe people who are fit for one environment is not for the other.
  - WJW 3y ago
    That only makes the Mr Market advice more important, no? Opportunities may come to your doorstep, but the fact that they are there does not mean you have to take them if you determine they won't bring you further to your goals. FWIW, for my personally I get drastically fewer unwanted offers in the form of advertising etc than two decades ago. Adblock and a spotify subscription instead of ad-supported radio makes a huge difference.
    - yard2010 3y ago
      Same, with youtube premium for music and cutting ads on yt (hope to pat more to cut the cancerous shorts bs too) and Vivaldi browser on mobile - virtually 0 ads
    - mettamage 3y ago
      I get a lot of “offers” in the form of learning anything faster on YouTube. It’s too much. I have to also contemplate and sit still. I refuse most offers in that sense
  - pjc50 3y ago
    Indeed - you have to have a sense of the "scam base rate". How likely is it that an opportunity is bad simply because someone is trying to sell it to you?
Shrezzing 3y ago
I think it's imprudent for the average retail investor to take on and action Buffets advice in most contexts, except for his "just put your money in an index" advice. Buffet could lose 99% of his net worth, and still be one of the top 5,000 or so wealthiest people in history. He could then lose 99% of that wealth, and still be comfortably inside of the top 1% of wealth holders. He could invest that 1% of 1% of his money in a broad index, and comfortably live off the hundreds of thousands of dollars in annual returns. The mental model he has of the market is completely different to someone who is putting 1/5th of their $50k life-savings into investments. His appetite for risk and loss are entirely detached from most investors, and even many investment firms. Similarly, the range of opportunities open to Berkshire Hathaway is considerably different to the range of options available to a typical investor.
- admissionsguy 3y ago
  It’s not useful for opposite reasons. For Buffet, spending considerable effort to outperform the market by 10% is huge. For someone investing $10k, that’s $1k of upside.
  - verbify 3y ago
    Conversely, if Buffett made 10% more one year, the impact on his life would be negligible. If someone has $10k, an extra $1k can make a huge difference.
    - WJW 3y ago
      That depends also on opportunity cost though. Buffett by his own admission just really enjoys the "game" (to him) of reading earnings reports and finding good companies to invest in. He sees no problem spending 40 hours per week of doing that, it's more like a hobby at this point. For people with $10k or less total invested, unless they also just really enjoy reading financial reports, spending their 40 hours per week on some sort of work or education is likely to have a much higher expected value than $1k.
- WJW 3y ago
blowski 3y ago
> What witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”? Great line, it explains so much about humanity, from politicians constantly wanting shiny policies that are the exact opposite of their predecessor, to tech people rolling out Kubernetes to serve very simple workloads.
- ipetrousov 3y ago
  Great analogy, hahaha
dade_ 3y ago
This is very good advice, and makes sense considering the best investors are dead ones. In every market crash I am surrounded by people losing their minds about all the money they've lost, but that is just what Mr. Market is offering that day. So they sell, the market recovers, they see it going up, they buy. Buy high, sell low, buy high again. People won't admit what they have done, but do this all the time. https://www.businessinsider.com/forgetful-investors-performed-best-2014-9 https://www.businessinsider.com/forgetful-investors-performe...
m0llusk 3y ago
> Warren Buffett, who has used to to make billions of dollars The assertion is that markets are about voting first but then weighing later. There is a similar clash of metrics going on in the article. Focus on identifying and following the rich and successful up front, then worry about proofreading and getting the metrics right later if at all. Don't bother with the details of getting the weight metric right, just worry about reacting to market volatility with the right attitude. Lots of investors have tried to follow value without generating the same success as Mr. Buffet. This article is shameful starry eyed slop that will make no one rich.
- danielmarkbruce 3y ago
  Yup, the execution is insanely difficult. To make an analogy to golf - the best strategy is to hit the ball 300 yards down the fairway, hit the approach shot on the green close to the hole, and then make the putt.
  - blitzar 3y ago
    Seems simple enough; just buy at the low and sell at the high of every day.
    - danielmarkbruce 3y ago
      You could be a strategy consultant.
      - blitzar 3y ago
        I would be terrible at it; a) I wrote the report above in once single sentence rather than a 300 page + appendicies report and b) I gave away my extraordinary insight for free within hours without bringing a team of grads and interns onsite for 9 weeks and billing them out to the client at $500 an hour.
        deleted 3y ago
        [deleted]
mapleoin 3y ago
I like this bit: If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. Makes me think of all the CEOs who are firing and slowing down market acquisition atm just because of "market conditions", even though they should presumably know their company better than the market does. Either they all think their companies are scams or they don't know their companies enough to say and convince their investors otherwise.
- disgruntledphd2 3y ago
  If you bonus CXO's mostly on equity prices, then this is rational (but stupid) behaviour.
  - sokoloff 3y ago
    If you were a shareholder, you're probably pretty interested in having the CEO's pay aligned to your investment value. Trying to fix this in a way that has shareholders working against their own interest is difficult from an incentive perspective.
    - btbuildem 3y ago
      What is this "shareholder" creature? Does hollowing out a company for a temporary bump in valuation one quarter count as against or for shareholder interests?
    - smallmancontrov 3y ago
      There are MANY institutional shareholders who buy/sell based on quarterly financial results and never extrapolate except by fitting lines and exponentials to past quarterly results. The C-Suite knows that this bottomless pool of money is available for pump & dump, so they do. If you can see what they are doing, you can ride along too.
    - disgruntledphd2 3y ago
gnfargbl 3y ago
> ... techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”? Off topic, but Buffett could also have been writing about the computer security industry here. "Minimise your attack surface, implement good password policies, patch often and practice defence in depth? Sounds boring, let's buy this AI-enhanced threat intel product, it found the North Koreans!"
- xorcist 3y ago
  That bothers me every time there was an incident and someone explains that "this organization has under-invested in cybersecurity". From my perspective, it is just as likely that overinvesting in cybersecurity is problematic. Nobody is more secure for buying more products, especially if the existing products are underutilized or undermaintained. Not even the talking heads or our industry pretends to be interested in minimizing attack surface anymore. We're just supposed to buy "more security".
  - sokoloff 3y ago
    It may be just as likely to be problematic, given that it’s done, but I think it’s far less commonly done. Invest 100% into product and 0% into security: you get a product and have a chance to build something that fits a valuable market. Invest 0% into product and 100% into security: you get no product and have no chance to find a valuable market. It’s no surprise that most founders (and most established companies) are biased away from significant over-investments in security.
  - klabb3 3y ago
    > From my perspective, it is just as likely that overinvesting in cybersecurity is problematic. Nobody is more secure for buying more products Yes, but isn’t this because security cannot generally be packaged into a product? Just like how anti-virus programs was a bad solution for consumers, a lot of the same snake oil is packaged up with B2B stickers and bolted-on a disastrous core of insecure dev and ops practices? I mean the companies with a good security track record that I know of develops it all in-house, and it permeates the culture of those companies, from the first design ideas through development, maintenance and ops.
emmender2 3y ago
the parable also has a "separating perception from reality" flavor for the science types. that is, the market is perception of what is out there, reinforced by the herd mentality. the reality is what actually exists. eventually perception and reality tend to converge.
harryquach 3y ago
There is a typo on the third line

93 points by ensocode 3y ago

markisus 3y ago

Except some firms have made extraordinary profits by statistical analysis of Mr Market, eg Renaissance

H8crilA 3y ago
They're not contradictory - markets are both short term and long term inefficient. Or at least they had been up to this point. Note though that in both cases there's a rather convincing story that explains where the edge is coming from. In Buffett's case it's treating securities for what they literally are, in Renaissance it's having a whole lot of detected small inefficiencies and a model that can merge them intelligently, including estimates on how far each inefficiency can be exploited before your own actions price it out of the market. There are even widely known edges that cannot be exploited, for example buying and holding real estate in a major city for the next 200 years is a guaranteed trade. But nobody who starts this trade will be able to live to complete it. Insurance is another one, one of the Bernoullis wrote a paper about it a long time ago. Given a sufficient wealth inequality / lack of competition one can exploit it forever.
danielmarkbruce 3y ago
All indications are that Renaissance is ~ market neutral, and are making money by predicting vol of buckets of individual securities based on statistical analysis and buying/selling baskets of options based on that.

WJW 3y ago

It works outside of investing too: Almost all of us will constantly be confronted with offers to buy things, take out loans, join clubs or companies, etc etc etc. Some of these offers will be worth it and some won't be. But it's still your right to take up or refuse such offers at any moment (unless you are literally dealing with the mafia I guess). Both accepting all offers and rejecting all offers is a mental error, and deciding what is worth it is part of being an adult in society.

actionfromafar 3y ago
The rate of offers has changed dramatically in the past decade or two though. We are bombarded with "opportunities" now. I believe people who are fit for one environment is not for the other.
- WJW 3y ago
  That only makes the Mr Market advice more important, no? Opportunities may come to your doorstep, but the fact that they are there does not mean you have to take them if you determine they won't bring you further to your goals. FWIW, for my personally I get drastically fewer unwanted offers in the form of advertising etc than two decades ago. Adblock and a spotify subscription instead of ad-supported radio makes a huge difference.
  - yard2010 3y ago
    Same, with youtube premium for music and cutting ads on yt (hope to pat more to cut the cancerous shorts bs too) and Vivaldi browser on mobile - virtually 0 ads
  - mettamage 3y ago
    I get a lot of “offers” in the form of learning anything faster on YouTube. It’s too much. I have to also contemplate and sit still. I refuse most offers in that sense
- pjc50 3y ago
  Indeed - you have to have a sense of the "scam base rate". How likely is it that an opportunity is bad simply because someone is trying to sell it to you?

Shrezzing 3y ago

I think it's imprudent for the average retail investor to take on and action Buffets advice in most contexts, except for his "just put your money in an index" advice. Buffet could lose 99% of his net worth, and still be one of the top 5,000 or so wealthiest people in history. He could then lose 99% of that wealth, and still be comfortably inside of the top 1% of wealth holders. He could invest that 1% of 1% of his money in a broad index, and comfortably live off the hundreds of thousands of dollars in annual returns. The mental model he has of the market is completely different to someone who is putting 1/5th of their $50k life-savings into investments. His appetite for risk and loss are entirely detached from most investors, and even many investment firms. Similarly, the range of opportunities open to Berkshire Hathaway is considerably different to the range of options available to a typical investor.

admissionsguy 3y ago
It’s not useful for opposite reasons. For Buffet, spending considerable effort to outperform the market by 10% is huge. For someone investing $10k, that’s $1k of upside.
- verbify 3y ago
  Conversely, if Buffett made 10% more one year, the impact on his life would be negligible. If someone has $10k, an extra $1k can make a huge difference.
  - WJW 3y ago
    That depends also on opportunity cost though. Buffett by his own admission just really enjoys the "game" (to him) of reading earnings reports and finding good companies to invest in. He sees no problem spending 40 hours per week of doing that, it's more like a hobby at this point. For people with $10k or less total invested, unless they also just really enjoy reading financial reports, spending their 40 hours per week on some sort of work or education is likely to have a much higher expected value than $1k.
WJW 3y ago

blowski 3y ago

> What witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”? Great line, it explains so much about humanity, from politicians constantly wanting shiny policies that are the exact opposite of their predecessor, to tech people rolling out Kubernetes to serve very simple workloads.

ipetrousov 3y ago
Great analogy, hahaha

dade_ 3y ago

This is very good advice, and makes sense considering the best investors are dead ones. In every market crash I am surrounded by people losing their minds about all the money they've lost, but that is just what Mr. Market is offering that day. So they sell, the market recovers, they see it going up, they buy. Buy high, sell low, buy high again. People won't admit what they have done, but do this all the time. https://www.businessinsider.com/forgetful-investors-performed-best-2014-9 https://www.businessinsider.com/forgetful-investors-performe...

m0llusk 3y ago

> Warren Buffett, who has used to to make billions of dollars The assertion is that markets are about voting first but then weighing later. There is a similar clash of metrics going on in the article. Focus on identifying and following the rich and successful up front, then worry about proofreading and getting the metrics right later if at all. Don't bother with the details of getting the weight metric right, just worry about reacting to market volatility with the right attitude. Lots of investors have tried to follow value without generating the same success as Mr. Buffet. This article is shameful starry eyed slop that will make no one rich.

danielmarkbruce 3y ago
Yup, the execution is insanely difficult. To make an analogy to golf - the best strategy is to hit the ball 300 yards down the fairway, hit the approach shot on the green close to the hole, and then make the putt.
- blitzar 3y ago
  Seems simple enough; just buy at the low and sell at the high of every day.
  - danielmarkbruce 3y ago
    You could be a strategy consultant.
    - blitzar 3y ago
      I would be terrible at it; a) I wrote the report above in once single sentence rather than a 300 page + appendicies report and b) I gave away my extraordinary insight for free within hours without bringing a team of grads and interns onsite for 9 weeks and billing them out to the client at $500 an hour.
      - deleted 3y ago
        [deleted]

mapleoin 3y ago

I like this bit: If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. Makes me think of all the CEOs who are firing and slowing down market acquisition atm just because of "market conditions", even though they should presumably know their company better than the market does. Either they all think their companies are scams or they don't know their companies enough to say and convince their investors otherwise.

disgruntledphd2 3y ago
If you bonus CXO's mostly on equity prices, then this is rational (but stupid) behaviour.
- sokoloff 3y ago
  If you were a shareholder, you're probably pretty interested in having the CEO's pay aligned to your investment value. Trying to fix this in a way that has shareholders working against their own interest is difficult from an incentive perspective.
  - btbuildem 3y ago
    What is this "shareholder" creature? Does hollowing out a company for a temporary bump in valuation one quarter count as against or for shareholder interests?
  - smallmancontrov 3y ago
    There are MANY institutional shareholders who buy/sell based on quarterly financial results and never extrapolate except by fitting lines and exponentials to past quarterly results. The C-Suite knows that this bottomless pool of money is available for pump & dump, so they do. If you can see what they are doing, you can ride along too.
  - disgruntledphd2 3y ago

gnfargbl 3y ago

> ... techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”? Off topic, but Buffett could also have been writing about the computer security industry here. "Minimise your attack surface, implement good password policies, patch often and practice defence in depth? Sounds boring, let's buy this AI-enhanced threat intel product, it found the North Koreans!"

xorcist 3y ago
That bothers me every time there was an incident and someone explains that "this organization has under-invested in cybersecurity". From my perspective, it is just as likely that overinvesting in cybersecurity is problematic. Nobody is more secure for buying more products, especially if the existing products are underutilized or undermaintained. Not even the talking heads or our industry pretends to be interested in minimizing attack surface anymore. We're just supposed to buy "more security".
- sokoloff 3y ago
  It may be just as likely to be problematic, given that it’s done, but I think it’s far less commonly done. Invest 100% into product and 0% into security: you get a product and have a chance to build something that fits a valuable market. Invest 0% into product and 100% into security: you get no product and have no chance to find a valuable market. It’s no surprise that most founders (and most established companies) are biased away from significant over-investments in security.
- klabb3 3y ago
  > From my perspective, it is just as likely that overinvesting in cybersecurity is problematic. Nobody is more secure for buying more products Yes, but isn’t this because security cannot generally be packaged into a product? Just like how anti-virus programs was a bad solution for consumers, a lot of the same snake oil is packaged up with B2B stickers and bolted-on a disastrous core of insecure dev and ops practices? I mean the companies with a good security track record that I know of develops it all in-house, and it permeates the culture of those companies, from the first design ideas through development, maintenance and ops.

emmender2 3y ago

the parable also has a "separating perception from reality" flavor for the science types. that is, the market is perception of what is out there, reinforced by the herd mentality. the reality is what actually exists. eventually perception and reality tend to converge.

harryquach 3y ago

There is a typo on the third line