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Passive vs. Active Management:
How to avoid the mood-swings of "Mr. Market"
(cont.)
[Download Printable White Paper]
In his allegorical lessons, Graham had the ingratiating
Mr. Market arriving at your door every other day with
something new to sell
suddenly becoming depressed
over, say, a slump in the bond market
constantly
jumping from sector to sector
dumping everything
one day, buying everything the next
worrying himself into
paralysis over quarterly earnings.
Trying to keep up with the schizophrenic Mr. Market
was a recipe for ruin, said Graham. Focus on the
fundamentals. Build your asset allocation on scientific
data. Keep your emotions firmly in check. Diversify.
And stay the course. That was Graham's advice to all
managers (and by extension, all investors).
Set your allocation, said Graham, and establish your
rebalancing methodology. Then, if you really can't resist
the distractive ups-and-downs of Mr. Market, go and
"live in a cave for a few years," to paraphrase the
Columbia professor.
Just stay away from that addictive stock ticker
Graham compared the short-term performance of all
markets to "voting machines" in which temporary
winners and losers are chosen by popular and often
ill-informed sentiment; whereas long-term returns are
sorted out by the unerring scale of time, which always
balances true.
In other words, Graham said, put history on your side.
Think of the markets as a measure, a data base,
a colossally efficient repository of collective daily
investment decisions. As the Nobel laureate Friedrich
Hayek pointed out: the market is a mechanism "more
immediate and precise than any system a human has
ever devised."
So in your daily perusal of the business press, watch
out for those fairy tales and amusement-park metaphors
and that unpredictable Mr. Market.
(end)
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