Mr. Market

January 22, 2013 (11:00 am)

During business school, students will often learn about Warren Buffet’s investment mantra. It seems like professors get a certain satisfaction from analyzing Buffet’s investment style. They say Buffett and his mentor Benjamin Graham use the phrase ‘Mr. Market’ to describe the typical investor. Mr. Market uses emotion when investing. He waits until he feels good to buy stocks, and quickly bails when shares are dropping (it doesn’t feel good to hold losers). His emotions drive him to buy high and sell low.

Buffet has become accustomed to trading only when Mr. Market is emotional. When euphoria kicks in and Mr. Market is buying stocks, Buffet sells to him. When Mr. Market is fearful and selling, Buffet buys from him. Buffet watches what Mr. Market is doing and does just the opposite.

So what is Mr. Market telling us here? Equity mutual funds recorded the second highest inflows on record in the first week of 2013. The SPY has jumped almost 7% over the past three weeks, climbing above its upper Bollinger Band for multiple days. Fear from the fiscal cliff debacle has since turned to euphoria, and market volatility (VIX) has plunged to near-record lows. It seems that Mr. Market is getting very cozy up here and not as concerned with hedging risk to the downside. There’s a reason buying protection (either through SPY puts buying the VIX) is cheap right now. Demand for protection is low. Buffet is likely happy to sell to Mr. Market up here. He knows he can buy it back cheaper in the future.

The SPY and Apple seem to be at a crossroads here. While Mr. Market is flooding into equities at a rate not seen in years, the opposite is true for Apple. When all is said and done, we expect to look back in a month’s time and be comfortable with the fact that we were short the market and long Apple at this critical juncture.