Benjamin Graham’s description of trading is apt. We understand that valuation formulas don’t work and that finding “intrinsic value” is an elusive endeavor, but that leaves us up in the air. Price is what you pay, value is what you get, so don’t we have to find value? The realization that we don’t trade against nature but against other investors radically changes the perspective: We don’t have to find the intrinsic value; all we must do is agree or disagree with these investors, personified as Mr. Market in Graham’s characterization. And that introduces a discussion with him: What do you think, Mr. Market, and do I disagree with you?
That’s a negotiation, a negotiation over the price Mr. Market is asking you to pay, just like a negotiation about the price in buying a second-hand car. And, in any negotiation, it bodes well to ask: Where is the other party coming from? What’s the thinking behind his (or her!) price? As investing is about buying risky growth, we are asking Mr. Market: What do you think growth is worth?
But it doesn’t end there. We must get our thinking straight to challenge his thinking, and that’s where the rest of the book takes you: Good thinking about growth and the risk to growth.
There is another subtle point. We carry out fundamental analysis to challenge the market’s pricing of growth, but it is worthwhile to let Mr. Market also challenge us. A common human trait is to think the other side in a discussion is stupid. Self-deception is all too common, and behaviorists tells us that we are prone to overconfidence. So, after our (confident) due diligence, we might dismiss Mr. Market too quickly. Best to turn the question on ourselves: What could Mr. Market know something that I don’t know?
This is also a lesson for life. Understanding the reasoning of the other side in any negotiation or dispute is necessary to develop a cohesive response. It leads to respect and civility in discussions and more productive argumentation.