Chapter 8 of The Intelligent Investor: Or, How I Learned To Stop Worrying & Love Market Fluctuations

Remember: Mr. Market is there to serve you — not to guide you

October is “The Intelligent Investor” month here at Kingswell.

A new edition of Benjamin Graham’s classic text will be released three weeks from today — and, of course, I will post a full review as soon as it comes out. But, in the meantime, I’ll be taking a closer look at why so many people (including Warren Buffett) consider this to be the most important investing-related book of all time.

Buffett not only recommends that everyone read The Intelligent Investor — he even pinpoints the two particular chapters that pack the most punch. He once called Chapters 8 and 20 “the bedrock of my investing activities” and credited them with changing his life.

So, this week and next, I will dive into these chapters and try to uncover the key lessons that await inside them.

Every time I read Chapter 8 of The Intelligent Investor (“The Investor and Market Fluctuations”) I think of J.P. Morgan’s response after being asked what he thought the stock market would do in the future. “It will fluctuate,” he replied drolly.

(I don’t know if that’s an apocryphal story or not — but if Morgan didn’t say it, he should have. No truer words have ever been spoken about the stock market.)

Even a newcomer to the money game knows that the stock market will move up, down, and all around — often with no obvious reasons for these wild swings. And, as Benjamin Graham writes in Chapter 8, how an investor handles all of this commotion — both emotionally and intellectually — will determine his or her ultimate success.

It’s one thing to pay lip service about the need to stay calm and disciplined in the face of market movements, but another thing altogether to actually put that into practice.

In Chapter 8, Graham gives us the tools to do just that…

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✨ Every investor must come to terms with one simple fact: The stock market will fluctuate — both up and down — and there’s nothing you can do about it.

I try never to go too long without quoting Charlie Munger, so here’s one of my favorites: “If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get.”

Ben Graham says much the same thing in Chapter 8 — albeit in softer terms than Charlie. “The investor may as well resign himself in advance to the probability, rather than the mere possibility, that most of his holdings will advance, say, 50% or more from their low point and decline the equivalent one-third or more from their high point at various periods in the next five years.”

The key to staying calm and composed during these fluctuations is to focus on a business’s actual operating performance — which often bears no resemblance to its latest swings in stock price. The intelligent investor celebrates improved business performance, not a rising stock price.

“As long as the earning power of his holdings remains satisfactory,” writes Graham, “he can give as little attention as he pleases to the vagaries of the stock market.”

That’s a lot easier to do when you internalize the fact that each share of common stock is not just a piece of paper, nor a ticker symbol on your phone screen, but an ownership interest in an actual business.

✨ A fluctuating market is an opportunity, not an impediment.

Back in the day, Jesus of Nazareth ruffled some feathers by healing paralytics and picking heads of grain on the Sabbath. (This was a big no-no according to the law.) When questioned by the Pharisees, He dropped this banger: “The Sabbath was made for man, not man for the Sabbath.”

In other words, the traditional day of rest was not an obstacle to prevent hungry people from eating — but God’s gift to humanity to allow them to spend time with family and mend weary bodies and minds in peace before another long grind.

In a similar way, it can be said that market fluctuations were made for investors and not the reverse. Plunging prices create unexpected bargains to sift through — while rampant enthusiasm makes for the ideal seller’s market.

Remember: You are the hunter, not the hunted.

The liquidity of common stocks gives great power to investors — but, too often, they seem determined to toss this boon aside and twist it into a debilitating handicap. Instead of empowering investors to take advantage of swings in market prices, it cruelly tempts them into making foolish, short-sighted, and emotional decisions.

“What this liquidity really means,” writes Graham, “is, first, that the investor has the benefit of the stock market’s daily and changing appraisal of his holdings, for whatever that appraisal may be worth, and, second, that the investor is able to increase or decrease his investment at the market’s daily figure — if he chooses.”

That’s the whole ballgame right there. People mistakenly view market fluctuations as something to be afraid of — rather than as opportunities for the intelligent investor to feast upon.

“The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage,” writes Graham. “That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.”

Warren Buffett often says that long-term investors shouldn’t care if the stock market were to close down for a year or two (or ten). You can kinda see the seed of that idea in the above passage from Chapter 8.

✨ Mr. Market will have his say — but you don’t have to listen.

To drive this point home, Graham tells “something in the nature of a parable” and introduces us to the mercurial Mr. Market.

Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis.

Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him.

You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

The true investor is in that very position when he owns a listed common stock. He can take advantage of the daily market price or leave it alone, as dictated by his own judgment and inclination.

In short, Mr. Market is there to serve you — not to guide you.

(And the crazier Mr. Market gets, the more money you should be able to make.)

“Mr. Market has another endearing characteristic,” Warren Buffett wrote in 1987. “He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option.”

“Following Ben’s teachings,” continued Buffett, “Charlie and I let our marketable equities tell us by their operating results — not by their daily, or even yearly, price quotations — whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it.”

“The market doesn’t instruct us,” Buffett said another time. “The market is there to serve us. If it does something silly, we get a chance to do something. And if it doesn’t, forget it and go play bridge that day.”