Mr. Market and other thoughts

Gudovac has escaped the City for a bit. He thought it might be reasonable to provide a bit more background on ownership of Enterprises during the interlude.  

A large minority of Readers seem to immediately grasp the Ownership approach presented in these pages. However, another large minority of Readers appear to be positively offended by the Approach. This group of Readers sends angry notes describing Gudovac as some sort of evil magician. They suggest base motives. It is to this group of Readers that this explanation  is written. 

Gudovac hopes this provides some clarity on why he might price a company at $5 when Mr. Market merrily prices it at $30. 

Mr. Market

Who is Mr. Market ? Mr. Market is a figure created by Columbia University Professor Benjamin Graham. Graham used the figure of a high strung business partner to illustrate the short term lunacy of stock prices.  At the bottom of page 204 begins Professor Graham's illuminating description of Mr. Market first written in 1949.  Read it. 

A modern real life Mr. Market is of course the most amusing Jim Cramer of Mad Money. It is unclear if Jim Cramer television character is a deliberate or accidental embodiment of Professor Graham's fictional character - Mr. Market.  

Owner's Time and Speculator's Time

Gudovac writes for Owners. Owners think very differently about time than Speculators. Owners measure time in terms of Business Cycles - from bottom to peak to bottom again.  This is a multi-decade time horizon.  The Business Cycle just ending began in the early 1980's. 

Not much happens in the course of a single day in the life of an Owner.   

This contrasts sharply with the day of a Speculator. Speculator's days are filled with minute-by-minute action. Gudovac has described the Owners method of investment as similar to that of a Hunter carefully stalking his prey. Perhaps the Speculator's method is analogous to that of the Hummingbird quickly leaping from flower to flower hoping for some nectar.  

Good Company Bad Price

Owners should be clear that there are many good companies which sell at a bad price.  

Management

American corporations seem to have developed a breed of managers who forget they are hired hands.  

The Sell Side and The Buy Side

Owners should be crystal clear that an entire industry exists to separate them from their money.  The vast majority of the financial industry is a far reaching apparatus of selling, selling, and more selling.  Owners should watch this clip from the film Boiler Room for a behind the scenes glimpse of the sell side in action. 

The sell side is Abby Joseph Cohen, it is CNBC, it is the Money Honey, it is Barrons, it is Wall Street Week, it is mutual funds, it is wealth managers, and it is your stockbroker.  The sell side is out there pushing, pumping, and trying to close the sale. The sell side is in-your-face every minute of every day. The sell side is what retail investors (aka Dumb Money) believe to be Wall Street.   It isn't. 

Wall Street is also the Buy Side. 

The Buy Side is the sub-set of the financial industry that doesn't need or want mass media around.  The Buy Side has capital to deploy.  Why would it broadcast how, where, and at what price it intends to deploy its capital ?  The Buy Side are Owners.

How to Determine a Price ? 

Price is a simple mechanical exercise. Owners provide capital - Managers use that capital to generate profits - Owners allocate a share of the profits to themselves and a share of the profits to the Enterprise. 

At some point, every worthwhile Enterprise will pay Owners a share of its profits.  The size of the Owner's share determines price. If an Enterprise shows no sign of ever returning profits to Owners no matter what the story - well, then they can't be priced very high can they ? 

Very bright people get PhD's & Nobel Prizes in the subtle aspects of pricing.  These aspects relate to growth rates, dividend payout ratios, share buybacks, capitalization, and discount rates. However, Owners should never get mired in the theory at the expense of the big picture.

All Owners need to ask is - When &  How much will this Enterprise pay me back ?

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Don't Get Massacred !

Gudovac1941@gmail.com

Please note - This article was written on of those thoroughly modern devices - the iPhone. Gudovac, being a old fuddy duffy, is not yet versed with this machine. Gudovac thanks his Readers, in advance for their tolerance of any grammar and spelling errors.