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An investment parable is a short story designed to illustrate an important truth about investing.
Here are a few that we think are the most important.
Benjamin Graham's 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 to either 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. He must take cognizance of important price movements, for otherwise his judgment will have nothing to work on. Conceivably they may give him a warning signal which he will do well to heed - this in plain English means that he is to sell his shares because the price has gone down, foreboding worse things to come. In our view, such signals are misleading at least as often as they are helpful. Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies." Source: This parable is contained in chapter 8 of Benjamin Graham's Intelligent Investor (ISBN 0060555661) which deserves a spot on every investor's bookshelf. Warren Buffett specifically draws the readers attention to this chapter. |
David Dreman's The Sure Thing Almost Nobody Plays
| Imagine you are
entering a deluxe, well-appointed casino. Off the lavish entry foyer,
there are two ample gambling wings, one hued in reds, the other in
muted greens. The red wing looks enticing, but if I may insist, let's
first enter the less crowded green rooms to watch the action.
The atmosphere is unhurried, the blackjack tables are sparsely attended, and every player sits behind a mound of green and black chips. You think at first you've come to the wrong place. You see the ordinary table limits, the ordinary clothes, the ordinary games. But then how did these ordinary people get such piles of money? Then it comes to you. They're all winning. In fact, as you walk around the green wing, you hardly can find a losing player. You know, of course, that the average house take on table games is 5%, but as you count winning and losing hands, you realize these players are getting a better break. They seem to be gaining at a rate of 60% to 40%. You start fresh and take another count. The results are the same. A pit boss appears at your shoulder. "Excuse me," you say, "but can this be right? The odds favor the players?" "Yes, indeed. The odds in the green room usually run 60 to 40. It's been that way since we opened." "But...most of the players must go away winners." "They sure do. At those odds, we calculate that 9,999 out of 10,000 make money. At our high-stakes tables in the back, they do even better, with winners running about 20,000 to 1. It's a good thing we get so few players, or they'd break the house." Somewhat amazed, you thank him and shake your head. There's no time to lose, you decide, but you'll need more than the few dollars you have in your pocket. You hatch a plan to gather your life savings, come back to the casino, and win the bundle you've been dreaming of. On your way out, you glance into the red wing. The action level is much, much higher. The room is crowded and fairly roars with excitement. Can it be even better here, you wonder? Curious, you go in. Players bet multiple table positions, wave frantically for change, entreat the gods for luck. You see few green and black chips, fewer winning players. The piles of chips in front of them are dwindling with each hand. In fact, the odds are worse than normal. Again, you start to count. Although the players continue to excitedly toss in their chips, the odds appear to be maybe 60 to 40 in favor of the house. Once more, your curiosity whetted, you walk over to a pit boss and ask her the odds at these tables. She tells you what you suspected. They are 60 to 40 in favor of the casino. Warming up to the subject, she chuckles and says, "This room coins gold for the casino, the chances are 9,999 in 10,000 rounds that we wind up winners." You don't have to be a genius to see that this is obviously not the place you want to be. You go home and get your stash. You return to the casino with your fistful of money, excited, eager for action, all the time figuring how you'll do even better at the game. But then a strange thing happens. You walk into the red wing and start to play." Source: The introduction to David Dreman's "Contrarian investment strategies : the next generation" (ISBN 0684813505). This is also a must have book. |
If you spot an investment parable that should be added to our list, let us know.
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A Dan Hallett and Associates Inc. publication. Norm Rothery, Ph.D., CFA, is the Chief Investment Strategist at Dan Hallett and Associates Inc. (DH&A) and the founder of StingyInvestor.com. DH&A is registered as Investment Counsel in the province of Ontario. Norm, DH&A, or related-parties may have an interest in the securities mentioned. More...