Schizo Mr Market is a nuisance

I am privileged to act as an adviser to a fairly large pension fund. The investment committee includes some of the country's brightest financial and property brains.

At the beginning of the year , we each write down where we believe leading indicators - such as the rand and gold price, all-share index and long bond rate - will be 12 months hence.

At our first meeting in January, our faces usually redden with embarrassment when we learn how wrong we were. We generally correctly forecast the direction of the market but are way out with the extent of the moves. For example, we all recognised the rand would weaken against the dollar in 2013, but not over 20%, and felt gold would dip, but nowhere close to 25%.

Fortunately, the success of the fund is not built on prophecies that appear in the media almost daily. We've learnt from experience that it is almost impossible to anticipate the recurrent oscillations in financial markets, and accept psychologically that the value of the fund will vary monthly, sometimes even brutally.

Though we are not strict scholars of the Benjamin Graham (The Intelligent Investor), school we do adhere to many of his principles. Graham advised investors who bought stocks to consider themselves silent partners in a private business where the value of the corporation is determined by its underlying worth; a function of its book value and future earnings capabilities. As an owner of the business, you are not forced to sell shares at all times and are free to disregard daily quotations of the price of the shares on the stock market.

But he warns you will frequently encounter another partner in the business, the whimsical but very obliging Mr Market. Daily Mr Market will let you know what he thinks your interest in the business is worth and will offer either to buy you out, or sell you an additional interest on that basis. Sometimes, according to Graham, Mr Market's idea of value appears plausible and justified by the business's prospects. On the other hand, he often lets his enthusiasm or fears run away and the value he proposes seems a little short of silly. When Mr Market's price is outrageously high, you may be happy to sell, and equally content to buy when his price is absurdly low. The rest of the time Graham reckons it is wiser to form your own ideas of the value of your holdings, acknowledging that businesses can change in character and quality down the line, sometimes for the better, but more often for the worse.

Over the past fortnight, the schizophrenic Mr Market has been very active on the JSE. He aggressively bought holdings in companies such as Famous Brands, hiking the price to an all-time peak of R111 a share. Immediately thereafter he began looking to offload his exposure, pushing the price below R90, an 18% fall from the top. On Friday he was noticed increasing his position again, prepared to pay up to R96 a share, 5% higher than Thursday's level. He's not only bothering his partners in Famous Brands but has also been a nuisance in Naspers, Imperial Holdings and Discovery Health.

Graham's overriding precept was to buy a stock when it traded below fair value and sell when it rose above that level. His notions were introduced at a time when info flows were nowhere near as speedy and sophisticated as today, making it possible, with diligence and hard work, to uncover gems trading at low multiples of assets and earnings. Even long-time devotee of Graham's teachings, Warren Buffett, recognises that easy access to information today has resulted in hefty premiums being placed on successful businesses, compelling him to modify his mentor's customary definition of value.

The current impulsive movements on the JSE will not make serious investors richer or poorer. Winning money managers, like my pension fund colleagues, will continue to believe that as long as the earnings power of their equity holdings remain steady and sustainable, they can afford little attention to the daily vagaries of the stock market.