One of the most famous ideas from The Intelligent Investor is the idea of Mr. Market. This is the technique of imagining the market as a partner in your business who, everyday, offers you a price to either buy his share of the business, or sell your share. Mr. Market is an irrational person and, while most days the price he offers is within the realm of reasonable, sometimes the price will be absurd. On rare occasion, he will offer you a sell price far beyond of the worth of the business. Other times, he will offer you a buy price deeply discounted.
Recognizing this, Charlie Munger coined what he calls “Sit on your ass investing” or SOYA. This is the idea that the vast majority of the investor’s time should be spent outside of the brokerage. They just sit on their ass until Mr. Market offers them a stupid deal - a “fat pitch”, as Buffet calls it.
Until then, the investor does not need to be out of the market entirely, they can keep some cash if they wish, but they could also just keep their money in the index, reaping whatever the market returns in the meantime - a result that is not to be balked at.
Luckily, market crashes are rare overall, but common in certain areas, or for specific businesses. An investor who wants to be active can spend their time studying these areas of the market that are currently pessimistic, expanding their understanding and circle of competence, while potentially finding a bargain here or there.
Connections
Mr Market Is An Irrational Partner
Link Explanation: The linked note above details the idea of Mr.Market. The current note expands on it to build a recommendation for action that the investor can take.
Link Explanation: While the investor who desires to be active can spend their time studying places in the market that are currently pessimistic, they should also be weary that the pessimism they are observing may be warranted. In fact, they should enter the area of the market with an assumption that the market is right.
Link Explanation: This note is effectively the same concept as SOYA. The investor does not need to desperately search the market for a deal. They just need to be continually learning, deepening and expanding their circle of competence, and be ready to act when Mr.Market gets things wrong.
Prices Reflect Perception, Not Truth
Link Explanation: The linked note contains the actual reasoning for why Mr. Market is sometime irrational in his price offerings. The price he offers is based on the common perception of a situation or business, not necessarily the truth. Understanding this logically leads to SOYA investing because if you are continually learning and developing confidence in your own perception of truth, there will inevitably be times when you disagree with Mr.Market. This is your opportunity to be active.