To demonstrate how the stock market works, Benjamin Graham created the parable of “Mr. Market”:
Imagine you had a partner in a private business named Mr. Market. Mr. Market, the obliging fellow that he is, shows up daily to tell you what he thinks your interest in the business is worth.
On most days, the price he quotes is reasonable and justified by the business’s prospects. However, Mr. Market suffers from some rather incurable emotional problems; you see, he is very temperamental. When Mr. Market is overcome by boundless optimism or bottomless pessimism, he will quote you a price that seems to you a little short of silly. As an intelligent investor, you should not fall under Mr. Market’s influence, but rather you should learn to take advantage of him.
The value of your interest should be determined by rationally appraising the business’s prospects, and you can happily sell when Mr. Market quotes you a ridiculously high price and buy when he quotes you an absurdly low price. The best part of your association with Mr. Market is that he does not care how many times you take advantage of him. No matter how many times you saddle him with losses or rob him of gains, he will arrive the next day ready to do business with you again.
When the stock market is irrationally pessimistic about a stock that you estimate worth more than its current price, you exploit the market’s irrationality by buying the stock at a discount. When the stock market is irrationally optimistic about a stock that you estimate is selling at or above its true value, you exploit the market’s irrationality by selling the stock at a premium. Most stock market investors do the opposite: they sell a stock as its value plunges and they buy a stock as its price skyrockets.
This is the exact opposite of what they’d do if they were buying a shirt. If the shirt was on sale, they wouldn’t deliberately hold off until after the sale was over just for the privilege of buying the shirt at a higher price; they’d buy the shirt while it was on sale. Yet, when stocks are on sale, investors often sell instead of buy. Instead of exploiting Mr. Market’s shifting moods to buy low and sell high, they join in his madness and sell low and buy high. They fail to notice, as Graham said, “In the short run, the market is a voting machine but in the long run it is a weighing machine.”
Like Graham, Carl von Clausewitz created a parable to demonstrate how something complicated works. While Graham wrote about the stock market, Clausewitz wrote about war: Mr. Market, meet wunderliche Dreifaltigkeit:
Carl von Clausewitz (1832):
Der Krieg ist also nicht nur ein wahres Chamäleon, weil er in jedem konkreten Falle seine Natur etwas ändert, sondern er ist auch seinen Gesamterscheinungen nach, in Beziehung auf die in ihm herrschenden Tendenzen eine wunderliche Dreifaltigkeit, zusammengesetzt aus der ursprünglichen Gewaltsamkeit seines Elementes, dem Haß und der Feindschaft, die wie ein blinder Naturtrieb anzusehen sind, aus dem Spiel der Wahrscheinlichkeiten und des Zufalls, die ihn zu einer freien Seelentätigkeit machen, und aus der untergeordneten Natur eines politischen Werkzeuges, wodurch er dem bloßen Verstande anheimfällt.
What the gods would complicate, they first make German. In German, every phrase is simple but even the simplest phrase is complex. German’s complexity quadruples when translated into English. This complexity has left translators wrestling with Clausewitz’s parable for the past 130 years:
J. J. Graham (1873):
War is, therefore, not only a true chameleon, because it changes its nature in some degree in each particular case, but it is also, as a whole, in relation to the predominant tendencies which are in it, a wonderful trinity, composed of the original violence of its elements, hatred and animosity, which may be looked upon as blind instinct; of the play of probabilities and chance, which make it a free activity of the soul; and of the subordinate nature of a political instrument, by which it belongs purely to the reason.
O.J. Matthijs Jolles (1943):
War is, therefore, not only a veritable chameleon, because in each concrete case it changes somewhat its character, but it is also, when regarded as a whole, in relation to the tendencies predominating in it, a strange trinity, composed of the original violence of its essence, the hate and enmity which are to be regarded as a blind, natural impulse, of the play of probabilities and chance, which make it a free activity of the emotions, and of the subordinate character of a political tool, through which it belongs to the province of pure intelligence.
Michael Howard and Peter Paret (1976):
War is more than a true chameleon that slightly adapts its characteristics to the given case. As a total phenomenon its dominant tendencies always make war a remarkable trinity — composed of primordial violence, hatred, and enmity, which are to be regarded as a blind natural force; of the play of chance and probability within which the creative spirit is free to roam; and of its element of subordination, as an instrument of policy, which makes it subject to reason alone.
Michael Howard and Peter Paret (1984):
War is more than a true chameleon that slightly adapts its characteristics to the given case. As a total phenomenon its dominant tendencies always make war a paradoxical trinity — composed of primordial violence, hatred, and enmity, which are to be regarded as a blind natural force; of the play of chance and probability within which the creative spirit is free to roam; and of its element of subordination, as an instrument of policy, which makes it subject to reason alone.
Christopher Bassford (2012):
War is thus more than a mere chameleon, because it changes its nature to some extent in each concrete case. It is also, however, when it is regarded as a whole and in relation to the tendencies that dominate within it, a fascinating trinity — composed of: primordial violence, hatred, and enmity, which are to be regarded as a blind natural force; the play of chance and probability, within which the creative spirit is free to roam; and its element of subordination, as an instrument of policy, which makes it subject to pure reason.
Google Translate (2012):
The war is not only a true chameleon, because in each concrete case, his nature something changes, but he is also his total appearances to, in relation to the ruling in his tendencies a strange trinity, composed of primordial violence of his element, the hatred and enmity, like a blind natural instinct to look at are, from the play of probabilities and chance, which led him to a free mental activity making, and the subordinate nature of a political tool, making it the mere intellect falls prey.
Microsoft Bing Translate (2012)
The war is not only a true Chameleon because he in any concrete case does change its nature, but he is a wonderful Holy Trinity, his total phenomena, in relation to the trends ruling in it put together from the original violence of his element, the hatred and animosity, to view as a blind Naturtrieb are from the game of chance and probabilities, which to a free soul activity it, and from the subordinate nature of a political tool, which he falls prey to the mere intellect.
Man and machine agree: there are many possible translations. Battles over which possible translation is correct have been fierce. Many have thrown fuel on these fires in the past, many are throwing fuel on them right now, and many are doomed to throw fuel on them in the future.
Here’s one more stick for the fire:
While doing family history research to save my dead, this definition of the German surname “Wunderlich” came up:
nickname for an eccentric or moody person, from Middle High German wunderlich ‘odd’, ‘capricious’, ‘unpredictable’ (a derivative of wunder, Old High German wundar ‘puzzle’, ‘marvel’).
Perhaps Clausewitz writes of “Mr. War”.
Mr. War, like his neighbor Mr. Market, has “some rather incurable emotional problems”. You see, he is “eccentric”, “moody”, and “very temperamental”. With ghetto psychology, Mr. Market, with his sharp and sudden mood swings between infinite hope and endless despair, is easily diagnosed as bipolar. Mr. War’s diagnosis is even more extreme: Mr. War is tripolar.
It’s true that Mr. War’s moods change as often and as easily as a chameleon changes colors. However, his moods are not completely arbitrary. They are clearly dominated by three tendencies:
- deep violent hatred towards those Mr. War envies or despises
- strange bursts of improbable and sudden creativity
- moments of purposeful action guided by deliberate and calculated planning
The relationship between these three moods can fill passersby with wonder. They may even find the intersection of the three fascinating or remarkable. However, Mr. War’s moods are wonderful in the way that massive killer earthquakes are wonderful to seismologists observing their distant tremors from the far side of the earth. They are remarkable in the way that flaming train wrecks are remarkable to rubber-necking drivers moving by. They are fascinating in the way that the gaze of a snake is fascinating to a bird before the snake strikes. The company of Mr. War may normally be “months of boredom” but it is unsettling, bewildering, and often astounding because it is “punctuated by moments of terror“.
Mr. War’s moods are “capricious” and “unpredictable” because they shift capriciously and unpredictably. Their three ruling tendencies, when taken as a whole, compose an uncanny trinity that is unsettling, unstable, and unforeseeable. Just when you think Mr. War’s moods are governed by the tendency of his blind hatred to escalate to extremes of violence, his mood shifts to pure calculation. Just when you think his moods are a continuation of reasoned planning with the addition of other though perhaps (unavoidably) violent means, his hatred overflows and floods into the violence he unleashed and his mood swings to blind violence. The uncanny element in Mr. War’s moods is the element of chance and unpredictability within which Mr. War’s temperament is free to roam, fearsome in its erraticness.
When Mr. War is overcome by attacks of boundless rationality, unlimited randomness, or bottomless enmity, he will demand a price that seems to you little short of uncanny, astounding, or even paradoxical. As an intelligent war maker, you shouldn’t fall under Mr. Wars influence. Rather, you should learn to take advantage of him.
The value of your interest should be determined by rationally appraising Mr. War’s prospects. You can happily retreat when Mr. War demands a ridiculously high price and advance when he leaves an absurdly open flank. The best part of your association with Mr. War is that he does not care how many times you take advantage of him. No matter how many times you saddle him with losses or rob him of gains, he will arrive the next day ready to do business with you again. This is the value of your interest: you may not be interested in Mr. War but Mr. War is always interested in you.
[cross posted on perplexities]
5 thoughts on “Mr. Market, Mr. War, and the Uncanny Trinity”
Very clever. Still digesting this…
I will add one thing, perhaps the reason that people sell when the value of a stock is dropping and buy when it’s increasing is evidence that they are not confident about what they think the stock is actually worth. If you bought stock and then the value drops, you might think that perhaps your estimate of its value was too high and you’d better sell now to avoid a situation where it drops to its “true” value, robbing you of the difference. And vice versa. Of course if you are confident in its value (and in Mr. Market’s ability to see the true value) then you would not sell in that situation.
You might call it an emergent trinity.
Our president seems to favor a strategy of doubling down, rather than adapting to new realities by moderating or reversing his position, when situations go against him. This is generally a losing strategy when dealing with Mr. Market. How well does it do when dealing with Mr. War?
That’s how it used to work. Now it’s basically machines incrementing the delta. They win both ways automatically.
There is no reason for stocks to be where they are now, or for that matter any place they have been in the last … say five years. The big guys, GS JPM etc, manage to make money on over 90% of the days they trade. Goldman did 100% in one quarter recently. You think this is just because they are super smart? You can look at Google Earth and see how close these guys are to the NSE. That is what matters … your latency. Less latency means you get to run the show better than a guy with more. The public trading the old way just floats on the churn the algorithms generate.
panic and greed – the twin Gods that rule markets and war.
Just by the way,
It’s interesting that war has been the impetus and basis for so much scientific and practical advance. Creative Destruction.
Perhaps, like war, the economic system of Capitalism, with it’s it’s winners, its losers and striving to out preform the competition creates another kind of Creative Destruction.
Innovation results from having to compete.
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