Mr. Market and Joe Pesci

/Mr. Market and Joe Pesci

Mr. Market and Joe Pesci

By | 2017-08-18T17:00:02+00:00 September 7th, 2011|Research Insights, Behavioral Finance|0 Comments
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(Last Updated On: August 18, 2017)

We here at Turnkey Analyst are big fans of Ben Graham, and are stalwart believers in the enduring relevance of Graham’s famous character, Mr. Market, to questions about investing in common stocks.  Graham’s Mr. Market is a finicky character, some days wildly overpaying for stocks, while on other days refusing to pay anything but the cheapest prices.  Graham taught us that even though the prices Mr. Market would pay for stocks were subject to wild, emotion-driven swings, we as investors could choose when to transact with him.  On any given day, we can choose to buy from Mr. Market, sell to him, or do nothing at all.  Graham also believed that while Mr. Market could be erratic and unpredictable in the short run, in the long run he got it right, and that stock prices would tend to converge to fair value.

Graham believed that most people lacked the background, training, and temperament to be successfully take advantage of Mr. Market, and in fact had no business whatsoever picking stocks; they speculated in stocks, when they should be investing.  Graham suggested that one way to combat this tendency toward unprofitable trading and ensure you really did take advantage of Mr. Market was to rely on a set of quantitative measures that would allow you to obtain a margin of safety, and thus to make intelligent and disciplined investments.  Regardless of the extent to which you buy into Graham’s allegory, what is indisputable is that if you want to try to take money from Mr. Market, you would be wise to have a healthy respect for him.

I was watching Martin Scorcese’s “Goodfellas” the other night, and was fascinated by Joe Pesci’s character Tommy DeVito, for which Pesci won an Oscar for Best Supporting Actor.  This made me think about recasting Graham’s Mr. Market in latter day terms, consistent with today’s ever more cutthroat market realities.  You may remember DeVito as the unpredictable hothead who famously asked Ray Liotta’s character, Henry Hill, “I’m funny how, I mean funny like I’m a clown, I amuse you?”

The crowd of mobsters grows quiet as they have seen how dangerous DeVito can be when he is angry.  Luckily for Hill, this encounter doesn’t result in violence.  Later, however, when the hapless Billy Batts says, “go home and get your shinebox!” DeVito says “keep him here!” and leaves the bar in a fit of rage, only to return for the ultimate revenge; despite being a made man, Billy pays the ultimate price for his arrogance.

Now what I am going to suggest is that, for most investors, Tommy DeVito is like Mr. Market.  Mr. Market is extremely dangerous, and can be a cold-blooded killer at times.  He doesn’t care about you or your capital.  He’s looking for an excuse to kick your ass.  Furthermore, if you pick your own stocks, you are essentially telling Mr. Market, “go home and get your shinebox!”  It is for this reason that many investors who pick their own stocks frequently find their capital grabbed by Robert DeNiro, then beaten with baseball bats and stuffed into the trunk of a car.



Now would you make some “shinebox” comment to a real life DeVito?  Of course not.  It’s a death sentence.  So why on earth would you trust your own potentially flawed judgment with respect to real life stock picking?  Sure, maybe you are an unsung Warren Buffett, who will end up like Henry Hill, laughing it off with decent returns.  Alternatively, maybe in reality you are Billy Batts, foolishly taunting Mr. Market, in which case your precious after-tax dollars will end up in a shallow grave in upstate New York.

Now let’s turn to another of Mr. Pesci’s excellent films, “Home Alone.”  In Home Alone, McCaulay Culkin’s character, 8-year old Kevin McCallister, is mistakenly abandoned in his house by his family when they fly to Paris without him during Christmas vacation.  Kevin fends off the depredations of the insidious burglar Harry (played by Pesci, at left), by pretending to have a party, lighting off firecrackers, and via various booby traps.

Okay, sure this is a resourceful kid, but regardless, you know how this movie is going to end, and that Harry really doesn’t stand a chance.  No matter what Harry does, he is going to lose, and Kevin is going to win.  And so it goes with quantitative factors and Mr. Market.

If you look back over long time frames, Mr. Market just can’t win.  He never does.  Sure he may get the better of you from time to time, in a given year say, but then, inexorably, the quantitative strategies begin to assert themselves.  As with Home Alone, you know how this movie is going to end too.




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About the Author:

Mr. Foulke is currently an owner/manager at Tradingfront, Inc., a white-label robo advisor platform. Previously he was a Managing Member of Alpha Architect, a quantitative asset manager. Prior to joining Alpha Architect, he was a Senior Vice President at Pardee Resources Company, a manager of natural resource assets, including investments in mineral rights, timber and renewables. He has also worked in investment banking and capital markets roles within the financial services industry, including at Houlihan Lokey, GE Capital, and Burnham Financial. He also founded two technology companies:, an internet-based provider of automated translation services, and, an online wholesaler of stone and tile. Mr. Foulke received an M.B.A. from The Wharton School of the University of Pennsylvania, and an A.B. from Dartmouth College.