Ben Graham was a towering intellect. He wrote a book which has inspired legions of hedge fund managers and smaller investors to wealth, and quite interestingly, they all took the basic concepts laid out in this book, but applied them in radically different ways. Warren Buffett is Ben Graham’s best known pupil, but there are legions of others, the so-called “Super Investors of Graham and Doddsville”.
If we can agree that Ben Graham’s book, called “The Intelligent Investor,” is an exploration in the search of sound investing principles, not a recipe, we can also agree that Mr. Market, one of the key constructs of the book, is one of the best illustrations of market psychology ever devised.
Mr. Market, for those that are not regular readers of my blog, is a construct, a Bipolar (then called “manic depressive”) individual that you are in partnership with regarding a business concern. This individual’s mood is constantly cycling, and depending on how he feels, he will day in and day out, barge into your office and offer to either buy you out or sell his shares to you at whatever price he feels like offering.
This model illustrates several things. First, that day to day, the market is completely irrational. You can not predict what the shares of a given company will be worth today or tomorrow, its dumb luck if you do. But Mr. Market is moody, not dumb, so we can assume that whatever price he is seeking to offer or extract for his shares, is at least founded on some perception of reality. Ben Graham never argues that Mr. Market would offer to sell you his shares of Amazon for $1.
So if we expand this a bit, we can explain why over very long periods of time, the prices of securities tend to approach their real value (as understood by a value investor). This is because Mr. Market, as your partner, will be privy to how the company is doing, either selling lots of inventory, or taking huge losses. It stands to reason that he will base his offer, over time, on the trends that arise from these observations, If Mr. Market observes sales increases over many years, with healthy margins, the baseline of his offers to buy you out or sell his shares to you over this period, will also likely trend up, even if we can not predict his offer or its trend on any single day.
So if the main feature of Mr. Market is that he is moody, then, Mr. ICO is just in a rush. He doesn’t have much of a business to observe, but he needs money to run what there is, and even before he has come up with a prototype for the gizmo he is planning to make, he calls on you trying to sell you some shares. This is key, Mr. ICO is not there to buy anything, he is there to sell you his shares.
Unlike your partner Mr. Market, who is not bothered when you turn him away, and is always happy to come back tomorrow and make a deal; your acquaintance, Mr. ICO, wants to get things done now, because he needs the money to keep the lights on. And this is greatly in our benefit, because Mr. ICO is in such a rush, we can take advantage of him.
There is an important fact we need to understand though, and this has to do with Mr. ICO’s state of mind. If we start from the principle that Mr. ICO wants to maximize the price of his shares now (because he needs the money), we can expect that Mr. ICO’s shares are being discounted with respect to their expected (by an intelligent investor) value into the future, in exchange for money today. Because otherwise, why would anyone buy his shares?
This discounting does not just happen at the ICO itself, the ICO is indeed the best price opportunity any of us are likely to get on most projects, but this discounting happens for as long as the project keeps adding work capital post-launch. it stands to reason that the earlier you are willing to buy Mr. ICO’s shares off of Mr. ICO, the lower the price he will likely be willing to take. There will, however, be a point in the future in which the project becomes self-funding (like Bitcoin or Dash), at which point other forces are at play and we can no longer rely on ICO pricing principles. This is one of the key reasons my own investing has shifted to early stage projects, they are a safer bet (if you can identify that 10%).
This is why we take Mr. ICO seriously, because we understand that as things get done and the project moves forward, today is likely the cheapest day to buy out Mr. ICO. Assuming Mr. ICO is not trying to scam you, and is acting in good faith, we can assume that the expected future value of the shares he is offering us today will be positive into the future, because work capital will go into them. If we can gain a good understanding of Mr. ICO’s “business”, and if we are smart (and funded), there is a point at which it will become reasonable for us to buy out Mr. ICO, even if the prototype is not yet built.
But how do we make ourselves a partner in the business (or project)? We learn enough about it that we can discuss it at approximately the same level a founder could (minus any unreleased information). But crypto projects are gargantuan, and as we have discussed, a large majority of them are scams, how do we identify the good ones? As stated in previous articles, we focus on team, technology, and funding (TTF). Whereas Mr. Market can count on a stable foundation underlying the value of his business (sales, profits, growth), Mr. ICO does not have that luxury, because his foundation (TTF) needs to be fed money, and he always needs that money now.
If we can identify assets which have a solid team, highly innovative technology, and which can secure funding for the foreseeable future, we should be able to take advantage or Mr. ICO’s psychology and his need, and buy into the ground floor of an excellent project.
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Mr. Market vs. Mr. ICO was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.