Vulture Culture

Vultures prey on the sick and dying. Similarly, if you want to make money in the stock market, you need to look for "sick" companies whose shares have fallen due to problems that are not likely to have a long-term impact. But, unlike vultures, it is best to leave "dying" companies alone (ex. Ford, GM)!

The concept of Mr. Market is what I call Vulture Culture. Mr. Market is a concept popularized by Benjamin Graham in his book, The Intelligent Investor.

Think of Mr. Market as someone who offers to sell you and buy from you the shares of many different companies at prices that depend on his mood. Sometimes the prices are outrageously high, sometimes he offers you the deal of a life time and yet other times the prices may seen reasonable.

The idea is that the intelligent investor will take advantage of Mr. Market's mood swings to make some profitable investments. For example, if Mr. Market has gone into depression and offers to sell you shares of good companies at rock-bottom prices, then it might be wise to make your purchases at that time. On the other hand, if Mr. Market is feeling extremely optimistic and offers to buy from you shares at a very high price, then it might be wise to sell those to him.

Maybe it should have been Miss Market rather than Mr. Market ...?

Mr. Market is not just a theoretical concept, but it works quite well in practice. For example, the shares of Canadian Imperial Bank of Commerce (CIBC) fell sharply in August 2005 after is was announced that CIBC struck a massive US$2.4 billion settlement with Enron investors. To put that in perspective, the bank earned C$2.1 billion for fiscal year 2004.

Yes, the settlement was massive, but did it mean that it was the end for CIBC? Absolutely not! As a matter of fact, it was a new beginning for CIBC since the ugly Enron chapter was now closed. Mr. Market had reacted strongly to the settlement and the shares fell from a high of over $80/share to a low of $68.56.

While the mutual funds and other "professional" investors were busy selling their shares and equity analysts downgrading the ratings for CIBC, I was able to buy the shares at $70. They are currently selling for over $82. Thanks for a great deal, Mr. Market!