Ben Graham and the Triviality of the Market

As a boy, I once had a small rubber ball. When you let this unprepossessing little sphere drop to the ground, it would bounce with a force that seemed wholly out of proportion to its size.

Share prices are like that ball. Investors tend to overreact to every new piece of information. That sends prices bouncing disproportionately far from where they started.

Robert Shiller found that prices move by as much as thirteen times more than is actually justified by actual changes in underlying value. This is what Graham may have had in mind when he wrote today's quote:

Quotations fluctuate constantly, reacting often illogically to all sorts of temporary and even trivial influences.
-- Benjamin Graham

This is also the philosophy behind "buy the dip." Just make sure you haven't misjudged the reason for the dip, because not all dips are temporary.

Today's story is the second in this week's Ben Graham focus. If you missed it, catch up on yesterday's story here: Ben Graham on Beating the Big Boys.

If you can't wait until tomorrow for your next hit of Graham, get one of his masterpieces on Amazon: Security Analysis and The Intelligent Investor.

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