In the world of alternative investments, transactions typically take place between smart buyers and sellers who know the true worth of the asset or business. That is not the case with auction driven markets. An auction market is a market where the price is determined by the highest bidder and the lowest price the seller deems worthy. The more crowded the market, the higher the potential for frequent price fluctuations – which in turn leads to mispricing.

Auction driven markets possess superior characteristics that set it apart from other investment alternatives.

Volatility

The volatility of financial instruments often creates ample opportunities to buy great businesses at dirt cheap prices that just don’t happen in the private market. Such opportunities present themselves in the financial markets mostly in chaotic times, when a cloud of uncertainty hovers over the future. There’s nothing that investors hate more than uncertainty. If you can see through the cloud of uncertainty, you can make opportunistic investments at rock-bottom prices.

Benjamin Graham introduced the concept of Mr. Market, who can be seen as a metaphorical representation of an individual with borderline personality disorder. This analogy portrays Mr. Market as someone who approaches you daily, presenting opportunities to either purchase his offerings or sell your  investments at market price. On certain days, Mr. Market may exhibit excessive enthusiasm. During such times, it is wise to decline his offers or sell your investments if they are unreasonably overvalued. Conversely, when Mr. Market appears distressed and has a gloomy face, it very well may be the opportune moment to make purchases. The key takeaway is that we should not allow ourselves to be dictated by Mr. Market’s fluctuating moods.

Variety

The abundance of business choices presents a notable advantage. You can find almost any type of business: Real estate developers and funds, power plants, tech-firms, semiconductors, bio-tech companies, etc. For the most part, the businesses you acquire have reached a mature stage, so if you exercise careful consideration in selecting your investments, the probability of them yielding no returns is significantly decreased.

Value

In the end – price is what you pay, and value is what you get. In auction driven markets, the value we get relative to risk and potential returns is superior to the alternatives.