Mr. Market

Mr. Market is an allegory created by investor Benjamin Graham to describe what he believed were the irrational or contradictory traits of the stock market and the risks of following groupthink.[1][2][3] Mr. Market was first introduced in his 1949 book, The Intelligent Investor.[4][5][1]

Mr. Market is an allegory created by investor Benjamin Graham.

Allegory

Character
Mr. Market is described by Benjamin Graham as a fickle investor primarily ruled by his emotions from day-to-day.[6][2][3]

Graham asks the reader to imagine that they are one of the two owners of a business, along with a partner called Mr. Market.[7][8][2] The partner frequently offers to sell their share of the business or to buy the reader's share.[9][10][6] This partner is what today would be called manic-depressive, with their estimate of the business's value going from very pessimistic to wildly optimistic.[2][3][11] The reader is always free to decline the partner's offer, since they will soon come back with an entirely different offer.[12][13][14]

Traits

Mr. Market is often identified as having human behavioral manic-depressive characteristics,[2][3][11] he:

  1. Is emotional, euphoric, moody
  2. Is often irrational
  3. Offers that transactions are strictly at your option
  4. Is there to serve you, not to guide you.
  5. Is in the short run a voting machine, in the long run a weighing machine.
  6. Will offer you a chance to buy low, and sell high.
  7. Is frequently efficient…but not always.

This behavior of Mr. Market allows the investor to wait until Mr. Market is in a 'pessimistic mood' and offers low sale price.[15][16][17] The investor has the option to buy at that low price.[1][5][16] Therefore, patience is an important virtue when dealing with Mr. Market.[1][5][16]

Influence
Warren Buffett has frequently advocated investors heed the lessons of Mr. Market.[18]

Since its introduction in Graham's 1949 book The Intelligent Investor, it has been cited many times to explain that the stock market tends to fluctuate.[19][2][20] The example makes it clear that the sole reason for the change in price is Mr. Market's emotions.[21][22][6] A rational person will sell if the price is high and buy if the price is low.[23][24][25] He would not sell because the price has gone down or buy because the price has gone up.[26][27][28] Graham instead believes that it is important to focus on whether the stock valuation of a company is reasonable after calculating its value through fundamental analysis.[4][29][30] Warren Buffett has frequently quoted Graham's 1949 book, The Intelligent Investor.[18][5][31] Chapter eight covers Mr. Market and Warren Buffett thinks that this is the best part of the book.[5][32] Buffett described it as "by far the best book on investing ever written".[32][33]

Elaine Wyatt wrote in her 1994 book Financial Times - The Money Companion, "Before you begin your trek into the nitty-gritty of investing, you should meet Mr. Market. Mr. Market is the creation of Benjamin Graham, who in 1949 wrote a book called The Intelligent Investor. Graham's influence has reached every corner of the financial world".[34] Janet Lowe observed in her 1997 book, Value Investing Made Easy, "James Grant is such a devotee of Graham that he named his book Minding Mr. Market after a parable Graham often used".[10] In his 1999 work, The Warren Buffett Portfolio, author Robert G. Hagstrom commented, "The well-known story of Mr. Market is a brilliant lesson on how and why stock prices periodically depart from rationality."[35] Hagstrom observed that the Mr. Market parable, "is a lesson learned well by Buffett, that he in turn urges all others to embrace."[18] Hagstrom pointed out, "It is easy to see why Warren Buffett has, on several occasions, shared the story of Mr. Market with Berkshire Hathaway shareholders."[18]

Writing in his 2001 book, J.K. Lasser's Pick Stocks Like Warren Buffett, author Warren Boroson called Benjamin Graham's Mr. Market concept, "a famous metaphor he invented".[36] Mark Hirschey commented in 2003 in his work Tech Stock Valuation, "In his classic book, The Intelligent Investor, Benjamin Graham ... describes the relationship between the intelligent long-term investor and market fluctuation using his now famous Mr. Market metaphor."[37]

In his 2015 book Heroes and Villains of Finance, author Adam Baldwin wrote that, "Famously, Graham used the analogy of 'Mr. Market' in order to portray his value investing strategy".[38] In his 2016 work on shareholder activism, Dear Chairman, author Jeff Gramm observed, "The Intelligent Investor is most famous for the parable of Mr. Market and the concept of 'margin of safety'."[7]

See also

References
  1. Greenblatt, Joel (2010), The Little Book That Beats the Market, Wiley, pp. 32–34, ISBN 978-0470624159, One of the greatest stock market writers and thinkers, Benjamin Graham, put it this way. Imagine that you are partners in the ownership of a business with a crazy guy named Mr. Market. Mr. Market is subject to wild mood swings.
  2. Santos, Leandro da Rocha; Montezano, Roberto Marcos da Silva (August 2011), "Value and growth stocks in Brazil: risks and returns for one- and two-dimensional portfolios under different economic conditions", Revista Contabilidade & Finanças, 22 (56): 189–202, CiteSeerX 10.1.1.1030.3203, doi:10.1590/S1519-70772011000200005, ISSN 1519-7077
  3. Bierig, Robert F. (April 2000), The Evolution of the Idea of 'Value Investing': From Benjamin Graham to Warren Buffett (PDF), Duke University, retrieved August 23, 2019
  4. Graham, Benjamin (1949). "Chapter 8". The Intelligent Investor. ISBN 0-06-055566-1.
  5. Hagstrom, Robert G. (2005), "Introducing Mr. Market", The Warren Buffett Way, Wiley, ISBN 978-0471743675
  6. "Mr. Market", Value Investing History: History of Value Investing, Columbia Business School, The Heilbrunn Center for Graham & Dodd Investing, 2019, retrieved August 23, 2019, Mr. Market - you should view market prices as if being in business with a manic-depressive partner. Repeatedly your partner offers to either sell or buy shares at prices strongly linked with their mental state at each time, ranging everywhere from highly pessimistic to wildly optimistic.
  7. Gramm, Jeff (2016), "1: Benjamin Graham versus Northern Principle", Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism, ISBN 978-0062369833
  8. Lowe, Janet (2007), "Meet Mr. Market", Warren Buffett Speaks: Wit and Wisdom from the World's Greatest Investor, Wiley, p. 126, ISBN 978-0470152621
  9. Peterson, Richard L. (2016), "Long-Term Patterns", Trading on Sentiment: The Power of Minds Over Markets, Wiley, pp. 151–153, ISBN 978-1119122760
  10. Lowe, Janet (1997), Value Investing Made Easy: Benjamin Graham's Classic Investment Strategy Explained for Everyone, McGraw Hill Professional, pp. 2–4, 113–115, ISBN 978-0070388642
  11. Ruble, Daniel Blake (2004), Common Sense with Uncommon Results: An Application of Graham-Buffett Value Investing Principles, University of Tennessee, Knoxville, retrieved August 23, 2019
  12. "Mr. Market", Course 504: Great Investors: Benjamin Graham, Morningstar, Inc., Investing Classroom: Stocks 500, 2015, retrieved August 23, 2019
  13. Walsh, Justyn (2008), Keynes and the Market: How the World's Greatest Economist Overturned Conventional Wisdom and Made a Fortune on the Stock Market, Wiley, pp. 76–78, ISBN 978-0470284964
  14. Tier, Mark (2006), "Meet Mr. Market", The Winning Investment Habits of Warren Buffett & George Soros, St. Martin's Press, ISBN 978-0749445034
  15. Hirschey, Mark (2001), Investments: Theory and Applications, Harcourt College Publishers, p. 438, ISBN 978-0030268878
  16. Buffett, Mary; Clark, David (2002), The New Buffettology: The Proven Techniques for Investing Successfully in Changing Markets That Have Made Warren Buffett the World's Most Famous Investor, Simon & Schuster, ISBN 978-0684871745
  17. Hunt, Andrew (2015), "Principle 3: Mr. Market", Better Value Investing: Improve Your Results as a Value Investor, Harriman House, ISBN 978-0857194749
  18. Hagstrom, Robert G. (1999), The Warren Buffett Portfolio, Wiley, pp. 143–145, ISBN 978-0471392644
  19. Miller, Jeremy C. (2016), "Mr. Market", Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor, HarperCollins Publishers, ISBN 978-0062415561
  20. Glassman, James K. (2002), The Secret Code of the Superior Investor: How to be a Long-term Winner in a Short-term World, Crown Business, pp. 58-60, ISBN 978-0812991086
  21. Kilpatrick, Andrew (September 1992), Warren Buffett: The Good Guy of Wall Street, Dutton, pp. 260-262, ISBN 978-1556113345
  22. Cunningham, Lawrence A. (2001), How To Think Like Benjamin Graham and Invest Like Warren Buffett, McGraw-Hill, pp. 3-5, ISBN 978-0071369923
  23. Prentis, Eric L. (2004), The Astute Investor, Prentis Business, pp. 329–331, ISBN 978-0975966006
  24. Westbrook, David A. (2015), "Efficiency Cannot Be Presumed", Out of Crisis: Rethinking Our Financial Markets, Routledge, ISBN 978-1594517273
  25. Cunningham, Lawrence A. (2004), What Is Value Investing?, McGraw Hill Professional, pp. 57–59, ISBN 978-0071429559
  26. Martin, Frederick K. (2011), Benjamin Graham and the Power of Growth Stocks: Lost Growth Stock Strategies from the Father of Value Investing, McGraw Hill Professional, pp. 255–257, ISBN 978-0071753890
  27. Penman, Stephen (2010), Accounting for Value, Columbia University Press, pp. 15–17, ISBN 978-0231151184
  28. Arffa, Robert C., ed. (2001), "Value Investing", Expert Financial Planning: Investment Strategies from Industry Leaders, Wiley, ISBN 978-0-471-39366-5
  29. Gerstein, Marc (February 3, 2010). "Mr. Market Is A Good Stock Picker". Forbes. Retrieved August 23, 2019.
  30. "Mr Market and you". Rediff.com. March 8, 2004. Retrieved August 23, 2019.
  31. Buffett, Warren (February 29, 1988), Chairman's Letter - 1987, Berkshire Hathaway, retrieved August 23, 2019
  32. Buffett, Warren (February 25, 1985), Chairman's Letter - 1984, Berkshire Hathaway, retrieved August 23, 2019
  33. Greenwald, Bruce C. N.; Kahn, Judd; Sonkin, Paul D.; van Biema, Michael (2004), "Warren Buffett", Value Investing: From Graham to Buffett and Beyond, Wiley, pp. 190–193, ISBN 978-0471463399, In what I think is by far the best book on investing ever written — The Intelligent Investor, by Ben Graham
  34. Wyatt, Elaine (1994), Financial Times - The Money Companion: How to Manage, Penguin, pp. 96–98, ISBN 978-0140243826
  35. Hagstrom, Robert G. (1999-04-02), The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy, Wiley, pp. 142-144, ISBN 978-0471247661
  36. Boroson, Warren (2001), "The Influence of Benjamin Graham: Mr. Market", J.K. Lasser's Pick Stocks Like Warren Buffett, Wiley, pp. 25-27, ISBN 978-0471397748
  37. Hirschey, Mark (2003), Tech Stock Valuation: Investor Psychology and Economic Analysis, Academic Press, pp. 122–124, ISBN 978-0123497048
  38. Baldwin, Adam (2015), Heroes and Villains of Finance: The 50 Most Colourful Characters in The History of Finance, Wiley, pp. 114–116, ISBN 978-1119038993

Further reading
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