Course 504: Great Investors: Benjamin Graham
Mr. Market
In this course
1 Introduction
2 The Principles of Value Investing
3 Intrinsic Value
4 Mr. Market
5 Margin of Safety
6 The Bottom Line

If all investors based their investment decisions on rational and conservative estimates of intrinsic value, it would be very difficult to make money in the stock market. Fortunately, the participants in the stock market are humans subject to the corroding influence of emotions. Investors are frequently given to bouts of over-optimism and greed, which causes stock prices to be bid up to very high levels. These same investors are also vulnerable to excessive pessimism and fear, in which case, stock prices are driven down substantially below intrinsic value.

Graham offers intelligent investors an escape from the swift tides of greed and fear. He wrote, "Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market."

Graham's attitude toward market fluctuations, of course, makes perfect sense. Can you imagine waiting to purchase a television until its price went up, but refusing to buy the same television when it went on sale? Strange as it seems, behavior that is blatantly irrational in most aspects of life is commonplace in the stock market.

Graham succinctly captured his liberating philosophy toward market fluctuations in the famous parable of Mr. Market. Graham said to imagine you had a partner in a private business named Mr. Market. Mr. Market, the obliging fellow that he is, shows up daily to tell you what he thinks your interest in the business is worth.

On most days, the price he quotes is reasonable and justified by the business's prospects. However, Mr. Market suffers from some rather incurable emotional problems; you see, he is very temperamental. When Mr. Market is overcome by boundless optimism or bottomless pessimism, he will quote you a price that, as Graham noted, "seems to you a little short of silly." As an intelligent investor, you should not fall under Mr. Market's influence, but rather you should learn to take advantage of him.

The value of your interest should be determined by rationally appraising the business's prospects, and you can happily sell when Mr. Market quotes you a ridiculously high price and buy when he quotes you an absurdly low price. The best part of your association with Mr. Market is that he does not care how many times you take advantage of him. No matter how many times you saddle him with losses or rob him of gains, he will arrive the next day ready to do business with you again.

The lesson behind Graham's Mr. Market parable is obvious. Every day the stock market offers investors quotes on thousands of businesses, and you are free either to ignore or take advantage of those prices. You must always remember that it is not Mr. Market's guidance you are interested in, but rather his wallet.

Next: Margin of Safety >>


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