Value Investing Blog

Mr Market - Your Manic Depressive Friend

Mr. Market is a fictitious character described by the father of value investing, Benjamin Graham, in his influential book The Intelligent Investor. This metaphor for the stock market will radically change the way you look at investing.

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Mr. Market is a fictitious character described by the father of value investing, Benjamin Graham, in his influential book The Intelligent Investor. This metaphor for the stock market will radically change the way you look at investing.

The story is this: Every single day a guy named Mr. Market offers you stocks for a certain price. You then have the option to buy, sell or do nothing. It doesn’t matter to Mr. Market what you decide to do, because he will be back with a new quote the next day anyway.

However, Mr. Market is a manic depressive guy. When he is in a good mood, he gets greedy and quotes ridiculously high prices, but when he is feeling depressed and fearful, he is willing to sell you the same stocks for rock bottom prices.

What Benjamin Graham tried to point out with this metaphor is that the price of a stock is primarily determined by emotions rather than facts. The prices Mr. Market quotes you on a daily basis therefore say little about how well the underlying company is actually performing. He does not offer you guidance, he simply pitches opportunities and then you can decide whether to act on it or not.

So how can you apply this to your own investment strategy? Well, Graham teaches us to profit from market folly rather than participate in it. You can take advantage of Mr. Markets manic depression by buying stocks when he is depressed and selling to him when he is manic and optimistic. If the prices that Mr. Market quotes are reasonable, just sit still and wait for a better offer. He’ll be back tomorrow.

 

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