Portfolio Managers • Advisers • Financial Planners










Mr. Market

Benjamin Graham offers investors an escape from price volatility. 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 favorite allegory is that of Mr. Market, an obliging fellow who turns up every day at the shareholder's door offering to buy or sell his shares at a different price. Often, the price quoted by Mr. Market seems plausible, but sometimes it is ridiculous. The investor is free to either agree with his quoted price and trade with him, or ignore him completely. Mr. Market doesn't mind and will be back the following day to quote another price. On most days, the price is reasonable and justified by the business's prospects. However, Mr. Market suffers from some rather incurable emotional problems. When Mr. Market is overcome by boundless optimism or bottomless pessimism, he will quote a price that, as Graham noted, "seems to you a little short of silly." One should not fall under Mr. Market's influence but rather learn to take advantage of him. No matter what, he will arrive the next day to make another offer.

An investor should not regard the whims of Mr. Market as the determining factor in valuing a company. An investor should determine the value of a stock rationally by concentrating on the operating performance of a company rather than Mr. Market’s behavior. He should profit from market folly rather than participate in it.

An investor should not regard the whims of Mr. Market as the determining factor in valuing a company. An investor should determine the value of a stock rationally by concentrating on the operating performance of a company rather than Mr. Market’s behavior. He should profit from market folly rather than participate in it.

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 acquiring shares of companies that you choose at prices you choose. Mr. Market’s judgment is formed more by mood swings than by rational thought, giving a wise investor additional opportunities.

Graham does not conclude from Mr. Market’s behavior that market fluctuations should be ignored. They can be valuable as an indicator that something is going wrong with the investment. However, a successful investor makes his own decision based on his own idea of value.

John Maynard Keynes expressed a similar concept known as a “Keynesian beauty contest”. Keynes claims, “Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”

Later in Chapter 12, Keynes adds, “These considerations should not lie beyond the purview of the economist. But they must be relegated to their right perspective. If I may be allowed to appropriate the term speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over enterprise. As the organization of investment markets improves, the risk of the predominance of speculation does, however, increase. In one of the greatest investment markets in the world, namely, New York, the influence of speculation (in the above sense) is enormous.”

Daniel Dower (2011)





1John Maynard Keynes, General Theory of Employment, Interest, & Money







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