Meet Ben Graham’s Mr. Market, It Aint Always Pretty

Meet Ben Graham’s Mr. Market, It Aint Pretty

As you probably already know, the stock market is off to a bit of a rough start this year.

Currently the S&P 500 is down about 7% YTD and the Nasdaq composite is down about 11% YTD. Volatility in prices has also increased, with stocks down 1.5% one day, up 1.5% the next, and then back down the following day.

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The most confusing part of these movements is the fact that the economy still seems to be on stable ground. Unemployment is down, wages are rising, and – apart from energy and mining companies – most businesses are still reporting healthy demand for their products and services.

It would seem that financial markets have, in a way, become slightly detached from economic reality. Just take a look at the headlines in the WSJ over the past several months: as much as I love the WSJ, the newspaper’s headlines every day seem to be some variation of either “Stocks Gain on Oil Price Rally” or “Stocks Sink on Fear of Oil Glut”. Sometimes these two headlines even appear on the same day – one in the morning and one in the afternoon!

This correlation between the total stock market and oil prices certainly seems silly, especially since the energy sector accounts for less than 7% of the total stock market – and less than 6% of the United States’ total GDP.

So, what’s an intelligent value investor to do? Are we heading toward a recession? Should you dump your stocks and get out now, before it gets worse?


I’m not recommending that you sell your stocks. However, I’m also not recommending that you don’t sell your stocks. That’s your decision. But it’s a decision that ultimately depends on what the intrinsic value of your stocks are – not what the current market price is.

As Benjamin Graham wrote in Chapter 7: The Investor and Marketing Fluctuations of The Intelligent Investor:

[N]ote this important fact: The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.

Jason Zweig notes that “this may well be the single most important paragraph in Graham’s entire book. In these 113 words Graham sums up his lifetime of experience. You cannot read these words too often; they are like Kryptonite for bear markets. If you keep them close at hand and let them guide you throughout your investing life, you will survive whatever the markets throw at you.”

Ben Graham’s Mr. Market – MEET MR. MARKET

Mr. Zweig is very right, of course. You cannot read Graham’s words too often. It’s hard, though, to memorize 113 words.

So instead, let me introduce to you Ben Graham’s Mr. Market.

Ben Graham’s Mr. Market
Ben Graham’s Mr. Market

Mr. Market is a parable that Ben Graham used in his teachings and that’s found it’s way into the heart of value investing. Mr. Market helps us remember the difference between market price and intrinsic value:

Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form you own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

The true investor is in that very position when he owns a listed common stock. He can take advantage of the daily market price or leave it alone, as dictated by his own judgment and inclination… Basically, price fluctuations have only one significant meaning for the true investor. They provided him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention… to the operating results of his companies.

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Ben Graham’s Mr. Market - WARREN BUFFETT ON MR. MARKET

Warren Buffett has also talked about Mr. Market. As always, Buffett shows off his wittiness and his ability to clearly explain any topic in this passage from the 1987 Berkshire Hathaway Shareholder Letter:

Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Ben Graham’s Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.

…[A]n investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.

Ben Graham’s Mr. Market - SUMMARY

It’s foolish to think that all stock price declines are merely the result of the market being fearful. Often, a decline in share price can be warranted. But remember, in the short-run the stock market is a a voting machine; in the long-run the stock market is a weighing machine.

Stock prices will fluctuate day-to-day. But over many years, stock prices will reflect the true intrinsic value of the underlying business. In today’s market environment, it’s especially important to remember this fact – and to always think of Mr. Market.

Remember, Mr. Market has incurable emotional problems – Buffett once even referred to Mr. Market as a “drunken pscycho“. Sometimes he’s happy, sometimes he’s depressed. But he doesn’t mind being ignored, and he’ll always be back tomorrow to quote you a new price. So let Mr. Market serve you and not guide you. Take advantage when he quotes you an attractive price and ignore him the rest of the time. Keep this in mind, and you will survive whatever the marke

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Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…