The story of Mr. Market

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Benjamin Graham, the father of value investing and Warren Buffet’s friend and teacher wrote about the kind of mental attitude that would be most useful for investment success.

Imagine that we own part of a business – a privately held one – and have a partner called Mr. Market.

Each day, Mr. Market comes into our office and names a price where he will sell his share of the business to us, or buy our shares of the business.

Our business might be in something quite normal – a restaurant, retailer, a professional services firm.

Mr Market, on the other hand, is anything but normal.

Some days he is euphoric, wildly optimistic, and the price he gives us is high because by selling to you he may lose out on future gains.

At other times he is down and depressed – unable to see anything but problems ahead – and names a very low price because he doesn’t want us to dump our shares on him.

The other thing about Mr. Market is that he comes back day after day.

He doesn’t take offence if we ignore him for a while – he’s always willing to offer a price to buy and to sell.

So, the question is would we sell to Mr Market at his prices? Should we be up when he is up and down when he is down?

That would seem very odd in a business we owned.

We would know the value of the business – how much it makes and is likely to make. We understand the costs and profits.

So, if we were to go through all the hassle of selling, we’d only do it when we felt like it.

We’d let the results of the business tell us how well we were doing rather than rely on Mr. Market’s opinion.

Mr. Market is there to serve us – to allow us to buy and sell when we want – and not to guide us and tell us when to do something.

Benjamin Graham also said – In the short run, the market is a voting machine but in the long run it’s a weighing machine.

The story of Mr. Market is a useful one to keep in mind when trying to make our own investment decisions.

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