Mr. Market
Graham's moody business partner who quotes a price every day, and why you don't have to take it.
FinanceGraham ch. 8About 5 min: 3 reading, 2 practiceUpdated
General education, not financial advice.
- Retell Graham's Mr. Market parable
- Tell timing from pricing
- Explain why market prices are there to use or ignore, not to obey
The Intelligent Investor: Benjamin Graham's ideas: lesson 8 of 24
- Graham ch. 1
- Investment versus speculation 4 min
- Graham ch. 2
- Inflation and the investor 4 min
- Graham ch. 3
- A century of market history 5 min
- Graham ch. 4
- The defensive investor's portfolio 4 min
- Graham ch. 5
- Defensive investors and stocks 4 min
- Graham ch. 6
- What the enterprising investor avoids 4 min
- Graham ch. 7
- What the enterprising investor does 5 min
- Graham ch. 8
- Mr. Market 5 min
- Living with fluctuations 5 min
- Graham ch. 9
- Investing in funds 5 min
- Graham ch. 10
- The investor and his advisers 4 min
- Graham ch. 11
- Security analysis for the lay investor 4 min
- Graham ch. 12
- Per-share earnings and their traps 4 min
- Graham ch. 13
- Comparing four companies 4 min
- Graham ch. 14
- The defensive investor's screen 4 min
- Graham ch. 15
- The enterprising investor's screen 7 min
- Graham ch. 16
- Convertibles and warrants 6 min
- Graham ch. 17
- Four extreme case histories 7 min
- Graham ch. 18
- Eight pairs of companies 7 min
- Graham ch. 19
- Shareholders, managements and dividends 5 min
- Graham ch. 20
- Margin of safety (1): the idea 5 min
- Margin of safety (2): in practice 7 min
- Graham appendix 1
- The superinvestors of Graham-and-Doddsville 6 min
- Graham postscript
- Graham today 7 min
Try first
You haven't learned this yet, so guess. Guessing before you read helps the explanation stick. Nothing here is scored.
Already know this? Take a 3-question check and skip ahead.
Get all three right and the lesson is marked done.
Pairs with Graham, The Intelligent Investor, revised edition with commentary by Jason Zweig (HarperBusiness, 2003), chapter 8, "The Investor and Market Fluctuations" (first part)
What it is
Imagine you own a small share of a private business, bought for 1,000. One of your partners, Mr. Market, is very obliging: every day he tells you what he thinks your share is worth, and offers either to buy you out or to sell you more at that price.
Sometimes his price is sensible. Often his enthusiasm or his fears run away with him, and his price is close to silly. Graham asks: would a sensible owner let Mr. Market's daily mood decide what the business is worth? Only if you agree with him, or want to trade with him. You can sell to him when his price is absurdly high and buy from him when it's absurdly low. The rest of the time you'll do better to judge value yourself, from the company's reports on its business and finances.
That is Graham's view of the stock market: prices are offers, not verdicts.
Graham also separates two ways to try to profit from price swings:
- Timing: forecasting where the market will go, and buying or selling ahead of it. Graham expects this to end in speculation.
- Pricing: buying when shares are quoted below fair value and selling when they rise above it, or at least making sure you never pay too much.
Quick check
Tap an answer to check it.
In Graham's parable, what should you do when Mr. Market quotes a silly low price?
- Mr. Market's price is an offer, not a verdict
Show answer
Consider buying from him; you don't have to sell. You can use his moods or ignore them.
Why it matters
Prices can swing far more than the businesses behind them. Graham's view: for a true investor, price swings have one real meaning. They offer a chance to buy wisely when prices fall sharply and to sell wisely when they rise a great deal. The rest of the time, pay attention to the dividends and to how the companies are doing, not to the market.
Worked example
Zweig's example of Mr. Market's moods, from the dot-com era (company not named here):
- March 2000: an internet software company that had never made a profit traded at about 231.63 a share; the market valued it at about 25 billion.
- September 2002: the same shares closed at 0.25, a total value under 40 million, though the business was still bringing in about 113 million a year in revenue.
- December 2002: another company agreed to buy it for 1.65 a share, more than six times that September price.
The business hadn't changed nearly as much as the price. Mr. Market's mood had.
Common mistake
Letting the daily price tell you how to feel. Zweig points out that the average contribution to U.S. workplace retirement (401(k)) plans fell from 8.6% of pay in 1999, when stocks were soaring, to 7% in 2002, after three years of falling prices: the cheaper stocks got, the less eager people were to buy them.
Key terms
- Mr. Market
- Graham's moody partner who quotes a price every day
- timing
- trying to forecast market moves and act ahead of them
- pricing
- buying below fair value, selling above it, or at least never overpaying
- fair value
- what a business is worth, judged from its earnings and assets
Practise the key terms
Tap a card to turn it over. 4 cards.
| Front | Back |
|---|---|
| Mr. Market | Graham's moody partner who quotes a price every day |
| timing | trying to forecast market moves and act ahead of them |
| pricing | buying below fair value, selling above it, or at least never overpaying |
| fair value | what a business is worth, judged from its earnings and assets |
Practice
Sort it
Timing or pricing?
Selling because you expect the market to fall next month
A forecast of market direction.Show answer
Timing. A forecast of market direction.
Buying because the price is well below your estimate of value
Price compared with value.Show answer
Pricing. Price compared with value.
Refusing to buy because the price is far above value
Never overpaying.Show answer
Pricing. Never overpaying.
Buying because a chart suggests a rise is coming
A forecast, not a valuation.Show answer
Timing. A forecast, not a valuation.
Quick quiz
Tap an answer to check it.
According to Graham, what do price swings mean for the true investor?
- That's letting Mr. Market decide for you
Show answer
Chances to buy when prices fall sharply and sell when they rise a lot; otherwise, watch the business. Use the swings; don't obey them.
In Zweig's example, what had changed most between March 2000 and September 2002?
- Its revenue was still about 113 million a year
Show answer
The market's mood about the company. The business changed far less than the price.
In short
- Mr. Market quotes a price daily; you can trade with him or ignore him.
- Prices are offers, not verdicts on value.
- Timing (forecasting) leads to speculation; pricing (value versus price) is the investor's approach.
- Watch the businesses, and use extreme prices when they come.
Mastery check
Answer without looking back. Score 80% or more and the lesson is marked done. Your result is kept only in this browser.
Check yourself
Answer in your head first, then open the answer. Nothing is saved.
What two things can you do with Mr. Market's daily offer?
Show answer
Trade with him when his price suits you (sell high, buy low), or ignore him.
What's the difference between timing and pricing?
Show answer
Timing forecasts market moves; pricing compares the price with what the business is worth.
What should an investor watch most of the time, according to Graham?
Show answer
The dividends and the operating results of the companies, not the market.
Further reading
- Benjamin Graham, The Intelligent Investor, revised edition with commentary by Jason Zweig (HarperBusiness, 2003), chapter 8.
- On this site: Fund returns versus investor returns.
Finished? Mark it done to fill in your leaf on the Finance map.