Mr. Market is an allegory created by investor Benjamin Graham to describe what he believed were the irrational or contradictory traits of the stock market and the risks of following groupthink. [1] [2] [3] Mr. Market was first introduced in his 1949 book, The Intelligent Investor . [4] [5] [1]
Graham asks the reader to imagine that they are one of the two owners of a business, along with a partner called Mr. Market. [7] [8] [2] The partner frequently offers to sell their share of the business or to buy the reader's share. [9] [10] [6] This partner is what today would be called manic-depressive, with their estimate of the business's value going from very pessimistic to wildly optimistic. [2] [3] [11] The reader is always free to decline the partner's offer, since they will soon come back with an entirely different offer. [12] [13] [14]
Mr. Market is often identified as having human behavioral manic-depressive characteristics, [2] [3] [11] he:
This behavior of Mr. Market allows the investor to wait until Mr. Market is in a 'pessimistic mood' and offers low sale price. [15] [16] [17] The investor has the option to buy at that low price. [1] [5] [16] Therefore, patience is an important virtue when dealing with Mr. Market. [1] [5] [16]
Since its introduction in Graham's 1949 book The Intelligent Investor , it has been cited many times to explain that the stock market tends to fluctuate. [19] [2] [20] The example makes it clear that the sole reason for the change in price is Mr. Market's emotions. [21] [22] [6] A rational person will sell if the price is high and buy if the price is low. [23] [24] [25] He would not sell because the price has gone down or buy because the price has gone up. [26] [27] [28] Graham instead believes that it is important to focus on whether the stock valuation of a company is reasonable after calculating its value through fundamental analysis. [4] [29] [30] Warren Buffett has frequently quoted Graham's 1949 book, The Intelligent Investor. [18] [5] [31] Chapter eight covers Mr. Market and Warren Buffett thinks that this is the best part of the book. [5] [32] Buffett described it as "by far the best book on investing ever written". [32] [33]
Elaine Wyatt wrote in her 1994 book Financial Times - The Money Companion, "Before you begin your trek into the nitty-gritty of investing, you should meet Mr. Market. Mr. Market is the creation of Benjamin Graham, who in 1949 wrote a book called The Intelligent Investor. Graham's influence has reached every corner of the financial world". [34] Janet Lowe observed in her 1997 book, Value Investing Made Easy, "James Grant is such a devotee of Graham that he named his book Minding Mr. Market after a parable Graham often used". [10] In his 1999 work, The Warren Buffett Portfolio, author Robert G. Hagstrom commented, "The well-known story of Mr. Market is a brilliant lesson on how and why stock prices periodically depart from rationality." [35] Hagstrom observed that the Mr. Market parable, "is a lesson learned well by Buffett, that he in turn urges all others to embrace." [18] Hagstrom pointed out, "It is easy to see why Warren Buffett has, on several occasions, shared the story of Mr. Market with Berkshire Hathaway shareholders." [18]
Writing in his 2001 book, J.K. Lasser's Pick Stocks Like Warren Buffett, author Warren Boroson called Benjamin Graham's Mr. Market concept, "a famous metaphor he invented". [36] Mark Hirschey commented in 2003 in his work Tech Stock Valuation, "In his classic book, The Intelligent Investor, Benjamin Graham ... describes the relationship between the intelligent long-term investor and market fluctuation using his now famous Mr. Market metaphor." [37]
In his 2015 book Heroes and Villains of Finance, author Adam Baldwin wrote that, "Famously, Graham used the analogy of 'Mr. Market' in order to portray his value investing strategy". [38] In his 2016 work on shareholder activism, Dear Chairman, author Jeff Gramm observed, "The Intelligent Investor is most famous for the parable of Mr. Market and the concept of 'margin of safety'." [7]
Warren Edward Buffett is an American businessman, investor, and philanthropist who currently serves as the chairman and CEO of Berkshire Hathaway. As a result of his investment success, Buffett is one of the best-known investors in the world. As of June 2024, he had a net worth of $135 billion, making him the tenth-richest person in the world.
Berkshire Hathaway Inc. is an American multinational conglomerate holding company headquartered in Omaha, Nebraska. Founded in 1839 as a textile manufacturer, it transitioned into a major conglomerate starting in 1965 under the management of chairman and CEO Warren Buffett and vice chairman Charlie Munger.
Benjamin Graham was a British-born American financial analyst, investor and professor. He is widely known as the "father of value investing", and wrote two of the discipline's founding texts: Security Analysis (1934) with David Dodd, and The Intelligent Investor (1949). His investment philosophy stressed independent thinking, emotional detachment, and careful security analysis, emphasizing the importance of distinguishing the price of a stock from the value of its underlying business.
Value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis. Modern value investing derives from the investment philosophy taught by Benjamin Graham and David Dodd at Columbia Business School starting in 1928 and subsequently developed in their 1934 text Security Analysis.
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Philip Arthur Fisher proponents of the growth investing strategy.
The Intelligent Investor by Benjamin Graham, first published in 1949, is a widely acclaimed book on value investing. The book provides strategies on how to successfully use value investing in the stock market. Historically, the book has been one of the most popular books on investing and Graham's legacy remains.
A margin of safety is the difference between the intrinsic value of a stock and its market price.
Security Analysis is a book written by Benjamin Graham and David Dodd. Both authors were professors at the Columbia Business School. The book laid the intellectual foundation for value investing. The first edition was published in 1934 at the start of the Great Depression. Graham and Dodd coined the term margin of safety in the book.
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An undervalued stock is defined as a stock that is selling at a price significantly below what is assumed to be its intrinsic value. For example, if a stock is selling for $50, but it is worth $100 based on predictable future cash flows, then it is an undervalued stock. The undervalued stock has the intrinsic value below the investment's true intrinsic value.
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Owner earnings is a valuation method detailed by Warren Buffett in Berkshire Hathaway's annual report in 1986. He stated that the value of a company is simply the total of the net cash flows expected to occur over the life of the business, minus any reinvestment of earnings.
"The Superinvestors of Graham-and-Doddsville" is an article by Warren Buffett promoting value investing, published in the Fall, 1984 issue of Hermes, Columbia Business School magazine. It was based on a speech given on May 17, 1984, at the Columbia University School of Business in honor of the 50th anniversary of the publication of Benjamin Graham and David Dodd's book Security Analysis. The speech and article challenged the idea that equity markets are efficient through a study of nine successful investment funds generating long-term returns above the market index. All these funds were managed by Benjamin Graham's alumni, following the same "Graham-and-Doddsville" value investing strategy but each investing in different assets and stocks.
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One of the greatest stock market writers and thinkers, Benjamin Graham, put it this way. Imagine that you are partners in the ownership of a business with a crazy guy named Mr. Market. Mr. Market is subject to wild mood swings.
Mr. Market - you should view market prices as if being in business with a manic-depressive partner. Repeatedly your partner offers to either sell or buy shares at prices strongly linked with their mental state at each time, ranging everywhere from highly pessimistic to wildly optimistic.
{{cite book}}: CS1 maint: others (link)In what I think is by far the best book on investing ever written — The Intelligent Investor, by Ben Graham