Essays of Warren Buffett Chapter 1: Mr. Market

"In the short run, the market is a voting machine, but in the long run, it is a weighing machine." — Warren Buffett (quoting Ben Graham)

The Investment Context

Warren Buffett has never written a traditional investment book. Instead, his wisdom is dispensed through his annual letters to Berkshire Hathaway shareholders. In The Essays of Warren Buffett, Lawrence Cunningham organizes these letters to present Buffett's core philosophy.

The absolute foundation of Buffett's approach is that buying a stock is buying a piece of a business. You are not buying a chart, a ticker symbol, or a lottery ticket. Furthermore, Buffett relies heavily on his mentor Benjamin Graham's allegory of "Mr. Market"—an emotionally unstable business partner who offers to buy your share or sell you his share every single day. Mr. Market's prices are driven by panic and euphoria, not underlying value.

The Wall Street Translation

Wall Street views the stock market as a casino where you try to outguess the other players. Buffett views it as a vehicle to acquire cash-generating businesses.

1. The Folly of Forecasting: Buffett explicitly ignores macroeconomic forecasts. Wall Street spends billions trying to predict interest rates and GDP growth. Buffett argues that these are unknowable variables. He focuses entirely on knowable variables: the competitive advantage of the specific business he is buying.
2. Exploiting Volatility: Wall Street defines volatility as risk. Buffett defines volatility as opportunity. If a great business drops 30% in price because "Mr. Market" is having a panic attack about the broader economy, the business is not riskier; it is actually safer to buy at the lower price.
3. The Ownership Mentality: A true business owner doesn't check the value of their farm every 10 minutes. If you buy a stock, you should be perfectly happy if the stock exchange closes for five years, provided the business continues to generate cash.

Actionable Trading Rules

1. Stop Checking the Price: If you have done your research and bought a wonderful business, stop checking the stock price every day. Judge your success by the quarterly operating earnings of the company, not the daily mood swings of Mr. Market.
2. Buy the Panic: When the broader market crashes due to an external shock (a pandemic, a banking crisis), Mr. Market will offer you incredible businesses at ridiculous discounts. You must have the cash and the courage to buy when everyone else is terrified.
3. Write Down the Business Case: Before buying any stock, write down exactly how the company makes money, why it will make more money in 10 years, and why customers will never leave. If you cannot explain the business to a smart teenager, you do not understand it well enough to buy it.