The Intelligent Investor Chapter 2: Mr. Market

"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." — Benjamin Graham

The Investment Context

In Chapter 8 of the book, Graham introduces "Mr. Market," arguably the most brilliant allegory in the history of finance.

Graham asks you to imagine that you own a small share in a private business. One of your partners is a man named Mr. Market. Every single day, Mr. Market knocks on your door and tells you what he thinks your share is worth. He offers to either buy your share or sell you an additional share at that exact price.

The catch is that Mr. Market is emotionally unstable. Some days he is wildly euphoric and quotes ridiculously high prices. Other days he is deeply depressed and quotes terrifyingly low prices.

The Wall Street Translation

The average retail investor lets Mr. Market dictate their emotions. When Mr. Market is euphoric and prices are high, the amateur buys. When Mr. Market is depressed and prices crash, the amateur panics and sells.

1. Market Quotes are for Your Convenience: You do not have to answer Mr. Market's knock. If his price is unreasonably high, you can sell to him. If his price is unreasonably low, you can buy from him. If his price is fair, you can simply ignore him and go back to work. He will return tomorrow with a new price.
2. Price vs. Value: Mr. Market's daily quotes have absolutely nothing to do with the underlying intrinsic value of the business. The intrinsic value changes slowly over years as the company generates cash. Mr. Market's quotes change by the second based on news headlines and fear.
3. Volatility is an Advantage: Academic finance teaches that volatility is a risk to be feared. Graham teaches that volatility is the value investor's greatest weapon. Without a manic-depressive Mr. Market, you would never be able to buy great companies at steep discounts.

Actionable Trading Rules

1. Stop Checking Your App: If you own a portfolio of solid, cash-generating businesses, looking at your brokerage app every day serves no purpose other than to let Mr. Market agitate you. Check your portfolio quarterly.
2. Reverse Your Emotional Response: Train yourself to feel joy when the stock market crashes. A crash is simply Mr. Market showing up at your door, deeply depressed, offering to sell you his wonderful businesses at a 40% discount.
3. Never Let the Market Tell You What You Are Worth: If a stock you own drops 20% in a week, the business did not lose 20% of its value. Only the price changed. Rely on your own fundamental analysis, not the market's manic pricing.