Sunday, April 30, 2006

Graham's Mr. Market

Ben Graham, the guru of value investing , long
ago described the mental attitude toward market
fluctuations that is most conducive to investment success. He
said that you should imagine market quotations as
coming from a remarkably accommodating fellow named Mr.
Market who is your partner in a private business.
Without fail, Mr. Market appears daily and names a price
at which he will either buy your interest or sell
you his. Even though the business that the two
of you own may have economic characteristics that
are stable, Mr. Market's quotations will be anything
but. For, sad to say, the poor fellow has
incurable emotional problems. At times he feels euphoric
and can see only the favorable factors affecting the
business. When in that mood, he names a very high buy-sell
price because he fears that you will snap up his
interest and rob him of imminent gains. At other times
he is depressed and can see nothing but trouble
ahead for both the business and the world. On these
occasions he will name a very low price, since he is
terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He
doesn't mind being ignored. If his quotation is
uninteresting to you today, he will be back with a new one
tomorrow. Transactions are strictly at your option. Under
these conditions, the more manic-depressive his
behavior, the better for you. But, like Cinderella at
the ball, you must heed one warning or everything
will turn into pumpkins and mice: Mr. Market is there
to serve you, not to guide you. It is his
pocketbook, not his wisdom, that you will find useful. If
he shows up some day in a particularly foolish mood,
you are free to either ignore him or to take
advantage of him, but it will be disastrous if you fall
under his influence. Indeed, if you aren't certain that
you understand and can value your business far better
than Mr. Market, you don't belong in the game. As they
say in poker, "If you've been in the game 30 minutes
and you don't know who the patsy is, you're the

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