In 1949, Benjamin Graham described an imaginary business partner. It remains the clearest explanation of stock prices anyone has produced.
Not a model. Not a formula. A short story about a man with a mood disorder.
The Parable
Imagine you own a small stake in a private business — say it cost you $1,000.
One of your partners is a man named Mr. Market. He is extraordinarily obliging. Every single day, without fail, he tells you what he thinks your stake is worth, and offers either to buy you out at that price or to sell you more of his own on the same terms.
Sometimes his valuation seems reasonable, given what you know about how the business is doing.
Often it does not. Mr. Market lets his enthusiasm or his fears run away with him, and the number he proposes is, in Graham’s phrase, a little short of silly.
The business itself has not changed. It has the same customers, the same products, the same prospects it had yesterday. Only Mr. Market’s mood has changed.
His Two Moods
When Mr. Market is euphoric, he sees only good things ahead. On those days he quotes a very high price — partly because he fears you might buy him out and take gains he believes are coming.
When he is despondent, he sees nothing but trouble for the business and the world. On those days he quotes a very low price, terrified you might sell your stake to him.
And here is his most convenient characteristic: he does not mind being ignored.
Refuse to deal with him today and he is not offended. He returns tomorrow with an entirely new number, having forgotten yesterday’s completely.
The Line That Matters
Graham told his students that it is Mr. Market’s pocketbook that is useful to them, not his wisdom.
He is not there to tell you what your business is worth. He is there to offer you a transaction, which you are free to accept, decline, or exploit.
You might be delighted to sell when he names an absurdly high price. You might be delighted to buy when his price is unreasonably low.
The rest of the time — which is most of the time — you are better off forming your own view and letting him talk.
Where it goes wrong is falling under his influence. Graham’s warning was blunt: an investor who allows himself to be stampeded or unduly worried by unjustified market declines is perversely transforming his basic advantage into a basic disadvantage.
The advantage is that you never have to trade. Converting that into a source of anxiety is a remarkable own goal.
The Test That Makes It Obvious
Jason Zweig offers a way of seeing this that is difficult to argue with.
Think about your home, or a home you might own.
You have some sense of its value. Now imagine a man standing outside shouting a new price at it every sixty seconds, all day, every day.
At 11:04 he shouts a number 3 percent lower than yesterday. Would you rush out and sell?
By 1:37 the number has changed again. Did you check? Would it have altered anything if you had?
And here is the real question: by not knowing the minute-to-minute price of your house, have you somehow prevented its value from rising over the next twenty years?
Obviously not.
Yet this is precisely the relationship most people have with their investments — and the shouting man is treated as a source of information rather than noise.
What It Looks Like When People Listen
A documented example.
On March 17, 2000, shares in Inktomi Corporation reached a high of $231.625. Since listing in June 1998, the stock had gained roughly 1,900 percent. In the few weeks since December 1999 alone, it had nearly tripled.
The company sold internet search software, and its revenue was growing fast — around $36 million in the final quarter of 1999, more than it had made in the whole of the previous year.
At that price, Mr. Market valued the business at approximately $25 billion.
He was overlooking something. Inktomi was losing money — around $6 million in the most recent quarter, $24 million in the year before that, and $24 million the year before that. Across its entire corporate life, it had never produced a profit.
Then Mr. Market’s mood turned, as it always does, and the price collapsed.
Nothing about the underlying business changed on the way up or the way down at anything like the speed the price did. What changed was how people felt about it.
The Evidence on Paying Attention
You might think more information would protect you from this. The research suggests otherwise.
In experiments in the late 1980s, psychologist Paul Andreassen, working at Columbia and Harvard, gave one group of investors frequent news updates about their holdings and another group none at all.
The group receiving constant news earned roughly half the returns of the group that heard nothing.
Not because the news was wrong. Because it prompted action, and the action was costly.
This is the same finding we covered in why watching your money too closely costs you, arriving from a different direction. Mr. Market is more persuasive the more often you listen to him.
The Part That Feels Wrong
Here is the conclusion most people resist.
If you are still in the accumulation phase — contributing money monthly, with years or decades ahead — falling prices are good news.
Lower prices mean your regular contribution buys more. The further and longer prices fall while you keep buying, the more you end up owning, and the better the eventual outcome, provided you continue.
The instinct is to feel that a falling market is something happening to you. For a net buyer, it is closer to a sale.
Nobody feels distressed when groceries get cheaper. The reaction is different only because a price is attached to something you already hold, and loss aversion does the rest — as covered in the same article.
Buffett’s version, learned directly from Graham: be fearful when others are greedy, and greedy only when others are fearful.
Ninety Years, No Progress
Writing in the 1940s, Graham observed that security analysis had advanced considerably in his lifetime, but in one important respect there had been essentially no progress at all.
Human nature.
He and David Dodd had already described the psychology of the late 1920s, when the doctrine took hold that good stocks were sound investments regardless of the price paid — which they characterized as a way of dressing up a gambling impulse as investment.
They also predicted the cycle would repeat. The chastened investor of a downturn, they wrote, tends not to stay chastened. In the next period of prosperity the public reliably forgives, and particularly forgets.
Read that alongside the Inktomi episode seventy years later, or any enthusiasm since, and the continuity is uncomfortable.
Mr. Market has not become more rational. There is no reason to expect he will.
What to Actually Do
The practical response is not to become unemotional. It is to arrange things so your emotions have fewer opportunities to act.
Automate contributions. Money that moves on a schedule is not money you decide about while feeling something. It also means you automatically buy more when prices are low, without needing courage.
Check rarely. Quarterly is plenty. Annually is defensible. Turn off price alerts entirely — they exist to generate engagement, not to help you.
Write down why you bought. When the price falls, you can check whether your reasoning changed or only the number did. Usually only the number did, which is precisely the information you need.
Decide in advance what would make you sell. If the answer is “a large enough fall,” you are not investing on analysis — you are following Mr. Market. The distinction is the subject of investing versus speculating.
Own something broad. The parable is easier to live by when you hold a diversified fund rather than individual companies, because there is less to second-guess. Our guide to index funds covers the reasoning.
The Test
Graham suggested a way to know whether you have understood this.
Would you be comfortable owning your investments if the market stopped quoting prices altogether for the next ten years?
If yes, you own things you believe in and the quotes are genuinely optional.
If the thought is alarming, it is worth asking what you are actually relying on. Because the price is not the value — it is one anxious man’s opinion, and he will have a different one tomorrow.
The Bottom Line
Mr. Market shows up every day with a number. The number reflects his mood, not the health of what you own.
His pocketbook is useful. His judgment is not.
You can trade with him when the price suits you, and ignore him entirely the rest of the time. He will not mind, and he will be back tomorrow regardless.
Ninety years on, that is still the most useful thing anyone has said about owning investments.
This article is general information, not personalized investment advice. All investing involves risk, including possible loss of principal.
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