Mr. Market is a concept first introduced by Benjamin Graham in his book, The Intelligent Investor, in chapter 8. Graham is known as the father of “value investing.” He is also famous for being a mentor to Warren Buffett. Graham is an important person in the investing world—especially for beginners—as his ideas establish a specific mindset.
Most of the time, the price of a stock is accurate to its objective value. But sometimes prices are not right; they are indeed wrong. Mr.Market does not always price stocks in a way an appraiser or a private buyer would value a business. Instead, when a stock is going up, he happily pays more than their objective value and when they are going down he is desperate to dump them for less than their future true worth.
The most prominent example of this is the tech bubble. The valuation of many companies went from nothing to billions. Some of these companies had never earned a dollar. In many cases, the revenue simply wasn’t there yet.
A great example is Microsoft, one of the highest valued companies in the world . The average revenue growth given by the company from 1990 to 2019 was approximately 14% CAGR (compound annual growth rate). During the euphoric period of the Dotcom Bubble, the revenue was approximately $22 – $25 billion, but the market cap went to $600 billion. The valuation of almost all the internet companies was insane. Mr. Market was happy to buy Microsoft stock at any price whatsoever. The stock went down 50% in 3 years (2000-2003), because the Dotcom Bubble burst. It took 14 – 15 years for Microsoft stock to break even, but sales were growing on a year-over-year basis
Would you be willing to allow a certifiable lunatic to come by at least five times a week to tell you that you should feel exactly the way he feels? Would you ever agree to be euphoric just because he is miserable, just because he thinks you should be? Of course not. You’d insist on your right to take control of your own. But when it comes to financial lives, Mr. Market tells you how to feel and what to feel despite the obvious facts, from time to time, it can get nuttier than Charles Manson.
Mr. Market’s only job is to provide you with prices; it’s our job is to decide whether or not to take advantage of it or to act on the prices. We do not have to trade with him just because he constantly begs us to.
By refusing to let Mr. Market be your master, you transform him into your servant.
One of Graham’s most powerful insights is this:
Basic advantage means the investor has the luxury of being able to think for him or herself, not to follow Mr. Market blindly. When asked what keeps most individuals from succeeding, Graham had a concise answer:
If we own a house, other real estate properties, or farmland, do we call our broker every two hours to find a quote on it? Of course not. But in the case of the stock market, where we can check the quote every minute, we tend to do so. Does the value of a company really change in an hour? No. Do the company’s sales change? Not much in an hour. Does its profit change? Not really. SO why do we drive ourselves mad by checking our stocks every hour?
The stock market is a long term game. Do people, in general, flip real estate daily? Then why on earth do people think they can flip stocks or trade constantly? Shares are just small pieces of business ownership; it’s the most important thing to understand for a investor. Short-term news may affect the short-term price, but company growth and valuation always create the long-term price of a stock.
One of the present examples of the insanity of Mr. Market: There’s a company listed on NYSE call Service Corporation International and they are in the business of providing funeral goods and services, as well as cemetery property and services. The business has a huge moat. But due to the coronavirus crash, with practically all other stocks, Service Corporation International also went down. This makes no sense from a logical standpoint. If COVID-19 was supposedly going to kill a huge number of people, the stock should have gone up. This is simply an example of Mr. Market’s insanity.
One of the ways to make big money in the market is to overcome the psychological effects on the brain which Mr. Market tends to instill. One of the ways to neutralize psychological effects is to consider profit and losses. Pay less attention to the news and current events when it comes to stocks. Because psychological studies show that the pain of a financial loss is more than twice as intense as the pleasure of an equivalent gain. And we have to think long-term when it comes to the stock market.
About the Author:
Sahil writes more investing articles over at Financial Wizard India.