Lesson 3 of 7
Mr Market, and how to use him
Graham's Mr Market offers you a price every day. Take it or leave it, and never mistake his mood for the business's value.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Mr Market is Graham's name for the party who quotes you a price every day, whether or not the business has changed.
- He swings between euphoric and fearful, and the business he is quoting moves far less than his mood does.
- His price is useful. His mood is not something to imitate, and you are never obliged to trade with him.
Graham's Mr Market is a moody partner who shows up daily and offers to buy your share or sell you his, at whatever price his mood decides that day. Nothing obliges you to trade with him, and that refusal costs you nothing. The allegory comes from chapter 8 of The Intelligent Investor, and it still describes the market you can look up this afternoon.
A year of quotes around one estimate of value
- Estimated value
- Quoted price
Show the numbers
| Estimated value | Quoted price | |
|---|---|---|
| Jan | $100 | $95 |
| Feb | $100 | $60 |
| Mar | $100 | $80 |
| Apr | $100 | $105 |
| May | $100 | $140 |
| Jun | $100 | $115 |
| Jul | $101 | $90 |
| Aug | $101 | $70 |
| Sep | $102 | $100 |
| Oct | $102 | $130 |
| Nov | $103 | $110 |
| Dec | $104 | $120 |
He offers, he never advises
Buffett's 1987 letter restates the allegory after the October crash. Use Mr Market's price when it suits you, and never take his opinion of the business as guidance. He is described as manic-depressive, euphoric on some days and fearful on others. The more extreme his mood, the more useful he becomes to somebody who is not taking cues from him. Following his mood instead of using his price is the one way the allegory turns against you.
Take him or leave him
You never have to trade with him. Ignoring today's quote costs nothing, because he is back tomorrow with a new one whether or not you traded on the last. That patience is an advantage an individual investor has: nobody grades you every quarter. Nobody requires you to answer his offer at all, on any given day.
Why the allegory still holds
Buffett's 1987 letter takes on the objection that efficient markets and beta made the allegory out of date, and keeps it. One caveat holds all the same: when interest rates move, what future cash is worth today moves too, with nothing new in the filings. Not every swing is mood.
Nothing in the filings moved
The business behind the quote can have economic characteristics that barely change from one month to the next, while its price swings from euphoric to fearful and back. Most of a swing this size is evidence about Mr Market's temperament, not about the business.
Check yourself
In Graham's allegory, what is Mr Market's job?
- To tell you what the business is worth
- To offer a price every day, which you may take or leave
- To buy back shares whenever the price is low
Show the answer
Answer: B.
He is an offer, not an opinion. Taking his price is optional, and ignoring it costs nothing.A business is quoted 40 percent below your estimate in one month and 40 percent above it three months later. What does that most likely reflect?
- The business's value more than doubled in three months
- Mr Market's mood, rather than a change in the business
- New information disclosed in a filing
Show the answer
Answer: B.
Buffett's 1987 letter makes the same point: the quote is Mr Market's mood on a given day, and a stable business can sit under a very unstable price.What does Buffett's 1987 letter say you should take from Mr Market?
- Whichever mood he is in that day
- His price, never his opinion
- His forecast for the business next quarter
Show the answer
Answer: B.
His price can be useful. His view of the business is not information about the business.Sources
- Graham, The Intelligent Investor, revised edition 1973, chapter 8, on Mr Market and the investor's own temperament toward price swings.
- Berkshire Hathaway shareholder letter, 1987, restating the allegory after the October crash.
What this leaves out
- The monthly quotes and the value line are round invented numbers, not any company's actual history.
- Real filings do move a business's value over a year. This lesson isolates the case where the quote moves far more than the business does.
- Some price moves are real changes in value: a higher interest rate lowers what future cash is worth today.
- Nothing here is advice about any security.