Graham's Mr. Market Allegory

Any investor who want to be a right value investor must read and understand what meant by two most famous value investing allegories from the 'Father of Value Investing' Benjamin Graham. His most admired allegories "Mr. Market" and "Margin of Safety", attracted huge number of investors world wide and now it is your turn to understand both. I have already posted an article on the allegory ""Margin of Safety"", some times back, and here is the simplified idea on the second one "Mr. Market".

Both these allegories found in Graham's great investing book "The Intelligent Investor", the only one and most admired value investing classic, which strengthen value investing skills to countless number of people. So we will start with the second allegory "Mr. Market". What is "Mr. Market"? Before moving to further explanation, we will have a look on the allegory presented by Benjamin Graham with his investment classic "The Intelligent Investor".(You can even read my review on Intelligent Investor here)

Let us close this section with something in the nature of a parable. Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them.

Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly. If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

Did you understood what he meant from the above parable? Yes it is little difficult but very easy at the same time. Read below the explanation from Graham itself:

The true investor is in that very position when he owns a listed common stock. He can take advantage of the daily market price or leave it alone, as dictated by his own judgment and inclination. He must take cognizance of important price movements, for otherwise his judgment will have nothing to work on. Conceivably they may give him a warning signal which he will do well to heed—this in plain English means that he is to sell his shares because the price has gone down, foreboding worse things to come.

In our view such signals are misleading at least as often as they are helpful. Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

If you still have not understood the meaning, I will explain the same in one sentence "Never consider market up and down to take buying or selling decisions. Instead, focus on value than price"

There are some important points a value investor keep in mind when reading above:

1. "The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.

2. “Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.”

3. "The same criteria should logically be applied in testing the effectiveness of a company’s management and the soundness of its attitude toward the owners of the business."

How do you feel after reading this? To get more better idea, read this article too, a bonus. Did you understood the internal meaning fully or required further clarification?

I love to hear from your mouth as a comment here.