FP Article 13

Who Is Mr. Market?

by Rajen Devadason

If you were a prudent investor or a sensible businessman, you would not let Mr. Market's daily communication determine your view of the value of your interest in the enterprise.

Benjamin Graham

Yet that's not to say Graham didn't recognise the existence of emotional overreactions on the part of most stock market punters. Graham was wise in many ways.

Nonetheless, it seems unlikely when his seminal book Security Analysis was published in 1934, while America was still in the grip of the Great Depression, that Graham fully understood the far-reaching impact his masterpiece would have upon generations of fundamental investors. Another outstanding book Graham wrote later in his life was The Intelligent Investor.

Despite those important works, he may well be most famous for a metaphorical figure he conjured up for use in his classes on investment science at New York City's Columbia University. That teaching device was christened Mr. Market by Graham.

This allegorical figure was a powerful teaching device because it allowed Graham to guide his students - among them the 20-year-old Warren Buffett who entered Columbia in 1950 - to an almost tangible visualisation of the ludicrous mis-pricing extremes the stock market sometimes succumbs to.

Modern students of investment will quickly realise that those who believe in the applicability of Mr. Market in our capital arenas stand diametrically opposed to hardcore proponents of the Efficient Market Theory.

Personally, I believe Graham's approach is the wiser one to adhere to - if you're a patient retail investor who doesn't need to worry about the short-term knee-jerk reactions of institutional players who often suffer from a bad case of 'lemming-itis'.

The best way to understand who Mr. Market is would be to imagine him the way Graham portrayed him to his students:

As an equal partner in a business you own with him.

Unfortunately, your partner is a manic depressive! That means he suffers from rather extreme (and decidedly unpredictable) mood swings. The more politically correct way of referring to this condition today would be to say he suffers from bipolar disorder.

I'm not too concerned about political correctness, so let's just call a spade a spade! Mr. Market is an over-reactive sap who has extreme mood swings!

Each morning when he walks through the door of your jointly owned business you never know if he's going to wax eloquent about how wonderful the world is and quickly offer to buy out your share at an incredibly high price, or if he's going to drag himself into your office utterly convinced the world is about to end... so you might as well buy out his share for a pittance.

Graham taught his students a profound truth: Mr. Market is not smart, but he is ever so rich!

If you're currently still developing your personal money mind and need a framework to help guide your long-term investment decisions, you could do a whole lot worse than researching Graham's wisdom further.

If that's what you'd like to do, those book titles I mentioned earlier would be a great place to begin your study of the man and his ideas: Security Analysis and The Intelligent Investor.

A word of warning, though, you might want to begin with the later book first. Security Analysis can be tough going. It is worth wading through though... eventually!

Happy hunting, reading, studying, thinking, learning and ultimately, I hope, prospering.

© Rajen Devadason