Saturday, 6 June 2015

Who is the Mysterious "Mr. Market"?

For anyone who is acquainted with Value Investing, they would have heard the term "Mr Market" mentioned at least a couple of  times. 

Who is this "Mr Market" and what has he got to do with investing? 

"Mr Market" is an imaginary character who is introduced by Benjamin Graham in an attempt to explain the irrationality and daily gerrations of the stock market. Graham asked us to imagine that we have a business partner who is attempting to buy our business or sell us his business every day. 

Every day, Mr Market will quote us a price for the business. However, Mr Market is manic depressive which means that he will have wild mood swings daily. On days when he is feeling extremely optimistic, he will offer an exuberance price for the businesses that we are holding. Likewise, to buy a business from Mr Market on such days, he will want us to pay a hefty sum for it. On the other hand, on days when Mr Market is feeling depressive, he will offer a low price for the businesses that we are holding and for the ones that he is selling to us as well. Luckily, we are free to ignore or accept Mr Market's offer whenever we feel like it and Mr Market will just come back every day with a new offer. 

I believe that from this analogy, Graham is trying to teach us to ignore the daily fluctuations of the stock market and only to focus on the underlying fundamentals and valuation of the businesses that we are holding. 

To put in the words of Benjamin Graham: "In the short term, the market is a voting machine but in the long run, it is a weighting scale." This is to remind myself daily, to prevent getting caught up in chasing performance for the short term and to have a long term view of holding quality businesses.

The Journey To Financial Freedom,

1 comment:

  1. Mr. Market is sick, hahaha just kidding.

    Something we can't control is Mr. Market, I'm glad I don't have a son who acts like Mr. Market :)