Graham's Most Famous Story
In The Intelligent Investor, Benjamin Graham introduced Mr. Market—a brilliant parable that every investor should internalize. It's the key to maintaining emotional discipline in volatile markets.
Imagine you own a share of a business worth $1,000. You have a partner named Mr. Market who comes to your door every day offering to buy your share or sell you his share.
Mr. Market's Emotional Swings
Some days, Mr. Market is euphoric. The sun is shining, business is booming, and he offers you $1,200 for your share. Other days, he's depressed. Storm clouds gather, doom is everywhere, and he'll sell you his share for just $700.
The key insight: Mr. Market's price has nothing to do with the actual value of the business. It reflects only his emotional state that day.
Mr. Market does not always price stocks the way an appraiser or a private buyer would value a business. Instead, when stocks are going up, he happily pays more than their objective value; when they are going down, he is desperate to dump them for less than their true worth.
— Benjamin Graham
Mr. Market Is Your Servant, Not Your Guide
Most investors let Mr. Market dictate their emotions. When he's euphoric, they feel rich and buy more. When he's depressed, they panic and sell. This is exactly backwards.
The intelligent investor uses Mr. Market, not the other way around. When Mr. Market offers crazy low prices, you buy. When he offers crazy high prices, you sell (or do nothing). The rest of the time, you ignore him entirely.
Buffett's Application
Warren Buffett, Graham's most famous student, built his fortune by taking this parable seriously. He's famous for being greedy when others are fearful and fearful when others are greedy.
During the 2008 financial crisis, while everyone else panicked, Buffett invested billions in Goldman Sachs, Bank of America, and other companies at fire-sale prices. Mr. Market was terrified; Buffett was buying.
Be fearful when others are greedy and greedy when others are fearful.
— Warren Buffett