Like many industries, Wall Street loves to use metaphors, and so today I thought it would be fun to visit a classic. Back in the late 1940s, investor/economist, Benjamin Graham, created an allegory called “Mr. Market”. In his classic 1949 book, The Intelligent Investor, Graham asks the reader to imagine that he is one of the two owners of a business, along with a partner called ‘Mr. Market’. The partner frequently offers to sell his share of the business or to buy the reader’s share, and this ‘partner’ is what today would be called manic-depressive, with his estimate of the business’s value going from very pessimistic to wildly optimistic. The reader is always free to decline the partner’s offer, since he will soon come back with an entirely different offer.

Since introducing ‘Mr. Market’ it has been cited many times in order to help explain major stock market fluctuations – the only reason for changes in stock prices are ‘Mr. Market’s’ emotions. For example, a rational person will sell if the price is high and buy if the price is low – however, that person would not sell BECAUSE the price has gone down or buy BECAUSE the price has gone up. Graham used this to note that it is importation to focus on the stock’s valuation through fundamental analysis. In fact, Chapter 8 of the book covers Mr. Market and (my favorite investor) Warren Buffett believes that this is the best part of the whole book.

The personification of the market is brilliant to explain its actions; Mr. Market is often described as having human behavioral manic-depressive characteristics. He is: 

  • Is emotional, euphoric, moody

  • Is often irrational

  • Offers that transactions are strictly at your option

  • Is there to serve you, not to guide you

  • Is in the short run a voting machine, in the long run a weighing machine.

  • Will offer you a chance to buy low, and sell high.

  • Is frequently efficient…but not always.

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