Mr. Market

Has the stock market been volatile lately?

Yes.

The stock market is made up of humans, who are emotional by nature.

Euphoric in good times, depressed in bad.

Also, irrational, biased, greedy and fearful.

So when Benjamin Graham published the Intelligent Investor in 1949, he penned one of the simplest, most important investments concepts, Mr. Market.

If you are not familiar with Mr. Market, he is Graham’s allegorical moody neighbour representing the stock market.

Mr. Market will show up at your door every day. Some days he’s happy and upbeat, other days he's downright miserable. Depending on his mood, he will offer you a price for the shares of any investment you own. Somedays the price he offers seems reasonable and others ridiculous. It’s up to you whether you want to trade with him. He takes no offence and always shows up the next day with a new price.

Let’s put this a simpler way.

Let's say Mr. Market only wants to buy iPhones.

Everyday he shows up at your doorstep, looking to buy your iPhone X. If he shows up and offers you $100 for your phone you would most likely laugh, say that's ridiculous and send him on his way.

He would smile, nod and say “no problem, see you tomorrow”.

The next day he shows up and offers you $700 for your iPhone. You take him a bit more seriously, however you are still not interested at this price. This goes on for several weeks until one day he shows up and offers to buy your iPhone for $2800.

Would you sell?

Most likely you would. Your thought process would go something like this. A new iPhone is worth somewhere around $1000, Mr. Market is offering me well above that, therefore I would sell. I can always head down to the Apple store, buy a new one and keep the profit.

What you weren’t thinking is “I better go out and buy another iPhone at $2800 because the price keeps rising”.

Likewise, on the day he showed up and offered $100, you weren’t thinking “geez, maybe I should sell my iPhone before the price goes down even further”. Rather, you had a general idea or range of what the phone was worth.

To put it another way, if I was willing to sell you my iPhone X for $100 would you:

A. Buy it because you know its worth more than that, or

B. Be worried that your iPhone was only worth $100.

This answer is most likely A.

This concept tends to get cloudy and almost reversed in the real stock market. People get excited when the market is rising, a lot of times wanting to buy more shares at higher prices simply because they are going up. Furthermore, when share prices are falling its the natural tendency to be fearful and worried that they will continue to fall, thus wanting to sell.

Most days our job is to not get caught up in the irrational behaviour and whims of the market.

So the next time Mr. Market shows up with some ridiculous offer, you can either take advantage of his offer, or politely decline, ignore the feelings of greed or fear, and simply send him on his way.

“In the short run, the market is a voting machine but in the long run it is a weighing machine." — Ben Graham

Disclosure: The information on this site should not be considered advice or solicitation to buy or sell any securities. Please see my Disclosure Page for a full disclaimer.