Benjamin Graham’s Mr. Market
Who is Mr. Market?
According to Benjamin Graham, Mr. Market is a fictional character who shows up every day at an investor’s office and offers to buy or sell shares at various prices. Often, Mr. Market’s quote sounds good but in reality, his quote is crazy. The investor has the option to agree to trade with him or ignore him. Mr. Market doesn’t take anything personally; he will be back the next day with a different quote.
Mr. Market was “born” in Graham’s classes at Columbia University to explain stock market fluctuations. Mr. Market suggests it is best to ignore fluctuations when making a decision about buying or selling a stock. The character also appears in Graham’s 1949 book, The Intelligent Investor.
What is Benjamin Graham’s message?
Graham’s point is that the investor should not consider Mr. Market as having the ability to determine the value of shares the investor holds. Rather than paying attention to Mr. Market, the investor is better off focusing on facts such as a company’s earnings and dividends, not what Mr. Market is saying.
The use of Mr. Market helps Graham illustrate his concept that true investors pay attention and form their own ideas about the value of their investments based on facts, not on how the stock market is performing.
Graham suggests the prudent investor is one who bases his decisions on full reports from the company that details its operations and financial position.
Graham advises investors to analyze financial statements, management and competitive advantages, competitors and markets. Look at both historical and current data to help make a financial forecast. This will help investors predict probable price targets, project business performance, evaluate its management and internal business decisions and calculate credit risk.