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August 19, 2018

Mr Market a Drunken Psycho: Warren Buffett


Legendary investor Warren Buffett,  the Sage of Omaha, recently referred to Mr Market as the “Drunken Psycho”. Aspiring value investors need to know who Mr Market is to understand why Warren Bufftett calls him a Drunken Psycho. Warren Buffett has in a letter to Berkshire Hathaway also called Mr Market the poor fellow with incurable emotional problems. The term Mr Market was coined by Benjamin Graham,  the father of value investing and the author of the famous book , The Intelligent Investor, a book widely referred to  as the bible of value investing. 

Benjamin Graham used the term to personify the behavior of the stock market. Here is how Wikipedia put it: “Benjamin Graham’s favorite allegory is that of Mr. Market, an obliging fellow who turns up every day at the shareholder’s door offering to buy or sell his shares at a different price. Often, the price quoted by Mr. Market seems plausible, but sometimes it is ridiculous. The investor is free to either agree with his quoted price and trade with him, or ignore him completely. Mr. Market doesn’t mind this, and will be back the following day to quote another price.

“The point of this anecdote is that the investor should not regard the whims of Mr. Market as a determining factor in the value of the shares the investor owns. He should profit from market folly rather than participate in it. The investor is advised to concentrate on the real life performance of his companies and receiving dividends, rather than be too concerned with Mr. Market’s often irrational behavior.”

Benjamin Graham, in his  parable about Mr Market, said: “Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Everyday he tells you what your interest is worth and further offers to buy you out or sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes to you seems to you a little short of silly.

“If you are a prudent investor or a sensible businessman will you let Mr. Market’s daily communications determine your view of the value of $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out  to him when he quotes you a ridiculously high price, and equally happy to sell to him when his price is low. But the rest of the time you will be wiser to form your own idea of the value of your holdings, based on full reports from the company about its operations and financial position.”

Benjamin Graham’s bottom line on Mr Market:  “Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he would be better off if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”

In his letter (dated February 29, 1988 for FY1987) to Berkshire Hathaway shareholders, Warren Buffett, the most famous disciple of Benjamin Graham,  called Mr Market “the poor fellow with incurable emotional problems”.

Warren Buffet went on to say: “Ben’s Mr. Market allegory may seem out-of-date in today’s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”?

“…In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.”

Recommended reading:

(1) The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) (Collins Business Essentials)

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013

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