Mr. Market.
Graham asks you to imagine you own a stake in a private business with a very obliging partner named Mr. Market. Every day Mr. Market shows up at your door and quotes a price at which he will either buy your share from you or sell you more. The business has not changed. Only his mood has. The chart below is sixty trading days of Mr. Market’s moods, against an intrinsic value that never moves.
Chart 1 · The bid ledger
Sixty consecutive days. One company. One intrinsic value of $100.
The dashed line is what the business is worth. The gray line is what Mr. Market is willing to pay for it that day. Tan dots are the three lowest bids of the period; red rings are the three highest. Most days you do nothing. A handful of days are gifts.
The transaction goes both ways. The same line that hands you tan dots also hands you red rings. When Mr. Market is depressed, his bids are far below $100; when he is euphoric, they are far above. The intrinsic value never moves. Your job is to recognize which mood he is in and act accordingly — or, on most days, not at all. You are free to ignore him.
Chart 2 · The two moods
The same business, two different Mr. Markets.
Graham’s parable works because price is a daily reading of the marginal seller’s emotion, not a daily reading of the company’s health. The price is a question, not an answer.
Mr. Market depressed
“Take this thing off my hands. I’ll give you $44 for it. Everyone’s selling. The world is ending. I cannot bear to look at it another day.”
The company is the same as yesterday. The earnings are the same. The competitive position is the same. The only thing that has changed is the line of cars at the door, and the speed at which everyone wants out. This is when the math from the loss page works against the seller and for you.
Mr. Market euphoric
“Sell me your share. I’ll pay $139. Everyone’s buying. Don’t miss this. This time is different. The only direction is up.”
The company is the same as yesterday. The earnings are the same. The competitive position is the same. The only thing that has changed is what the marginal buyer is willing to pay. This is when the math from the safety page disappears, and you wait, or trim.
You are not obligated to trade with him. Mr. Market does not get insulted if you ignore him today. He will be back tomorrow with a different bid. Buffett’s addition to Graham’s parable was the observation that the more emotional Mr. Market gets, the larger the opportunity he hands you — provided you have done the work on the underlying value already, so that you recognize the gift when it arrives.