Benjamin Graham’s Mister Market Allegory

Benjamin Graham's Mister Market AllegoryBenjamin Graham's allegory of Mister Market teaches us one of the elementary bases of value investing. This allegory helps explain some of the fundamental questions that every potential investor asks. Why does the stock market oscillate? How should we behave in the face of these sudden movements in prices? Benjamin Graham answers these questions with this allegory that we analyze in this article.

Benjamin Graham, the smart investor

value investing. He was the teacher of many of the greatest investors in history, such as Warren Buffett, and was the author of “the smart investor”, I consider by many, including myself, as the bible of value investing. In other articles we will delve into the figure of Graham and his books, but I wanted to make it clear that we are talking about a heavyweight in the investment world, who created a way of seeing the stock market that was a revolution that continues today.

To explain how the stock market behaves, Ben Graham used an allegory in which he turns this financial market into a person with a psychological problem that affects his emotional stability. The investor's mission is to capitalize on these mood swings.

Mr. Market's bipolar disorder

Mr. Market bipolar disorderMister Market is an investor, a shareholder in many companies, who buys and sells shares on a daily basis. The problem with the protagonist of this story is that he suffers a Bipolar disorder, also known as manic-depressive psychosis. This disease has the consequence that Mr. Market has sudden mood swings that affect his way of trading his shares.

Some days you wake up very happy and optimistic, so you buy stocks at very high prices, while on others you are depressed and excessively pessimistic, selling your shares at very low prices. These mood swings can last for days, months, or even years, but in the long run you always have some period when you return to normal and come to your senses.

How to profit Mr. Market?

Despite the fact that the companies that Mr. Market buys and sells have large fluctuations in price caused by their emotional instability, the businesses that are behind these actions have a much more constant performance, being oblivious to these mood swings.

We, as investors, must be aware of these mood swings to take advantage of them. For this, we have to be prepared by doing the following:

  • Select quality companies in which we may be interested in investing. Of course, always in the long term, since Mr. Market can take years to come to his senses.
  • Analyze these companies and calculate their real value (intrinsic value), to know when to buy or sell based on a rigorous analysis of companies.

Once we have selected the companies in which we are interested in investing and have assigned them an intrinsic value, we will be prepared to buy shares in times of pessimism (when Mr. Market sells below the value we have calculated) and to sell them in times of exaggerated euphoria and optimism.

Of course, it is necessary not to lose your calm and not be carried away by pessimism or the euphoria of the markets. This, which seems easy, but is actually very complicated, is one of the keys to being successful in the stock market. We must not forget the great phrase of Warren Buffett:

"Be cautious when others are greedy, be greedy when others are cautious."

Benjamin Graham and his lessons on market inefficiencies have made it possible for followers of his teachings and value investing to become the most successful investors in history. The smart investor It was published in 1.949, more than 60 years ago, but its teachings are more alive than ever.