The concept of “Mr. Market,” the famous metaphor for the stock market created by Benjamin Graham, the father of value investing, can help you with that second important skill. It will forever change the way you look at stock prices and, if employed correctly, increase your investment returns noticeably.
Enthusiasm and Fear in One Market Metaphor
In his classic book, The Intelligent Investor, Graham captured the highs and lows of the stock market in one often irrational business partner.
Freedom of Choice
The best parts of this entire metaphorical arrangement are: 1) you are free to ignore Mr. Market if you don’t like his price and 2) he will always offer you a new price on the next trading day. As long as you have a strong conviction about what the company is really worth, you will be able to astutely accept or reject Mr. Market’s offers. The choice is always yours. And all the while, you should understand, the underlying value of the company may not have fundamentally changed—only Mr. Market’s mood has. If you find he is feeling gloomy and offering his stake in a company for less than it is worth, take advantage of him and load up on shares.
Emotional Detachment
By thinking of stock prices as offers from an emotionally unstable business partner, you can free yourself from the emotional attachment most investors feel toward rising and falling stock prices—and from the sometimes irrational decisions that emotional attachment can lead to. Before long, when you are looking to buy a stock, you will unemotionally welcome falling prices. And you will unemotionally invite rising stock prices when you are looking to sell your existing securities.
