Mr. Market's Neighborhood

By
Jerome V. Bruni, President
equity market

Benjamin Graham created the fictional character "Mr. Market" and used him as a metaphor for the sometimes irrational behavior of investors.  In Graham's story about Mr. Market, the reader is asked to envision Mr. Market as his volatile business partner.  Mr. Market, who has a history of emotional instability, periodically offers to sell his half of the business (or to buy the reader's half) at wildly gyrating prices, even though there are no fundamental changes in the business' inherent value.  The point of Graham's story, of course, was to illustrate that just because other investors offer to buy or sell stocks (i.e., ownership in businesses) at high or low prices, it doesn't necessarily mean that there is anything inherently terrific or worrisome with the businesses in question.  In short, astute investors would be wise to take advantage of Mr. Market's volatility, not to heed his constantly shifting opinions.

In Hollywood, virtually any successful movie is followed by a sequel, and in the Hollywood spirit I have created a Mr. Market sequel—"Mr. Market's Neighborhood."  In this story, imagine that Mr. Market moves into the house next to yours.  Suppose further that Mr. Market has the unusual habit of each day offering to buy your home—at a price of his choosing.  Basically, Mr. Market rises early each morning, quickly determines what he thinks your house is worth, writes that amount on a note, and then places his note on your front door.  As you leave your home each day you see Mr. Market's offer, and given his chronic instability, the price he quotes changes dramatically from one day to the next.  On Monday, Mr. Market might offer $1,000,000 for your home, yet on Tuesday the price he quotes could be only $750,000.  On Wednesday his price may be back to $1,000,000, but on Thursday his offer could plunge to only $500,000.  Perhaps on Friday Mr. Market's note would show a price of only $99.95!  (He might have visited Wal-Mart the prior evening.)  Do you think you'd be especially worried when Mr. Market wrote a very low figure?  Chances are that you wouldn't—for good reason.  If you really wanted to sell your home, and if you were willing to list it and take the time necessary to find a qualified and appreciative buyer, you would be able to sell your home for a fair price.  Of course, if for some reason you felt that you absolutely had to sell your home within minutes, then Mr. Market's low price could be a cause for concern.

It's the same with investing in stocks.  If you feel the need to sell your stocks within minutes, then you should be concerned if current marketplace prices seem unrealistically low.  However, if your stocks have a far greater inherent (or intrinsic) value, and if you can afford to patiently wait until markets regain their senses, then the stock prices one sees today should not be cause for worry.  Indeed, to the extent that an investor can spot good values, has patience and has funds available to invest, unrealistically low stock prices not only do not present a problem, they actually present an opportunity!

In short, whether Mr. Market represents a volatile business partner, an eccentric neighbor or the mass of other investors, the astute investor is best advised to take advantage of Mr. Market's emotional instability, not to heed it.