Mr. Market at 75: Meaning, Lessons, and Warren Buffett

What Is Mr. Market?

Used as an allegory, Mr. Market is an imaginary investor devised by Benjamin Graham and introduced in his 1949 book, The Intelligent Investor. In the book, Mr. Market is a hypothetical investor who is driven by panic, euphoria, and apathy (on any given day), and approaches his investing as a reaction to his mood, rather than through fundamental (or technical) analysis.

Modern interpretations would describe Mr. Market as manic depressive, randomly swinging from bouts of optimism to moods of pessimism.

Understanding Mr. Market

Investor and author Benjamin Graham invented Mr. Market as a clever means of illustrating the need for investors to make rational decisions about their investment activities instead of allowing emotions to play a deciding role. Mr. Market teaches that although prices fluctuate, it is important to look at the big picture (fundamentals) rather than reacting to temporary emotional responses.

Greed and fear are now well-accepted hallmarks of advanced capital market systems. The herd behavior of these markets and the individuals populating them can at times gravitate to certain stereotypes. Mr. Market is one such archetype.

Graham is also well-known for his most successful real-life student: legendary multibillion-dollar value investor Warren Buffett. Buffett, an ardent disciple of Graham, is a frequent student of The Intelligent Investor, particularly Chapter 8, where Graham describes Mr. Market. Buffett has even gone on to consider the book the best book on investing ever written.

Mr. Market Lessons

Mr. Market is willing to constantly buy or sell a stock based on whether it has recently gone up or down. Yet these actions are based on the emotion of recent events, and not on sound investing principles.

Graham, and the disciples who follow him, believe that investors are better off assessing the value of stocks through fundamental analysis, and then deciding whether the prospects of a company warrant a purchase or sale of the security.

Because Mr. Market is so emotional, that trait will offer up opportunities for diligent investors to enter and exit at favorable times. When Mr. Market gets too pessimistic, valuations on good stocks will be favorable, allowing investors to purchase them at a reasonable price relative to their future potential. When Mr. Market is overly optimistic, this may provide a good time to sell the stock at a valuation that is unjustified.

Mr. Market and Warren Buffett

Warren Buffett was an apprentice of the teachings of Graham, and has told his followers he loves The Intelligent Investor.

Buffett buys stocks and companies for the long haul, seeking out investments with strong growth, and tries to buy them at a reasonable stock price. This doesn’t mean that the stock has recently dropped. If a company continues to grow over time, even though the stock price rises and falls, as long as that company keeps growing, the stock price should rise over time.

One example is Apple Inc. (AAPL). The company fits within Buffett’s criteria for growth, as well as being a company that has an economic moat, which means it can likely continue to do well going forward despite potential competition. By the end of 2017, Buffett’s Berkshire Hathaway company owned more than 664 million shares of Apple (split-adjusted). That total had increased further by the first quarter (Q1) of 2022, with the company owning more than 911 million shares.

From 2017 to mid-2022, Apple’s stock had significant ups and downs. It had multiple pullbacks of 7% or larger, but overall managed to rally, later reaching an all-time closing high of $198.11 in late 2023. At the start of 2017, the stock was trading near $40 (prices adjusted for splits). All the while, Buffett’s stock position in the company grew. The objective of the investment was based on solid fundamentals, and not on price fluctuations to which Mr. Market was hyper-reactive. Even though large sell-offs were a period of pessimism for Mr. Market, to Buffett, they were an opportunity to buy stocks on sale.

It should be noted that companies change over time; therefore, this is not a recommendation to buy or sell anything. It is an example of how even as prices fluctuate, investors using a Graham (or Buffett) type methodology will tend to stick with their stock picks through the ups and downs, assuming the long-term outlook is still favorable.

The Bottom Line

Mr. Market is the classic stereotype of the typical investor, one who is given to trading based on emotions, such as fear and greed, rather than investing for the long term using research to discover fundamentals. Mr. Market was devised by legendary investor and author Benjamin Graham in his 1949 book The Intelligent Investor, to contrast with the author’s own main investing philosophy of value investing.

More than anything, Mr. Market is a lesson in what not to do when trading and investing. Mr. Market is prone to fits and starts based on emotions and is usually the one who sells at the lows and buys at the highs. Mr. Market is a friend to the financial media when they are seeking an explanation for current market moves and there is no other obvious cause.