Mr. Market: A Cautionary Tale of Investing Groupthink

This article is an excerpt from the Shortform book guide to "The Intelligent Investor" by Benjamin Graham. Shortform has the world's best summaries and analyses of books you should be reading.

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What is Mr. Market? How does Benjamin Graham use Mr. Market in The Intelligent Investor to help you understand the danger of groupthink?

Mr. Market is an allegory that Benjamin Graham introduced in The Intelligent Investor. Mr. Market is meant to serve as the popular opinion on stock trading, and Graham encourages you to think carefully about instances where you might encounter this.

Read more about the meaning of Mr. Market with examples.

What Is Mr. Market?

Say you own a piece of a business worth $1,000. Imagine a fellow named Mr. Market who is a manic-depressive sort of person and visits you once a day, asking to buy and sell your interest. 

  • When the market is up, he asks to sell another piece to you at exorbitant prices: $1,500, $2,000. 
  • When the market is down, he comes by asking to buy your stake for $600.

Should you go along with this odd person, feeling exactly what he feels at every moment and doing what he demands?

Of course not. You know the piece of business is worth $1,000. You’d maintain your own rationality and politely ask this oddly behaving person to leave your house.

(Shortform note: To make the analogy even more concrete, imagine Mr. Market quoting you the price of a hard asset, like your home or car,. If your house is worth $200,000 and someone comes by asking you to sell it for $100,000, would you? Likely not, because you expect the future value to rise again. The same thinking should apply to stocks.)

Yet countless traders behave as he demands they do. They buy when stocks are going up and sell when they have gone down.

You shouldn’t ignore him entirely, nor should you blindly follow whatever he tells you, but rather use his prices only when it is to your advantage. You are not obligated to trade with him.

Your Psychological Advantage

In his commentary, Zweig notes that your psychology is your advantage in the market. As an investor, you compete with lots of other traders, including professional money managers. In most dimensions, you are outclassed by professional money managers—they have more resources, people, and experience than you.

The one advantage you have over money managers is that you do not need to follow Mr. Market. Money managers do, because they represent the interests of people.

  • When the market rises, investors get greedy and put in more money, forcing money managers to buy more stocks (which drives price up more).
  • Likewise, when the market falls and investors withdraw money in a panic, money managers are forced to sell just as stocks are cheap.

This is essentially behaving as it demands. You do not need to suffer the same obligation.

Invert the News

One manifestation of Mr. Market is the way that financial news is commonly related. When stock prices go up, there is jubilation; when it falls, there is doom and gloom. These daily mood swings don’t really make sense—if you’re investing for an outcome 20 or 30 years from now, why should the movements on a single day (one ten-thousandth of your time span) make any difference?

In his commentary, Zweig proposes an interesting inversion of normal financial news.

  • When the stock market has fallen, frame this as the positive. “Stocks became even more of a bargain today, adding a 5% discount to its already steeply discounted price. This is an unprecedented buying opportunity for affordable stocks.” 
  • Likewise, when the market is raging to new heights, sound loud warnings. “Markets soared to dangerous heights today, with stocks at a 180% premium over their fair value. These stocks have become a certifiable rip-off and may get worse in the coming months.”

Inverting news this way may help you counter the natural effects of Mr. Market.

Mr. Market: A Cautionary Tale of Investing Groupthink

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Carrie Cabral

Carrie has been reading and writing for as long as she can remember, and has always been open to reading anything put in front of her. She wrote her first short story at the age of six, about a lost dog who meets animal friends on his journey home. Surprisingly, it was never picked up by any major publishers, but did spark her passion for books. Carrie worked in book publishing for several years before getting an MFA in Creative Writing. She especially loves literary fiction, historical fiction, and social, cultural, and historical nonfiction that gets into the weeds of daily life.

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