Who Is Mr. Market?
Benjamin Graham, the father of value investing, created the character “Mr. Market” to explain stock market behavior to his students. He described Mr. Market as an emotionally unstable business partner who appears every day offering to buy or sell shares at different prices. Sometimes his prices are wildly optimistic; at other times, they are excessively pessimistic.
The key takeaway is simple: Mr. Market is your servant, not your guide. Instead of following his moods, investors should take advantage of irrational offers only when they align with a careful valuation of the underlying business.
Buffett’s Take on Mr. Market
Warren Buffett, one of Graham’s most successful students, has repeatedly emphasized the importance of this concept. In March 1989, as the stock market soared, Buffett warned against irrational exuberance:
We have no idea how long the excesses will last, nor do we know what will change the attitudes of the government, lender, and buyer that fuel them. But we know that the less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.
This highlights Buffett’s investment philosophy: when the market is euphoric, be cautious; when fear dominates, look carefully for opportunity.
Lessons from the Late 1990s Market Bubble
During the late 1990s, investors became obsessed with technology and internet stocks, creating a speculative bubble. Berkshire Hathaway’s stock price, which peaked at $80,000 in mid-1998, fell to nearly half that value by March 2000. Many doubted Buffett’s strategy, but he remained committed to his principles.
In his 2001 annual report, Buffett reflected on the bubble’s collapse:
The Great Bubble ended on March 10, 2000… On that day, the NASDAQ hit its all-time high of 5,132. That same day, Berkshire shares traded at $40,800, their lowest price since mid-1997.
Despite the decline in its market price, Berkshire Hathaway’s book value continued to grow. This reinforced a central value-investing lesson: stock-price movements do not always reflect changes in a company’s intrinsic worth.
Buffett’s Biggest Regret: Not Selling Overpriced Stocks
Even the Oracle of Omaha has investment regrets. In hindsight, Buffett admitted that he should have sold some of Berkshire’s larger holdings during the technology bubble, when their valuations had become inflated:
I made a big mistake in not selling several of our larger holdings during the Great Bubble. If these stocks are fully priced now, you must wonder what I was thinking four years ago when their intrinsic value was lower and their prices far higher: So do I.
This offers another useful lesson for investors: extreme market optimism can be an opportunity to reduce or exit positions that trade far above intrinsic value.
Will an Undervalued Stock Eventually Rise?
Investors often wonder how long it takes for an undervalued stock to reach its true worth. Buffett once posed this question to Graham, who responded with a timeless principle:
In the short run, the market is a voting machine; in the long run, it is a weighing machine.
In other words, short-term prices are often driven by popularity and sentiment, while long-term results are determined by business performance and economic value.
Key Takeaways for Investors
- Do not let emotions dictate investment decisions. Mr. Market is irrational; use that irrationality to your advantage.
- Be cautious during euphoria and alert during panic. Greed can create overvaluation, while fear can create opportunity.
- Value matters more than short-term trends. Over time, business quality and intrinsic value matter more than daily price movements.
- Know when valuation has become excessive. A disciplined investor should consider taking profits when price materially exceeds value.
Final Thoughts
The stock market will always be unpredictable and driven by cycles of greed and fear. Investors who treat Mr. Market as a servant rather than a guide can make decisions based on value, patience, and financial prudence instead of emotion.
The market, like the Lord, helps those who help themselves.
Written by: Warren Buffett Speaks - Wit and Wisdom from the World's Greatest Investor : Janet Lowe