Mr. Market

Introduced in the 1987 Letter, and borrowed from his mentor Ben Graham, Mr. Market is an allegory used to describe the behavior of the stock market and how an investor should respond to it.

🎭 The Story

Imagine you own a small share of a private business with a partner named Mr. Market.

• Every day, Mr. Market appears and names a price at which he will either buy your interest or sell you his.
• Even though the business you both own may have stable economic characteristics, Mr. Market’s quotations are anything but.
• Mr. Market is a "manic-depressive": Some days he is euphoric and can see only favorable factors; on those days, he names a very high price. Other days he is depressed and can see nothing but trouble; on those days, he names a very low price.

🧠 The Lesson

Buffett uses Mr. Market to emphasize that the market is there to serve you, not to guide you.

1. Emotional Distance: You must not let Mr. Market’s moods dictate your own. You should only pay attention to him when his price is "mouth-watering" (too low to buy or too high to sell).
2. Intrinsic Value: Your judgment of the business’s value should be based on its earnings and assets, not on what Mr. Market says it is worth today.
3. The Advantage of the Private Investor: Unlike a corporate manager who might feel pressured by share price, the individual investor can simply ignore Mr. Market for years if his prices are uninteresting.

🎃 The Cinderella Warning

In the 1987 Letter, Buffett adds a critical warning about falling under Mr. Market's influence. Like Cinderella at the ball, an investor must leave before the clock strikes twelve, or their portfolio will turn into "pumpkins and mice." He notes that while Mr. Market has a useful pocketbook, he has no useful wisdom.

🃏 Key Quotes

"Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful." — 1987 Letter

"If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy." — 1987 Letter (Buffett quoting a common poker saying to illustrate the need to understand business value over market noise)

📉 Relation to the 1987 Crash

Buffett published this shortly after the "Black Monday" crash of October 19, 1987. He used it to explain why Berkshire shareholders should not be panicked by a 20% drop in a single day, as the underlying value of Berkshire's businesses (See's, GEICO, etc.) hadn't changed at all.

🔗 Connections

• Source: 1987 Letter
• Entity: Ben Graham
• Concept: Margin of Safety
• Concept: Intrinsic Value