If you’ve read about investing, then you may have heard of ‘Mr Market’. But who is he? And should you pay attention to him? Let’s explore.
Where does Mr Market come from?
‘Mr Market’ was coined by influential British investor Benjamin Graham in his 1949 book “The Intelligent Investor”.
Graham popularised ‘value investing’. This refers to determining the true value of a stock without relying on its current market price.
His book proposed a theory that stocks can be undervalued and that predicting growth is possible. It’s the reason why Graham’s followers are more likely to be active rather than passive investors. For more on this, see our article on active vs passive investing.
As a result of his work, Graham has been praised by Warren Buffett, one of the most successful investors of all time. Buffett was a former student of Graham’s during his time studying at Columbia University.
Who is Mr Market?
Now we know where the term ‘Mr Market’ originated from, let’s look at who he is.
Mr Market is a term – still in existence today – that refers to an imaginary investor with irrational, yet predictable, behavioural patterns.
In other words, when financial analysts refer to how Mr Market is behaving, they are referring to someone who makes investment decisions based on emotion.
For example, when a stock’s price is rising, he is bullish about its performance and will advocate a buying position. In contrast, when a stock is slumping, he will overreact and seek to sell the stock immediately.
Mr Market can therefore be overly optimistic or pessimistic, depending on the trajectory of a particular stock.
Why is he important for investors?
In his book, Graham says that recognising the actions of Mr Market can help investors make wiser stock choices. That’s because Graham believed many investors behave exactly like him and are led by human emotion.
Graham, therefore, believed that smart investors, particularly those with a long-term view, can take advantage of Mr Market to make better investment choices. For example, when investors believe a stock is undervalued, a shrewd buying opportunity emerges following a sell-off influenced by Graham’s character.
Likewise, if a stock is rising, but ‘smart’ investors believe a stock to be overvalued, then investors can sell stock to those taken in by the bull market.
These actions of a smart investor are consistent with one of Warren Buffett’s most famous quotes: “Be fearful when others are greedy, and greedy when others are fearful.”
What are the criticisms of Mr Market?
Critics of Graham’s character may believe that his theory is too simple. That’s because some critics feel that there are more than two types of investors.
Other critics believe that the theory falls flat due to the fact that over-optimistic investors would probably achieve very good returns during long bull markets in a particular stock. Similarly, others may feel that the stock market offers a true reflection of stock prices and valuations already take into account the actions of irrational investors.
Further criticism of Graham comes from those who are proponents of passive rather than active investing. Some passive investors believe that picking stock is futile due to the market always being one step ahead of the individual. Therefore, supporters of passive investing would be far more likely to buy an index fund, rather than trying to beat the market.
Whatever your view, if you’re new to investing, it’s worth spending the time getting your head around the investing basics. Check out our best investment guide for beginners to get started.