Mr. Market vs. The Intelligent Investor

  • The Intelligent Investor uses logical and mathematical analysis and doesn't trade on emotion.

Here is the original excerpt about Mr. Market, from Benjamin Graham's book, the Intelligent Investor, an allegory made famous by Warren Buffett:

Mr. Market

"Imagine that in some private business you own a small share which cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

If you are a prudent investor or sensible businessman will you let Mr. Market's daily communication determine your view as the value of your $1,000 interest in the enterprise? Only in case you agree with him or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operation and financial position."

- Benjamin Graham, The Intelligent Investor, 1949


The Intelligent Investor

The 3 characteristics of an Intelligent Investor are:


A Tale of Patience

The Intelligent Investor wants a home in Beverly Hills, California, an animating community where many movie stars live. The prices of real estate are very expensive. So the Intelligent Investor waits patiently for prices to fall. A time finally came when the real estate market collapses. Prices of homes fell. So the Intelligent Investor purchases his dream home in Beverly Hills. Right after his purchase, the market value of his home continues to plunge. Knowing that houses in Beverly Hills will always be worth a million bucks, the Intelligent Investor patiently waits for home values to rise back up.

When stocks are expensive, the Intelligent Investor waits patiently for prices to fall. When prices do fall and if the company has a Durable Competitive Advantage, we buy their stock and hold it forever. Mr. Market's fluctuations in price do not dissuade our "Buy and Hold a Company with a Durable Competitive Advantage" strategy. If we buy something and prices fall, we wait patiently for prices to come back up.


"Buy when everyone else is selling and hold until everyone else is buying. That’s not just a catchy slogan. It’s the very essence of successful investing."

- J. Paul Getty


Being Analytical

The Intelligent Investor piques his interest in a snail race. So he goes to Petco looking to purchase a snail to enter into the race. Upon arrival, he comes upon 2 snails, Turbo and SlowMo. Turbo was selling for $10 dollars while SlowMo was selling for $2 dollars. After inquiring with a salesman, the Intelligent Investor learns that today Turbo is sick and is on sale for 50% off bringing down the snail's retail price to $5 dollars. Looking at both snails, SlowMo was starting to look like he moves pretty fast compared to Turbo who was just laying there. As opposed to acting on a whim and run with his excitement to buy the cheaper $2 dollar snail SlowMo, the Intelligent Investor stops to think. He requests for both snails' record only to discover Turbo has a better history in winning many races. The Intelligent Investor thinks to themselves that if Turbo was nursed back to health, Turbo would be the more profitable purchase given the snail's winning history.

Every once in a while Mr. Market presents us with an opportunity to purchase a company with a Durable Competitive Advantage at very cheap price. When an excellent company is suffering from a short term problem, Mr. Market gets nervous and dumps his stock for a low price. The Intelligent Investor takes advantage of Mr. Market's short-sightedness and buys his stock. Knowing the company's excellent 10 year history, its excellent record of profitability, and awesome management track, a company with a Durable Competitive Advantage will always be worth a lot of money.


"Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway."

- Warren Buffett


The Use of Common Sense

The Intelligent Investor is looking to invest in a business. Through word of mouth, he fancies about Beverly Hills Donuts, a popular donut shop that sell high quality designer donuts. Upon speaking to the owner of Beverly Hills Donuts, he learns about other interested investors wanting to invest in the shop. The owner boasts how he's going to conquer the world and open many, many stores. The owner's enthusiasm about his business prospects creates a bidding war among investors who jacks up the price of the store to $1 Million. The Intelligent Investor does his due diligence and investigates Beverly Hills Donuts' financial statements. There he finds out the shop is actually losing money. Despite its high profit margins, the store hasn't made a penny. Using common sense, the Intelligent Investor walks away because this donut shop is a "do not".

Sometimes Mr. Market gets overhyped about a stock. He starts bidding up the stock price to a point of irrational exuberance. The stock price becomes too high. A lot of times, these overhyped stocks are of companies that does not make any money; companies that have no profits, lots of debt, and fictitious promises. As opposed to sailing with Mr. Market's hype, the Intelligent Investor uses common sense to NOT invest in money losing companies. Overhyped stocks are akin to a sinking ship with too many people on board. The last person that bails is the one who drowns.


"Financial freedom is available to those who learn about it and work for it."

- Robert Kiyosaki


Summary: The Nature of Personal Reality

The outside circumstance of our life is a direct reflection on who we are inside. If $1 Million dollars was taken away from a wealthy man, within a few years, he would be wealthy again. If $1 Million dollars was given to a poor man, within a few years, he would be poor again. Some people have the ability to succeed in investing, while others could never get it right. A successful investor is patient, analytical, and uses common sense. It is these personality traits that differentiate the Intelligent Investor from everyone else. To be a very successful investor means we have to change ourselves in the inside and acquire the personality traits of other very successful people.