Financial Reference

With all the volatility in the market, it’s good to remember the parable of Mr. Market. Created by the father of value investing, Benjamin Graham, Mr. Market is a reminder of how we should act in turbulent times.

As the story goes, Mr. Market is a very accommodating partner who, every day, shows up and offers a price at which he will purchase your interest in the partnership and sell you his interest in the partnership.

However, Mr. Market is a very emotional person who changes his appraisal of the company based on his mood. In a good mood, he will offer an extremely high price; in a bad mood, he will offer you his shares for a pittance.

How would you transact with Mr. Market? Would you sell to him when he offers too high a price and buy when he offers too low a price? Or would you, like so many market commentators, fall under his spell — letting your own emotions rise and fall with Mr. Market’s bipolar tendencies?

The easiest way to take advantage of Mr. Market is to figure out how much you think something is worth and compare it to Mr. Market’s price. If there is a large difference, buy or sell.