Investment Philosophy

Warren Buffett on “Mr. Market”

Ben Graham, my friend and teacher, long ago described the
mental attitude toward market fluctuations that I believe to be most
conducive to investment success. He said that you should imagine
market quotations as coming from a remarkably accommodating
fellow named Mr. Market who is your partner in a private business.
Without fail, Mr. Market appears daily and names a price at which
he will either buy your interest or sell you his.

Even though the business that the two of you own may have
economic characteristics that are stable, Mr. Market’s quotations will
be anything but. For, sad to say, the poor fellow has incurable
emotional problems. At times he feels euphoric and can see only
the favorable factors affecting the business. When in that mood, he
names a very high buy-sell price because he fears that you will snap
up his interest and rob him of imminent gains. At other times he is
depressed and can see nothing but trouble ahead for both the
business and the world. On these occasions he will name a very low
price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesn’t
mind being ignored. If his quotation is uninteresting to you today,
he will be back with a new one tomorrow. Transactions are strictly
at your option. Under these conditions, the more manic-depressive
his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning
or everything will turn into pumpkins and mice: Mr. Market is there
to serve you, not to guide you. It is his pocketbook, not his wisdom,
that you will find useful. If he shows up some day in a particularly
foolish mood, you are free to ignore him or to take advantage of
him, but it will be disastrous if you fall under his influence. Indeed,
if you aren’t certain that you understand and can value your business
far better than Mr. Market, you don’t belong in the game. As they
say in poker, “If you’ve been in the game 30 minutes and you don’t
know who the patsy is, you’re the patsy”.

…[A]n investor will succeed by coupling good business
judgment with an ability to insulate his thoughts and behavior from
the super-contagious emotions that swirl about the marketplace. In
my own efforts to stay insulated, I have found it highly useful to
keep Ben’s Mr. Market concept firmly in mind.

— Letter to Shareholders, 1987 Berkshire Hathaway Annual Report

Excerpts from Benjamin Graham’s “The Intelligent Investor”

Investment is most intelligent when it is most businesslike. It is amazing to see how many capable businessmen try to operate in Wall Street with complete disregard of all the sound principles through which they have gained success in their own undertakings. Yet every corporate security may best be viewed, in the first instance, as an ownership interest in, or a claim against, a specific business enterprise. And if a person sets out to make profits from security purchases and sales, he is embarking on a business venture of his own, which must be run in accordance with accepted business principles if it is to have a chance of success.

If you have formed a conclusion from the facts and if you know your judgment is sound, act on it—even though others may hesitate or differ. (You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.)

To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.


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