the analogy of Mr.Market

In the early 20th century, Benjamin Graham educated many investors through his book The Intelligent Investor, where he used the now-famous analogy of Mr.Market. Mr.Market is this person who always has an emotional fit, depending the circumstances of the economy. He's quite a stockbroker himself, as he knocks on your door asking you to buy his shares or sell your shares that you already own.

Sometimes Mr.Market is happy because the economy is doing really well, and he is happy to sell to you his shares at what he thinks is the right price. However, to some, it might be overpriced, but to Mr.Market no price is too high as the economy in his perception is just going to go up, up, and up. But as it always happens, economies do not go up all the time, and the next day the economy goes through a crisis, and Mr.Market throws a fit. He is angry and upset and disappointed all at the same time. He knocks on your door frantically trying to sell all his shares to you at crazy low prices. He believes its nearing the end of the world for the sharemarket and he just wants to get rid of all his shares.

In 1998, when the Asia crisis was going on, and Russia forfeited on some of their notes, Mr.Market panics and again rushes to sell to you all his shares. When we're in a bull market, Mr.Market will feel very rich indeed, and he might want to realise some of his wealth. Again he comes offering to you shares at the current prices and tempts you in order to get you to buy them. Mr.Market is also really good at sensing emotions and when he feels you are at unease about your shares, he tries to get you to sell them to him.

This famous analogy of Mr.Market is about the various forces of supply and demand working in the marketplace as depicted by Benjamin Graham himself. Investors have to remain certain about their position at all times, and when uncertainty strikes, there will be temptations to make a mistake, clothed in disguise in the form of emotions. I once joked around that if only we can buy a share, then sleep for 10 years, waking up after that and selling our shares, things would be so much easier. Unfortunately, not all of us have the privilege of sleeping beauty and so we investors must remain resilient in times of ups and downs.