Ben Graham And Mr. Market
By
Larry Holmes
If you study securities analysis at an academic institution or on Wall
Street, you will study Benjamin Graham. Ben Graham was an economist, a
business professor, and an investor. He has been called the father of value
investing.
His book, "Securities Analysis," was published in 1934 and is required
text for securities analysis students. And his 1949 book, "The Intelligent
Investor," has been described by Warren Buffett as the best investment book
ever written.
In fact, most people today know Graham as Warren Buffett's mentor.
Buffett is the only student to ever earn an A+ from Graham at Columbia
University. (As an interesting bit of trivia, Harvard Business School
rejected Buffett's admission application in one of the most boneheaded
decisions since the Red Sox sold Babe Ruth to the Yankees.)
Graham used what has become a famous metaphor called "Mr. Market" to
explain how the stock market works. It is probably still the best way to
understand how stocks are priced and what it means to you as an investor.
Let's say you own a business and you have a partner. His name is "Mr.
Market." Your business is a good one. It has given you a high return on what
you have invested in the business. The only thing is your partner, Mr.
Market, is kind of a strange dude. He's very emotional. Some days he's on a
very euphoric high and other days he's very depressed. I guess today we
would describe his condition as manic-depressive.
Mr. Market has a curious habit. Every day he comes into the office and
offers to sell you his share of the business or buy yours. However, because
he is so moody, if he happens to be euphoric on a particular day he wants a
very high price for his share. On the other hand, if he's in one of his down
moods he's willing to sell out for a pittance.
The interesting thing about Mr. Market is that he doesn't seem to care
whether or not you choose to buy his interest or sell yours. He doesn't get
his feelings hurt. You can do whatever you want. It's completely up to you.
He just keeps coming in the office every day, offering to buy or sell at
wildly different prices. It's always the same good business it has always
been. That doesn't change. It's just that, depending on his mood, some days
Mr. Market is enthusiastic about the business and other days he's very
pessimistic.
Since you know what the business is worth, you can just listen to Mr.
Market's offer every day and decide if his offer is a good one or one you
want to turn down. Even though Mr. Market's moods might be difficult to get
used to, he's actually a great business partner to have.
That's exactly the way you should view the stock market. Choose your
favorite business that happens to be one of the 10,000 or so publicly traded
stocks. Look at the stock tables in the paper and notice the yearly high and
low price for that stock. You'll find that there can be a dramatic
difference between the high and the low during a single year. The business
hasn't changed. It's just the mood of Mr. Market that changes.
So that's how some great investors like the Ben Graham's, Warren
Buffett's, and Joel Greenblatt's of the world have made fortunes. They
understand how the stock market works. They look to buy partial interest
(shares) in good businesses (a business with a high return on capital) when
Mr. Market is willing to sell his interest at a bargain price.
There is no reason why you can't do the same thing.
(c) Larry Holmes
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