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“I shall impersonate a man! Come, enter into my imagination, and see him.”
Those are the first two lines of the first song of the iconic Broadway musical “Man of La Mancha.”
And in my imagination, I can see Benjamin Graham – the father of value investing and mentor of Warren Buffett - replacing Miguel de Cervantes’ character, Don Quixote, and writing a Broadway musical about an equally intriguing character - Mr. Market.
I feel confident that no matter what year you read this article, if I said, “Wow, what a volatile year this has been,” you would likely say, “Yes, it has!”
How do I know?
Because Mr. Market never changes.
Who is Mr. Market? A 75-Year-Old Lesson in Investing
In his classic book - "The Intelligent Investor" - published in 1949, Benjamin Graham introduced Mr. Market as a fictional character to illustrate the erratic nature of the stock market.
And this idea is as relevant today as it was when Graham first introduced it, as it reminds us that the market can often be unpredictable and irrational. (1)
He described Mr. Market as a business partner who offers to buy or sell stocks daily at various prices. Sometimes, Mr. Market is exuberant and buys stocks at unreasonable prices, representing optimism, while at other times, he is despondent and sells the same stock at low prices, expressing pessimism.
Graham's key insight into Mr. Market is that while his buying and selling may be irrational and influenced by emotion, investors need not react similarly. Investors then should view Mr. Market's offers as opportunities to buy or sell stocks based on their intrinsic value analysis.
Simply put, Graham advised investors to:
- Buy when Mr. Market is fearful.
- Sell when he’s euphoric.
How Warren Buffett Applied Mr. Market’s Investment Strategy
While Benjamin Graham’s ideas have influenced many successful investors, his impact is most evident through his association with the Oracle of Omaha - Warren Buffett.
Graham's teachings significantly shaped Buffett's investment philosophy.
"Be fearful when others are greedy and greedy when others are fearful,” - Warren Buffett (3)
In fact, Warren Buffett regarded Benjamin Graham not only as a teacher but also as a mentor and a close friend.
This concept directly reflects on Buffett’s strategy - such as:
- During market bubbles, Buffett exercises caution when others are blindly optimistic.
- During downturns, he sees opportunity when panic drives prices below intrinsic value.
Buffett has also echoed Mr. Market’s principles in many other ways:
- “The stock market is a device for transferring money from the impatient to the patient.”
- “Remember that the stock market is a manic depressive.”
These insights highlight why Buffett focuses on long-term value investing, rather than reacting to short-term market swings.
The Key Take Away of Mr. Market and What You Need to Know
The allegory of Mr. Market serves as a reminder of the emotional and irrational facets intrinsic to financial markets.
The mentorship legacy of Benjamin Graham reverberates through the investment philosophy of Warren Buffett, offering what I consider a template for investors seeking to make market volatility work for them - not against them.
Understanding this may help you create an investment strategy that seeks to buy stocks when Mr. Market is fearful, selling his stocks below their intrinsic value. And then selling the same basket of stocks back to Mr. Market as he becomes exuberant and pays more than the stocks are fundamentally worth.
Why Mr. Market’s Strategy Works for Retirees
For retirees, understanding market cycles is especially important.
A disciplined investment strategy offers two key benefits:
- Less Equity Exposure at Market Highs
- Reduces sequence risk (4) by limiting stock exposure when markets are overvalued.
- More Equity Exposure at Market Lows
- Allows retirees to recover faster when a new bull market begins.
By following Mr. Market’s approach, retirees can potentially mitigate losses while maximizing long-term gains.
Final Thoughts: The Timeless Wisdom of Mr. Market
Benjamin Graham’s Mr. Market isn’t just a metaphor - he’s a timeless lesson on investor discipline, patience, and strategy.
The question is: Are you using them to your advantage?
- Are you buying when others panic?
- Are you selling when the market is euphoric?
Want to learn more about how to apply these strategies? Contact us at Dunham today to find out more.
Sources:
(1) On Mr. Market, by Chris Gilbert, Yahoo Finance, March 9, 2016, https://finance.yahoo.com/news/mr-market-163233852.html
(2) Ben Graham & Warren Buffett’s Bond, By Ben’s Granddaughter, N/D, https://beyondbengraham.com/ben-graham-warren-buffett/
(3) Warren Buffett Quotes on Life, Success, & More, Phil Town, December 21, 2022, https://www.ruleoneinvesting.com/blog/how-to-invest/warren-buffett-quotes-on-investing-success/
(4) Sequence Risk, What it Is, And Why It Matters In A Bear Market, by Sal Capizzi, Dunham, January 16, 2024, https://www.dunham.com/FA/Blog/Posts/sequence-risk-for-retirees
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Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice
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