Mr. Market – why trading back and forth empties your pockets
Benjamin Graham described the stock market as a moody business partner: "Mr. Market". Every day he quotes you a price, sometimes euphoric, sometimes frightened. You never have to accept his offer. You can use it when it is cheap – and otherwise simply ignore it.
The story of Mr. Market
In his book "The Intelligent Investor", Graham tells a parable. Imagine you own a share in a business, together with a partner called Mr. Market. Every day he comes by and quotes you a price: at this price he would sell you his share or buy yours.
The business itself carries on calmly, year after year. But Mr. Market is moody. On some days he is thrilled and asks an absurdly high price. On others he is desperate and offers you his share for almost nothing. Graham's point: you are not obliged to listen to him. He is there to serve you, not to guide you.
Price swings, value moves slowly
A made-up company has a fair value of around €100 per share, which barely changes over the year. In the same period, Mr. Market makes these offers:
| Month | Mood | Price |
|---|---|---|
| January | calm | €100 |
| March | euphoric | €125 |
| June | frightened | €75 |
| September | confident | €110 |
| December | uncertain | €95 |
The company did nothing differently this year. Only the mood changed. Anyone who knows its fair value sees an opportunity in June: a purchase with a margin of safety of 25%. Anyone who does not sees only a falling price – and may sell at exactly that moment.
Why trading back and forth empties your pockets
Whoever follows every mood of Mr. Market often buys when everyone is excited and sells when everyone is afraid – buying high, selling low. On top come costs that arise with every trade: fees, the gap between buy and sell price, and taxes on realised gains, which holding defers until later.
These costs look small, but they compound. An assumed example: €10,000 invested for 20 years. At 7% a year it grows to about €38,700. If trading back and forth costs just 2 percentage points a year, it is about €26,500 at 5% – over €12,000 less, without the company having been any worse.
How to use Mr. Market
Graham's advice is simple: know the value before you look at the price. Calculate the fair value, set your margin of safety and write down at what price you would buy. Then you wait. If the price falls below it, Mr. Market's fear helps you. If it rises far above, you can think about selling. Everything in between you may ignore.
Three common mistakes
Value first, then price.
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Frequently asked questions
Where does the idea of Mr. Market come from?
From Benjamin Graham, in his book "The Intelligent Investor". Warren Buffett, Graham's student, later often took up the image in his letters to shareholders.
Does this mean I should never sell?
No. Selling can make sense when the price is far above fair value or something fundamental in the business has worsened. The market's mood alone is just not a good reason.
Can't the market be predicted after all?
Short-term moods can hardly be predicted reliably. Graham's approach does not need that: it does not ask where the price is heading, but whether it is currently below value.
Does this apply to ETFs too?
The idea does: with an ETF, too, constant back and forth costs money and nerves. Whoever invests regularly and sits out the swings usually does better than someone trying to follow every move.
Not investment advice. All content is for informational and educational purposes only. The company and the returns in the example are assumed.