MR. MARKET THEORY AND MARGIN-OF-SAFETY BY BEN GRAHAM

No Equity investment starts without understanding “Mr. Market” theory given by Warren Buffett’s teacher Ben Graham, who 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. Mr. Market 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. Hence, Mr. Market is there to serve you, not to guide you.

In my (Warren Buffett) opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an 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. What’s the sense in getting rich just to stare at a ticker tape all day?)

Another leading prudential legacy from Graham is his Margin- of- Safety principle. This principle holds that while investment in a security, the price being paid is substantially lower than the value being delivered.

Don’t trap yourself into believing a business or product is worth exactly what someone is willing to pay. Someday, you’ll end up paying dearly for a business propped by perception only. For example, maybe grapes from a little 8-acre vineyard in France are really the best in the world, but I have always had a suspicion that about 99-percent of it is in the telling and about 1-percent is in the drinking – Warren Buffett

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