We believe that the key principle of value investing relates to Ben Graham’s analogy of Mr. Market.
Imagine you are an owner of a private business and Mr. Market is your partner. Every day, he throws out prices at which he would be willing to buy your stake from you or sell you his stake. Most of the time, Mr. Market is a reasonable fellow, but occasionally he suffers from dramatic mood swings. On some days, his good mood leads him to offer to buy your stake at ridiculously high prices, while on other days his bad mood leads him to offer to sell you his stake at ridiculously low prices.
Mr. Market represents, of course, the equity market. The lesson of the analogy is that investors should not look to stock prices for information, guidance, or insight because market prices may be highly irrational at any given time. Stock prices are volatile, influenced by greed and fear, and in the short-term, often flucuate independently from underlying businesses value. Therefore, we view the stock market not as an indicator of values, but as an incredible opportunity to capitalize on material mispricings between price and value.
