Mental Models
Mr. Market
Mr. Market is Benjamin Graham's parable for the stock market itself: a business partner who shows up at your door every day offering to buy your shares or sell you his, and his mood swings from wildly optimistic to deeply depressed for no reason connected to the business you actually own.
Picture it the way Graham set it up. You own a small piece of a private business alongside a partner named Mr. Market. Every single day, without fail, he knocks on your door and names a price, either to buy your stake or sell you his. Some days he's euphoric, certain the business is about to take over the world, and he'll pay you an absurd price for your shares. Other days he's in a black mood, convinced everything is falling apart, and he'll practically give his shares away. Here's the part that matters: he never gets offended if you ignore him. He just shows up again tomorrow with a new number.
An offer, not a verdict
The mistake almost everyone makes is treating Mr. Market's price as information about the business. It isn't. It's information about his mood that day. Whether his offer is generous, insulting, or somewhere in between is a separate question, one you answer by studying the business itself, not by reading the number he's holding. Most days the right move is simply not to answer the door.
Say you own a stake in a steady, well-run company and the market drops 15 percent on some macro headline that has nothing to do with that company's actual earnings. Mr. Market isn't telling you the business got worse. He's having a bad day. If anything, he just made you an unusually good offer to buy more.
Where people get it backwards
Where this breaks down is when people flip the relationship. Instead of using Mr. Market's price as an occasional opportunity, they let his mood become their mood. He panics, they panic. He gets greedy, they get greedy. At that point he's stopped serving you and started running you, which is exactly backwards from what he's for.
“Mr. Market is there to serve you, not to guide you.”· Berkshire Hathaway shareholder letter, 1987
The failure mode isn't complicated, it's just common. It's checking his price too often and letting temperament follow it.