CHAPTER 28

Mr. Market and Investor Psychology

In order to generate maximum returns possible in the investing business, it is important to understand investor psychology and market psychology. As Ben Graham explained in his famous Mr. Market analogy, you and Mr. Market are partners in business. Mr. Market has a peculiar character; sometimes Mr. Market tries to sell you his portion of the interest or tries to buy your interest in the business. Mr. Market comes up with a quote every day. Sometimes, Mr. Market sees only a rosy outlook for the business, so he quotes you a very high price for his share of the business. Sometimes, he is depressed, so he tries to quote bargain prices for his shares. You can ignore the quote or try to take advantage of his bargain prices. If you fall under his influence, then you will lose your investment capital.

This understanding of the market is one of the secrets to Warren Buffett’s success, but 98 percent of the people do the opposite. They react as per the market price of their stocks. The market is dominated by two conditions, fear and greed. Sometimes, there will be fear in the market; people feel that the world is coming to an end so securities are priced at bargain levels. Another feeling is when greed pumps up the price of stock beyond the true intrinsic value of the business it represents. In those situations, asset bubbles form and eventually burst. Because of this process, most of the investors lose money and get out of the market at the ...

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