Buffett on Mr. Market: The 1987 Letter, Quoted

Warren Buffett's view of market prices is that they are there to be used, not followed. In the 1987 letter he retold Ben Graham's allegory of Mr. Market and drew the lesson in one line: "Mr. Market is there to serve you, not to guide you."

This post walks through the Mr. Market passage in the 1987 Berkshire Hathaway shareholder letter, part of the 1977–1997 letters in Mímir's library. Each quote links to the original letter.

Who is Mr. Market?

Buffett credits the idea to "Ben Graham, my friend and teacher", who described the attitude toward market fluctuations that Buffett believed "to be most conducive to investment success." The setup:

"He 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."

Why are his prices unreliable?

Because his moods change while the business doesn't:

"Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems."

When euphoric, he "names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains." When depressed, "he will name a very low price, since he is terrified that you will unload your interest on him."

Why is that good for the investor?

Because you never have to deal with him. "Mr. Market has another endearing characteristic: He doesn't mind being ignored." If today's price doesn't interest you, "he will be back with a new one tomorrow. Transactions are strictly at your option." Buffett's conclusion is counterintuitive:

"Under these conditions, the more manic-depressive his behavior, the better for you."

What is the warning?

Buffett adds a condition, "like Cinderella at the ball":

"Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence."

The precondition is knowing the business better than the market does: "Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game."

Does the allegory still apply?

Buffett anticipated the objection that it "may seem out-of-date in today's investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas." His reply:

"In my 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."

He wrote that he found it "highly useful to keep Ben's Mr. Market concept firmly in mind."

How did Berkshire judge its own investments?

By business results, not prices. "Charlie and I let our marketable equities tell us by their operating results - not by their daily, or even yearly, price quotations - whether our investments are successful." He quoted Graham again: "In the short run, the market is a voting machine but in the long run it is a weighing machine."

Slow recognition, he added, "can be an advantage: It may give us the chance to buy more of a good thing at a bargain price."

When would Berkshire sell?

The letter lists the cases. Berkshire would sell if the market valued a business above what the facts supported, or to fund a more undervalued investment or one it understood better. But not for the usual reasons:

"We need to emphasize, however, that we do not sell holdings just because they have appreciated or because we have held them for a long time."

He called "You can't go broke taking a profit" possibly the most foolish of Wall Street maxims.

The short version

• Mr. Market offers a price every day; his moods swing, the business doesn't.
• His swings help you, because you only trade when you choose to.
• He is "there to serve you, not to guide you."
• Success comes from business judgment plus insulation from market emotion.
• Judge investments by operating results, not price quotations.

These are reports of what Buffett wrote in one letter. They aren't a recommendation about any investment.

To look up what Buffett, Paul Graham, Sam Altman, Marc Andreessen or Naval wrote on your own question, you can ask Mímir. Each answer cites the original letter or essay.