Ideas and Relationship between Mr. Market and Margin of Safety


Written by Sherin Dev. Follow me on Twitter

Mr. Market and Margin of Safety are two classic allegories gifted to investors by the legend investor Benjamin Graham who well known as ‘Father of Value Investing’. In his famous investment guide “The Intelligent Investor”, we can find both of these allegories. Through these classic metaphors, he exposes two strong investment behaviors that required by each investors in this world. When ‘Margin of Safety’ given to teach investors to identify the right price to buy a stock, ‘Mr. Market’ focused to inform stock market behavior and how an investor should be when approaching to stock markets. Both allegories spread highly important knowledge to investors to become a most successful investor like Benjamin Graham and Warren Buffett.

marginofsafety-8238542Once if you have read and clearly understood the inner meanings of both allegories from his great investment guide ‘Intelligent Investor’, then you should understand how both tightly associated with each other. Once understand this relationship, it is easy for an investor to practice it to become more successful. Here is a small introduction on the meaning of both allegories followed by its close relationship for your better understandings.

In his first allegory, Benjamin Graham reminds the investors on the required approach to a stock market. He called him with a new name ‘Mr. Market’, a person who regularly visits to his office every day morning without fail, to sell his business to him. Everyday Mr. Market appears to him with new quote for his business. If his mood is gloomy, he will give the lowest quote but if the moods is happy, he will presents a high value quote. He is trying to sell the business but if he don’t care him, he will never complain and again come in the next day with an another new quote!

In this scenario, Graham connected the stock market to Mr. Market. Every day, people can find the stock market would open and the prices may go up or come down. It has a highly fluctuating character. This behavior could test the patience and tendency of an ordinary investor to make wrong decisions to buy wrong stocks at wrong time. If you don’t care the stock market heights or down turns, it will again come in the next morning with new heights or downs. Graham clearly says, one should not fall to the charm of stock market and what it is offering every day. Instead, one should take action by learning properly and identifying the right business and stocks to purchase.

In his second allegory, the ‘Margin of Safety’, Graham gives enough knowledge to the investors to purchase a stock or business by understanding its real value and price. A buy should give an investor a sufficient margin of safety when compare the buying price to the real value of the business. Warren Buffet simplified Graham’s approach with his simple example. One should be able to identify and purchase a one Dollar bill with a buying price of 40 cents. In do so, the real value of the bill is one dollar but you are getting it in a price of 40 cents. There are sufficient margin of safety of remaining 60 cents! That is the right approach. Margin of Safety allegory highly intend to explore these difference and give right knowledge.

Are there any relations between Mr. Market and Margin of Safety?

Mr. Market intends to teach us the required behavior to stock market and Margin of Safety provides knowledge to identify difference between value and buying price. Is there any relation between these two allegories and if so, what it would be? Some of us agree and some others not. But, of course, there is a close relation between Mr. Market and Margin of Safety. When Mr. Market appears with gloomy mood, he gives the minimum price to us to buy the business. It mean, when stock market is gloomy or people come under the blanket of fear, stock prices come to down to maximum. Economic recessions and macroeconomic changes support such gloomy behavior of stock markets and put investors panic. If such, stock prices come to bottom line that supports the Margin of Safety buy. If understood well, such situations help to identify the real margin of safety buy against the real value of business or stock. Thus the relation between Mr. Market and Margin of Safety comes true.

This article providing knowledge to understand what is Mr. Market and Margin of Safety. It additionally provides information on how Mr. Market allegory closely associated with Margin of Safety. As a real value investor, we should understand each allegory and its relationships to take right decisions at the right time.If you like this article, share it. Your comment under this article helps me better to provide more fantastic information and knowledge to readers.

Image courtesy: mikemarcotte51