When you ask most people what the no. 1 rule of investing is, they'll probably quote you Warren Buffett's famous line "don't lose money". Whilst this simple (if not slightly confusing) rule is great advice and is easy to remember, there's another father of investing I want to talk about today. And that person is Benjamin Graham.
Ben Graham died back in 1976. However, in his day he was a masterful investor and was one of Warren Buffett's mentors and even employers for a time. In 1949, he wrote one of the most famous books ever written on value investing – called (appropriately) The Intelligent Investor.
This book is full of wonderful investing lessons. But one lesson that stands out for this writer above others is Graham's description of 'Mr Market'.
Mr Market is described as every investor's business partner, who is a fair businessman offering fair prices most of the time. But he does have trouble dealing with vicious mood swings, which can cause some irrationality. One day, he offers to sell you his share of a business at a stupidly high price. The next, he wants to buy your share for an offensively low price.
Graham points out that Mr Market isn't offended by an investor taking him up on his offer or not. Regardless, he comes back day in, day out with a new offer. But he also points out that most investors don't know how to deal with their mercurial business partner. They might panic when Mr Market offers them a low price for their share of a business, capitulate to their fears and accept Mr Market's offer. Otherwise, they might offer to buy Mr Market's share off him if he offers to overpay for theirs in turn.
Investing lessons from 'Mr Market'
Now if you haven't already figured out that 'Mr Market' is an allegory for the share market, then I apologise for being too subtle. But Graham's lessons on Mr Market are as true today as they were back in 1949. As such, Graham's no. 1 rule of investing (in my view) can be distilled into this: know how to deal with (and take advantage of) Mr Market.
In my view, the first goal of an aspiring investor should be to understand how this 'Mr Market' allegory applies when investing. It doesn't take a lot of experience in the markets to see how true it is in so many ways. And understanding this parable is a sure way to put yourself on the path to successful investing. But the second goal should be to learn how you can use Mr Market's temperament to your advantage. Financial markets like the share market run on human nature more than anything else. And they behave in a similar fashion today as they did in 1949. This is unlikely to change in the future, either, but if you understand this then you can use it to your advantage.
Foolish takeaway
So next time 'Mr Market' makes you an offer, you should think about whether its a fair or an emotional, mood-driven one. The best money you can make can be on the back of an emotional decision, but equally, these decisions can also be the most dangerous. Making sure you're on the right side of that equation, again and again, is how investors like Buffett became so successful, and its how we all can follow in his (and Graham's) footsteps.
