Stock Market - Your Business Partner
Stock Market : It's a place where buyer and seller meet to exchange their shares of public corporations. Market represents the collective wisdom of buyers and sellers.
Mr. Market : Ben Graham and Warren Buffett described concept of Mr.Market nicely here and here
Mr. Market & YOU
Imagine you are business owner with another partner named Mr. Market. Mr. Market approach daily to sell his stake at specific price or buy your stake. Even though business economics doesn't change daily, Mr. Market can offer to buy your stake at unreasonable high valuation when he feels euphoric.
When Mr.Market is depressed and can see lots of trouble for business, he offers to sell his stake to you at a very low price.
He doesn't mind being ignored. He will come to you everyday without failure to either buy or sell stakes.
Mr. Market is there to serve you and not to guide you.
How does this concept apply to investor?
Stocks : What is Stock? Stocks/Equity shares are representation ownership in issuing corporation. If you hold shares of any company, you are a shareholder owning a piece of business.
Concept of Mr. Market can be applied while buying or selling stocks. In euphoric mood, Stock Market quote some of the business at exorbitant price while in depressed mood, it quotes price of same stocks at dirt cheap valuation. As a part owner in business, investor shall understand economics of business and take advantage of Mr. Market rather than getting influenced by him.
Mr. Market is collective representation of all buyers and sellers, manic depressive behavioral biases often gets amplified which cause overvaluation of business as well as undervaluation.
Use Mr.Market to Your Advantage
Rational Decision Making: Imagine Mr. Market as someone who gets really happy or really sad about businesses every day. By seeing the market through his eyes, we can make decisions without getting too emotional. This means we think with our heads, not our hearts.