What are the specific details of the parable of Mr. Market?

Okay, let's talk about Graham's incredibly classic "Mr. Market" allegory. This story is arguably one of the cornerstones of value investing. Understanding it could give you a completely new perspective on the stock market.

I'll try to keep it conversational, forget the jargon.

The Mr. Market Parable: A Brilliant Story to Help You Understand the Stock Market

Imagine you go into business with a fellow named Mr. Market, and you each own half the company.

This Mr. Market has a very interesting characteristic:

He shows up every day: Rain or shine, without fail.
He offers you a daily quote: He tells you what he thinks the value of your shares is that day. Based on this quote, he gives you two options: either he buys your shares from you, or you buy his shares from him.
He is wildly emotional: This is the crucial point. Mr. Market is essentially a manic-depressive.
- On some days, he is inexplicably euphoric, full of wild enthusiasm. On those days, he'll give you an absurdly high price, convinced your company is the best in the world with a brilliant future.
- On other days, he is inexplicably gloomy, sunk into the depths of despair. On those days, he'll give you a ridiculously low price, convinced your company is about to go bust and is worth nothing.
He is utterly passive and forgetful: It doesn't matter to him at all if you refused him yesterday or scored a great deal off him. Today, he'll still show up with a completely new quote, influenced solely by his mood for the day. You can completely ignore him; he won't get upset in the slightest. He'll be back again tomorrow.

What Does This Allegory Teach Us? (This is the key part!)

This story sounds a bit comical, but it's actually a perfect analogy for the stock market.

1. "Mr. Market" is the "Stock Market"

Mr. Market's daily emotional quote represents the stock's daily price movements, fluctuating between gains and losses. Often, price volatility isn't because there's been any fundamental change in the company itself, but rather, just like Mr. Market, it's driven by the collective emotions (greed and fear) of countless investors.

2. You are the Boss; He is Your Servant

The core point Graham wants to make with this story is: Mr. Market is there to serve you, not to instruct you.

When he's depressed and gives you a very low quote (i.e., a stock market crash, panic everywhere), and if you know your company's intrinsic value (what the company is truly worth), you have the opportunity to buy more shares from this pitiful fellow at a very cheap price.
When he's euphoric and gives you a very high quote (i.e., a raging bull market, everyone yelling "buy!"), you can choose to sell your shares to him, letting this "madman" happily take them off your hands.
If the price he offers is neither high nor low, or you think it's unreasonable, you can simply do nothing! Have a cup of tea, read the newspaper, and wait for him to come back tomorrow. You always hold the initiative.

3. Your True Enemy is Yourself, Not Mr. Market

What would a foolish investor do? They would let Mr. Market's emotions dictate theirs. When Mr. Market is happy, they rush in, afraid of missing out; when Mr. Market is pessimistic, they panic and sell off their good holdings to him cheaply. This kind of person will ultimately become Mr. Market's piggy bank.

A smart investor, however, uses Mr. Market's emotions. They have their own measuring stick – their independent judgment of a company's value. The market's quote is just a reference point, a tool to be utilized.

Summing Up

Fundamentally, Graham wants to tell us:

Don't take the daily swings in stock price too seriously. View it as an opportunity presented by an emotional "Mr. Market." Your job isn't to predict his moods, but to understand the true value of the assets you hold. When he makes a mistake, exploit it. When he's pricing things sensibly, simply ignore him.

Mastering the essence of "Mr. Market" arms you with a powerful psychological tool to help you stay cool and rational amidst the noise and emotion of the stock market. Hope this explanation helps!