When should one heed Mr. Market's advice, and when should one disregard it?

Hey friend, let's talk about that moody "Mr. Market." This is a classic metaphor proposed by Graham in The Intelligent Investor. Understanding him means you're halfway there in grasping value investing.

Imagine Mr. Market is your business partner. He has one defining trait: wildly unstable emotions, like someone with bipolar disorder.

Sometimes, he gets extremely excited and optimistic, seeing the world through rose-colored glasses. Then he rushes over, offering you an outrageously high price, wanting to buy your shares or sell you his at sky-high prices.
Other times, he plunges into deep pessimism and despair, convinced the world is ending. Then he practically begs on his knees, selling you his good stuff at fire sale, dirt-cheap prices, or offering to buy your shares very cheaply.

Most importantly, he shows up every day with a quote, but you have every right to ignore him. He won't be angry if you don't trade with him.

Once you understand this character, the problem becomes much simpler.

When should you "listen" to his suggestions? (Actually, exploiting his quotes)

You should pay serious attention to his quote when Mr. Market is extremely pessimistic and fearful.

It's like grocery shopping. Suppose you think a bottle of milk is worth $10, and it usually sells for $10. Suddenly, the shop owner (Mr. Market), afraid the milk might expire tomorrow (even though it won't), insists on selling it to you for $2. Shouldn't you grab a few extra bottles then?

This usually happens during:

Major market crashes, when everyone is wailing: Bad news floods the headlines, everyone thinks the economy is doomed, and stocks become hot potatoes. Mr. Market is terrified, willing to sell you shares of quality companies at rock-bottom prices (far below their intrinsic value).
When an industry or company experiences a "black swan" event: For example, a good company has some negative news, but your analysis shows it doesn't affect its long-term prospects. Mr. Market panics regardless, giving you a "fire sale" price.

Simply put: When he offers you a ridiculously cheap price, it's your chance to score a bargain. When he cries, it’s time for you to smile. You listen to his quote not because you agree with his pessimism, but because his pessimism gives you a prime opportunity to buy good companies.

When should you resolutely "ignore" him?

You should treat him like thin air, or politely stay away, when Mr. Market is extremely euphoric and greedy.

Back to the supermarket analogy. One day, because of a rumor that this milk grants immortality, the shop owner (Mr. Market) slaps a $100 price tag on the $10 bottle, and people are scrambling to buy it. Would you join the frenzy? Of course not, you'd think everyone's gone mad.

This usually happens during:

The peak of a bull market, when everyone is euphoric: Taxi drivers are talking stocks, everyone says "this time it's different," "you could make money blindfolded." Mr. Market is wildly optimistic and quotes you exorbitant prices. If you follow his mood, you'll buy at the peak.
When a concept or theme is wildly hyped: Like the "metaverse" or "blockchain" craze of the past, where stock prices soared for any company remotely connected. Mr. Market is throwing a massive party, and it's best not to join because parties always end.

Simply put: When he offers you an absurdly high price, it's time to stay cool. When he laughs, it's time for you to be wary. You ignore his quote because you know it doesn't reflect the company's true worth; it's just a bubble of emotion. At times like this, if you happen to hold something he desperately wants, you might even consider selling it to him at his inflated price.

Core Principle: You are the Master, He is the Servant

Remember this most crucial principle: In your relationship with Mr. Market, you are the master, he is the servant.

Don't let his emotions dictate yours. His panic doesn't mean you should panic. His greed doesn't mean you should be greedy.
Don't go to him for investment advice. He's just a quote machine, not an analyst. You need to research and determine a company's value yourself.
Use his mood swings to your advantage. Buy when he's depressed; be cautious or sell when he's euphoric.

A Simple Metaphor to Summarize

Think of yourself as the owner of a house. You know clearly that your house has a great location, a good layout, and is worth $2 million.

Mr. Market (your emotional neighbor) rushes over and says: "Yikes! I heard they're building a landfill nearby (rumor), your house is doomed! Sell it to me for $500,000!" What do you do? You just smile and close the door. If he's willing to sell his similar house for $500,000, you might even consider buying it.
A few months later, a celebrity walks past your door. Mr. Market sprints over again: "Wow! This is blessed land! I'll give you $5 million for your house!" What do you do? You might seriously consider selling it to him because that price far exceeds your assessment of its value.

Throughout it all, the true value of your house hasn't changed dramatically; what changes is Mr. Market's mood and his quotes. Your decisions should be based on your judgment of the house's value, not Mr. Market's daily hysteria.

That's the wisdom of dealing with Mr. Market.