Munger's core operating modelsPart I

Mr. Market

The market is a manic-depressive business partner; you're free to ignore him or exploit his moods, never to be ruled by them.

Benjamin Graham's parable, popularised by Buffett and adopted by Munger. Imagine you own half a private business with a partner named Mr. Market. Every day, Mr. Market shows up and offers you a price at which he'll buy your half or sell you his. The catch: Mr. Market is manic-depressive. Some days he's wildly optimistic and offers you huge prices. Other days he's despairing and quotes you fire-sale prices.

You're not obligated to deal with him. The price is just a price; it isn't a measure of your business. Most days you ignore him. Some days he offers you something irresistibly good (cheap when he's panicking, dear when he's euphoric), and you act.

The point of the parable is to invert how most investors think. Most people treat the daily market price as information about the business. Graham and Buffett treat it as information about the market's mood. Two completely different stances.

For operators, the same logic applies in non-financial contexts:

• The "current market valuation" of your sector isn't the same as your company's intrinsic value
• The mood of the funding environment when you raise affects your valuation but not the underlying quality of your business
• Your competitors' loud claims aren't necessarily evidence about the actual state of the market

The discipline is to know what your business is worth independent of what the market is saying today, and to be willing to act when the gap between value and price gets big.

Examples in the wild