182 THE WARREN BUFFETT WAY
him or take advantage of him, but it will be disastrous if you fall under
his inf luence.
“The investor who permits himself to be stampeded or unduly wor-
ried by unjustif ied market declines in his holdings is perversely trans-
forming his basic advantage into a basic disadvantage,” Graham wrote.
“That man would be better off if his stocks had no market quotation at
all, for he would then be spared the mental anguish caused him by other
persons’ mistakes of judgment.”^8
To be successful, investors need good business judgment and the
ability to protect themselves from the emotional whirlwind that Mr.
Market unleashes. One is insuff icient without the other. An important
factor in Buffett’s success is that he has always been able to disengage
himself from the emotional forces of the stock market. He credits Ben
Graham and Mr. Market with teaching him how to remain insulated
from the silliness of the market.
MR. MARKET, MEET CHARLIE MUNGER
It was more than sixty years ago that Ben Graham introduced Mr.
Market, sixty years since he began writing about the irrationality that
exists in the market. Yet in all the years since, there has been little ap-
parent change in investor behavior. Investors still act irrationally. Foolish
mistakes are still the order of the day. Fear and greed still permeate the
marketplace.
We can, through numerous academic studies and surveys, track in-
vestor foolishness. We can, if we follow Warren Buffett’s lead, turn
other people’s fear or greed to our advantage. But to fully understand
the dynamics of emotion in investing, we turn to another individual:
Charlie Munger.
Munger’s understanding of how psychology affects investors, and
his insistence on taking it into account, have greatly inf luenced the
operations of Berkshire Hathaway. It is one of his most profound con-
tributions. In particular, he stresses what he calls the psychology of
misjudgment: What is it in human nature that draws people to mis-
takes of judgment?
Munger believes a key problem is that our brain takes shortcuts in
analysis. We jump too quickly to conclusions. We are easily misled and
are prone to manipulation. To compensate, Munger has developed a