The Stock Market's Election Day Rally Just Taught Investors a Crucial Lesson

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The stock market's response to the mid-term election results is almost the perfect example of how Mr. Market works in the real world. And all you need to see to understand is two…

Mr. Market was a fictional character created by Benjamin Graham, the man who helped to train Warren Buffett. The stock market's response to the mid-term election results is almost the perfect example of how Mr. Market works in the real world. And all you need to see to understand is two days of performance of Vanguard S&P 500 ETF (NYSEMKT: VOO). Here's a look at Graham's Mr. Market and why the election-day rally is a lesson you'll want to remember for the rest of your life.

Benjamin Graham was a famous investor and a teacher at Columbia University. That's where he taught Warren Buffett before hiring the man whose investment success earned him the nickname "The Oracle of Omaha". However, Buffett already knew about Graham because he'd read Graham's seminal investment book, The Intelligent Investor. If you haven't read it, you should. It is filled with timeless investment wisdom.

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While the book is a non-fiction work, it includes the fictional character Mr. Market. Mr. Market is your business partner. He is prone to swinging between extreme enthusiasm and extreme pessimism. When he's enthusiastic, he will offer to buy your half of the business for way more than it is worth. When he is pessimistic, he will offer to sell you his half of the business for much less than it is worth.

That, in a fun little story that is easy to understand and relate to, is how the market works. Sometimes stock prices are shockingly high for seemingly no reason. Other times they are so low that it is hard to understand. And Mr. Market's mood swings can happen surprisingly quickly. But Benjamin Graham didn't suggest that investors make rapid-fire trades; instead, he recommended focusing on fundamentals.

There couldn't have been a better example of…

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