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Bill Freehling is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Bill Freehling.

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Mr. Market can mislead you

THIS PAST WEEK’S crazy stock market brought to mind Benjamin Graham’s "Mr. Market" parable.

Graham, the great value investor, served as Warren Buffett’s mentor and wrote the classic book "The Intelligent Investor." In chapter eight, Graham teaches a lesson about how to capitalize on the market’s sometimes irrational ways.

In the parable, Mr. Market is the name of your partner in a small private business. Every day Mr. Market tells you what your $1,000 share is worth and offers to either buy you out or sell you more. A manic fellow, Mr. Market’s opinion changes sharply from day to day. Sometimes it’s overly dire, and sometimes he’s too giddy.

Graham’s advice is not to let Mr. Market influence your opinion of what your stake in this small private business is worth. But he urges you to profit off Mr. Market’s inconsistency.

"You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low," Graham writes. "But the rest of the time you will be wiser to form your own ideas of the value of your holdings."

Graham is making an analogy to the public stock market, which quotes you a price for your holdings every second during the trading day. If you’re confident in your judgment of a stock’s worth, you should pay no mind to what Mr. Market thinks. Just use it as an opportunity to buy low and sell high.

On Monday, U.S. stocks roared up 3 percent only to fall by the same amount Tuesday. Commodity stocks fell 5 percent Tuesday and rose the same Wednesday.

Had anything fundamentally changed in those two days? Or was Mr. Market just wielding his manic depressive ways? If you’re an intelligent investor, this kind of environment provides opportunities to profit.

A post-American world

I just finished reading Fareed Zakaria’s excellent new book titled "The Post-American World."

The book shows that America is quickly losing its status as the world’s lone superpower. He describes in depth the rise of India and China, and compares America’s strength at the beginning of the 21st century with the British empire at the peak of its power more than 100 years before.

Zakaria isn’t breaking any new ground, but he is a talented and balanced writer able to synthesize numerous global trends to paint a picture of where the world is now and where it’s heading.

The crux of Zakaria’s argument isn’t that America will soon succumb to these emerging giants, but rather that it must adjust to its status as just one of the many powers in a global economy.

He shows that America still has the world’s dominant economy and educational system, but its government must stop alienating the rest of the world with its unilateral policies. Rather, Zakaria suggests that America take the roll of chairman of the board, presiding over but working in unison with growing economies.

Zakaria shows that multinational companies such as General Electric have already learned to do this and are profiting immensely off their global investments. The U.S. government should follow suit, he urges.

Permalink: http://news.fredericksburg.com/businessbrowser/2008/09/14/mr-market-can-mislead-you/

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