Ignorance Can Still Mean Bliss

The stock market has been suffering, like the rest of us, from the terrible news out of Iraq, but it's also suffering from the good news out of the U.S. economy. This may be puzzling, but your mission as an investor is not to analyze the manic-depressive moods of Mr. Market -- that handy personification of the investing crowd, as invented by the financial genius Benjamin Graham -- but rather to exploit them.

If Mr. Market is so glum that he'll offer to sell fine companies for low prices, then take him up on the offer. Don't feel guilty!

Will Mr. Market become even more depressed in the months ahead? No one knows. If you think he will plead with you to take shares of excellent businesses off his hands at even lower prices, then wait. Be my guest. But understand that you are trying to predict the short-term behavior of an emotionally disturbed person.

"We don't try to forecast the market," writes William Nygren of Oakmark, a Chicago-based family of seven mutual funds with terrific records and $25 billion in assets, in a recent letter to shareholders. "We simply buy out-of-favor stocks that appear to be selling below growing business values."

There are, in fact, two ways to invest in stocks. The first suits what Graham's greatest student, Warren Buffett, calls, without disparagement, the know-nothing investor. This is the person who lacks the time and the inclination to buy and sell individual shares of businesses. Thanks to that brilliant democratizing invention, the mutual fund (and its cousin, the exchange-traded fund, or ETF), know-nothing investors can hire professionals to manage their portfolios or can simply participate in the market, or parts of it, by owning an entire index, such as the Standard & Poor's 500, roughly the largest U.S. stocks.

The second way to invest suits what Buffett calls the know-something investor, who likes to spend time picking stocks. Such an investor should slowly and deliberately determine the wonderful businesses in which he wants to become a partner for the very long run.

Whichever kind of investor you are, you should not base your decisions to buy or sell funds or stocks based on what the market as a whole is doing -- or what you think it may do in the weeks or months ahead.

For the know-nothing investor, the market doesn't matter because the immediate financial future can't be predicted, no matter what the pundits say.

Sure, we have a pretty good idea right now that short-term interest rates will rise, but that prospect is already built into the prices of stocks. The question is whether new information will come out that will affect that judgment, information that might indicate rates will rise even more, or less, or not at all. The new information, by definition, is unknowable. So why try to guess it? Are you really smarter than the considered opinions of millions of investors, rendered in cash in transactions every millisecond?

Instead, I urge K-N investors simply to put away a fixed amount each month or quarter or year into a stock-index portfolio, such as the ETF called Spiders (symbol: SPY), which trades on the American Stock Exchange and mimics the Standard & Poor's 500-stock index, or into a diversified mutual fund that tries to beat the averages, such as Muhlenkamp (MUHLX), a mid-cap value fund with a superb track record and low expenses that is a top selection of the No-Load Fund Investor newsletter.