Berkshire Hathaway
Is the Market Still a Weighing Machine?

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By aspenxtrm
October 27, 2005

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Hello Fools,

So, I have a question I have been mulling around in my head for a while now regarding Ben Grahams "weighing machine". Now, in his time I see why this idea made sense, stocks should eventually reflect what a business is "worth" because the point of the market was to efficiently allocate capital. I get that part...

But what if the markets are no longer wholly, or at least mostly, in the capital allocation business? I started thinking about this during the debates about investing part of the SS "trust fund" in stocks. I was against it for a variety of reasons, but the one that scared me the most, and is applicable to this post is, once we did that, the markets would be so important socially that there would be enormous pressure on our officials to not let the market "fail" people (i.e. go down in a big way). The market would have moved from a way to get capital to the most efficient place, to a way to feed people. Now, I know these can be similar goals, but they are indeed different goals.

Then, over the next several months, I read some literature about various peoples ideas about what (bad) things would happen if the market crashed. I read various folks ideas about the extent of the "wealth effect" from the market, and I read various opinions about how much, if any, the Fed should pay attention to the prices of asset levels. Finally, in the course of my graduate studies, I (am reading) quite a bit about the Asian financial crisis, and as well as various ideas on general market risk. And I kept thinking...

Finally, during my break this week, I am reading "Stress Testing the System" put out by the Council on Foreign Relations (I also read Jared Diamonds "Collapse", great book BTW). In it, there is the following quote: "The most dangerous near-term threat to US leadership and thus US security, as well, would be a sharp decline in the US securities market". When I read that quote I thought to myself "well lordy, now not only does our social welfare rest on the fait of the market, but now our dominance and very security do as well"!

That really scared me as an investor, because as irrational as markets can be, I like to think they will eventually reflect "fair value". But what if they can't, what if the system has changed because markets are no longer being allowed to be merely means of capital allocation? Wouldn't that have an impact on some of the Buffett/Graham folk's most cherished ideas? What happens if the time comes that the most cherished idea that we must examine is the foundation of the entire discipline?

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