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Charles Mizrahi
Charles Mizrahi

Mr. Market—a poor arbiter of value

November 02, 2006 | About:

The past ten days have continued to confirm for me that Mr. Market is a terrible judge of value . Mr. Market was the allegory used by Ben Graham to describe the stock market’s short-term fluctuations. Graham said that when Mr. Market is euphoric, he will bid prices up to the moon and when depressed he will push prices sharply lower. Warren Buffett cautioned that “Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful.”

Over the past few weeks when the DJIA was making new highs, I was keeping my eye on companies that are in the cement, concrete, and aggregate business . This sector caught my attention since they are easy-to- understand businesses and most of the stocks in the sector were trading sharply below their 52-week highs made less than four months earlier. Mr. Market pushed shares of these companies lower in fear that the housing slowdown will hurt future earnings over the short term. Over the long term, many of the companies in this sector are run by good management that has consistently increased revenue and earnings. Unfortunately, the few that I followed were close to but not yet at my target prices.

On October 27, CEMEX (CX), the world’s number-three cement maker, proposed an all-cash bid of $12.8 billion to buy Australia-based cement maker Rinker Group (RIN), which does 80 percent of its business in the U.S. The night before, RIN closed at $53 per share on the NYSE, and after the bid was announced, RIN’s stock soared. Although CX’s offer was for the equivalent of $65 per share for RIN, the stock climbed to $71 per share by the end of the trading day. What’s wrong with this picture?

At the end of April, Mr. Market bid RIN up to $76 per share (a 52-week high ), and five months later, Mr. Market pushed it down to $50 per share ( close to a 52-week low). You would have trouble finding another class of investments where something can go from a 52-week high to a 52-week low all in the space of five months. CX, being a knowledgeable buyer, saw RIN trading at a very cheap price and understood what Buffett said, that Mr. Market is there to serve, not guide . What is even more perplexing is why RIN was trading at $71 per share , six dollars higher than CX’s bid. Apparently Mr. Market agreed with RIN’s chairman, John Morschel, who turned down CX’s offer because the offer “ materially undervalues the company.”

Just to recap how well Mr. Market values companies: RIN went from a 52-week high to near a 52-week low and is now trading six dollars higher than CX’s bid offer. And to think all this crazy price movement happened in less than five months, with the fundamentals of RIN hardly changing . Just keep in mind that it’s Mr. Market’s pocketbook, not his wisdom, that we are after.

Berkshire Hathaway, Inc.Annual Report for 1987.

About the author:

Charles Mizrahi
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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