Watching the stock market these days is like being on a roller coaster - but it does not have to be. An investor would do well to think about the stock market as a person who is sometimes rational, yet sometimes irrational, always emotional, and subject to manic fits. Do not let Mr. Market guide you, but rather take advantage of his fearful moments to buy great businesses with good long-term economics, when these companies are selling at reasonable/advantageous prices.

Another way to look at it is to see the market as an auction, where people bid every day on all public companies. You can either buy or not. When the people at the auction are depressed and bidding really low for excellent companies, you would want to put in a bid and buy. If you knew of a local aptartment building or farm and you knew it was great and had a wonderful history and future, but everyone in town showed up to the auction depressed for a variety of factors, and was bidding low incorrectly, then you should bid and buy this wonderful building or farm at this low price.

The securities that I like best right now are an outstanding group of businesses that together should, over time, offer an investor nice income with capital growth; further, and importantly, an investor can own these businesses fractionally, knowing that if Mr. Market gets more pessimistic, he can simply buy more stock as the price drops. Indeed, it is actually beneficial for a long term investor to live through a pessimistic market that will give the buyer a better price to aquire more ownership in the businesses.

This group of businesses will provide a nice variety of stable earnings gained from a diversified group of franchises. Each franchise is based on a good idea and has a talented manager at the helm. These businesses have a history of delighting customers, holding costs down and improving products and services. Each business has a wide moat, and hopefully is widening its moat as I write.

As I read Berkshire Hathaway's (BRK.A) (BRK.B) annual reports recently, my attention was brought to an article Warren wrote decades ago entitled “The Security I Like Best”, in which he named GEICO as the security he most liked. A gentleman named Lorimar Davidson had given him an education on the insurance business and, more specifically, GEICO. Warren later was a stockbroker and made sales calls telling potential clients the business virtues that GEICO represented. His Aunt Alice bought some shares as his supporter, but most importantly, Warren bought shares; after a few lane changes and years, Warren bought the company.

I think it is relevant today to realize that Berkshire's most important business is insurance and GEICO, headed by Tony Nicely, is a huge part of Berkshire's insurance operation. More importantly, GEICO is still a strong economic castle.

When should one buy shares of a business? Well, I like Warren Buffett’s metaphor about swinging the bat in baseball. Basically, it says that you should swing only when the pitch is in the sweet spot of the strike zone. As a former tennis player, I like to think about when one should go for an approach shot and attack the net. You shouldn’t swing out on every ball and attack the net. You should not approach against balls that are hit deep or with a lot of topspin or which are hit low with pace and underspin. It just does not put the percentages of success at net in your favor. It would not lead to successful percentages against an apt opponent. There is a “sweet spot” associated with when a ball should be hit with spin and pace into a corner and come behind to attack the net. You want a shallow, not well struck ball that lacks spin and that lands around the service line and is bouncing up into your hit zone. Then you pounce.

In investing this means only swinging when you have a great franchise business with a strong economic position that is capable of achieving high returns on equity over long periods of time due to some moat. Also the company should be able to do this employing little debt and finally the company should be selling at a reasonable price. The business should be capable of growing earnings well into the future because it makes life tough for competitors. And it should be run by honest managers.

The market was as emotional as ever yesterday. Stocks were being pushed up and down on every latest macroeconomic data point. I continue to try to answer the two basic questions of investing: what to buy and at what price? This is not as easy as it seems, yet is easier than it may look. For one, I usually avoid the complex, opting for the simple and understandable. Said another way, I am, as always, looking for a 1 ft hurdle to jump - leaving the seven footers for the Wall Street crowd.

Long ago, I bought Kimberly Clark (KMB), thinking that it is a wonderful company with brands that touch people from the moment they're born, brands that are trusted and needed to get by in life. A friend challenged me, asking why I didn’t buy Procter & Gamble (PG) instead. Let's compare them here.

As I write this old Mr. Market has finally shown his nervous face. After arriving at the market 3 weeks in a row offering lower and lower prices. Appearing each day more pessimistic and gloomy, he finally has gotten downright fearful. He was, Monday morning, offering approximately 5% less for the S&P than he would on Friday. Then yesterday morning, in a fit of fearfulness - that may have been brought on by the realization a democrat could be in office, the fact that Bank of America barely made a dollar, and the realization that certain insurance companies cannot insure anything - he offers 5% less than the last day of trading. This puts his offer to sell his shares about 16% less than at the first of this year. In just 22 days old Mr. Market lowered his offer for United States Stocks by 16%.

There is much turmoil in current financial news, with large businesses revealing problems galore. This isn’t all news. Warren Buffett had dicussed the problems with derivatives for some time. He unwound the entire derivatives operation at General Re and has specifically avoided some banks over the years because their financials were too complicated and not understandable.

Now we see his intelligence again. These “complicated” banks are being forced to confess to poor management of their businesses over the last few years. Many of these banks made loans to people who really should not have received them and now these “assets” are being written down. This is really the banks saying ,"we made bad investments that are not worth near what we have been reporting on our balance sheet." The numbers are massive. These banks loaned billions of dollars that should not have been loaned and invested billions in subprime mortgages that cannot be paid off because the borrower does not have the capacity to pay the loan off .

I will start by asking a question that every analyst should ask. What is this company worth? Or, what is an appropriate price to pay today for fractional ownership in all the future cash earnings the company will earn?