If you are bothered by the down-turn in the stock market perhaps you need to think longer term when you invest. In the long term the market will be up. If you are hit with a cold sweat by rapid downward movement in stock prices perhaps you have not set aside enough reserve capital to ride out the storm. You should increase your cash reserves or invest a greater amount in a mix of bond funds. You should not put long term money in short term investments, nor should you put short term money (needed in the next six months) in long term investments.

Momentum can move a market up and it can move a market down very rapidly and good companies can get caught in the "group think" which may be very irrational. If your tolerance for volatility is low then you should increase your investment diversification, trade less, use index funds and continue to adjust your portfolio using a proven asset manager if you do not have the ability to do it yourself.

Any good investment company or manager will ask you to assess your risk tolerance early in the process of setting up an account, but you should ask yourself this question even if you do not have an adviser. If you are feeling anxious about the current market you were not honest with yourself when you considered this question, or you did not address the issue at all.

At times like these I am reminded of what the economist, John Maynard Keynes, said, "The market can stay irrational longer than you can stay solvent." If you foresee potential liquidity problems in your future you should address them now; you should not hope for a turn-a-round to save you. Yes, the market will turn around, but when is the question, and you do not want to be worried about when. This is where long term thinking and value investing have a great advantage over momentum investing, technical analysis, growth stories and of course day trading.

According to the Commodities Watch [subscription required] column in Tuesday's Wall Street Journal, analysts believe that the growth in exchange-traded funds has "buoyed" the prices of gold and silver. According to John Reade of UBS, the amount of gold in ETFs is "quite an impressive number." Basically, what has happened is this: As fund managers anticipated a growth in interest in investing precious metals, they established gold and silver ETFs. To establish the fund, they acquired large quantities of these metals, reducing the liquidity in the market. This, in turn, drove prices up, which in turn, attracted more investors and so on.

This is an interesting illustration of John Maynard Keynes's investing philosophy occurring on a large scale. While he is best known as more of a macro-economist, he provided one of the most compelling metaphors for financial markets.

Suppose that a newspaper hosts a beauty contest where entrants are asked to look at 100 photos of models and select the six that they thought were the most beautiful. Prizes would be awarded to readers who voted for the models who received the most votes. How would you vote? It would be naive to simply select the ones that you liked most. What if you have different tastes than the average person? Instead, you must try to select the models who will be considered most attractive by the average reader. However, the other readers will be making their selections the same way.

To quote Keynes:

Google closed down yesterday finishing at $367.23 per share on a day when the rest of the market moved notably upward. Although I have been very vocal about the stock price being overvalued in my Blogging Stocks posts, (see: 10 Reasons I think Google is going down), Google remains a very good company with a growing brand providing valuable services. So this begs the question: What is GOOG stock worth?

I'm not in the prediction business, I am in the investment business. Is there a price I would pay? Certainly. That price is unquestionably less than most other investors would pay because I always look for deep value. But is there a "fair market value?"

That's a very difficult question because the price is determined by what the last trader feels the stock is worth -- not everyone, not a consensus. For example, if you own a stock that you bought at $20 and it's now trading at $40, and you are holding on long term, then you are not a factor during the day when traders are moving the price up or down a few bucks. Your opinion on the value that day is silent and has no bearing on the price.

In trying to assess what the potential appreciation of the stock might be next year I had to make an assumption about the P/E ratio. This is based on what I envision is the level most traders will be willing to pay. If you use a P/E ratio of 40 and look twelve months out and assume Google's earnings continue to grow on a slower but still strong trajectory, you are looking at a lot of potential upside from here. GOOG's trailing twelve month EPS is $6.82. If it hits EPS of $12 then you might arrive at a value of $480. These are figures commonly discussed in the business pages and by analysts. Some of the thoughtful comments I have received to my posts suggest the same thing. Of course we have read higher estimates by Piper Jaffrey analysts who reached a $600 valuation. But to get there you must allow for EPS of $15 or a P/E of 50. That I am not willing to do, are you?