In the short run, the market is a voting machine. In the long run, it’s a weighing machine”
I often wonder when the short term morphs into check weigher machine the long term. After all, isn’t the long term just a series of short terms anyway. When does the voting machine turn into the weighing machine? Let’s think about that…
What invokes a response from a voting machine? Sentiment, popularity and perception. A story I would like to quote from “The Snowball” illustrates the sheer power of “the voting machine” An oil prospector died and went to heaven. He met St. Peter who said “Welcome! We are happy to have you here, there is just one issue. We have strict zoning laws here and we keep all of the oil prospectors in that pen and as you can see, it’s jam-packed”. The newcomer replied “don’t worry, I will get rid of them!”
He turned towards the pen and shouted out “There is oil in hell” and like that, the pen emptied, as his peers headed for the fiery pit to chase another million. St. Peter said “now you have it all to yourself!” The prospector paused for a minute and then said “no, I better follow them in case there is any truth in the rumour” and off he scurried. Ladies and gentlemen, you wouldn’t go, would you? The thing is that many people would. How often have you heard about a “red, hot” tip, ready to take off and without any further analysis, you either considered or actually bought it? What is that, but following a rumour to see if there is any truth in it? If we were to describe in three words on WHY this occurs,”sentiment, popularity and perception” would be good suggestions.
There is no question, but there have been some cases when the weighing machine came crashing down on top of the voting machine wiping populist stocks out. The internet era springs to mind. Companies’ that didn’t have assets, earnings or even revenue watched their prices rise and rise until the tech bubble burst. Many of these hollow shells were put on the weighing machine and registered nothing but hot air. These corrections enable the long term values of these companies to reign again. There is the answer to the question – the bear markets correct the bulls to identify the “actual” long run value and here is where the short and long term graphs cross.
Does it really have to come to painful collapses in price? Surely factual information about earnings, dividends, level of debt, cash flow etc should give us an idea if a company is trading way off its value or not… and without needing a degree in accounting. Anybody, who is looking objectively at the state of affairs and not blindly following the crowd, can see that a company without assets or income is a ludicrous investment and yet, the internet craze swept everybody up.
My suggestion – buy a weighing scales and use it to measure the value in a company. It is actually that simple – Buffett developed a system which literally weighs the companies he is looking at and from this, he makes his buying and selling decisions. Do you want to know more on Buffett
Remember a voting machine is only good after the election, but the weighing scales are crucial before you bake the cake.
Susan M Hayes Has a Degree in Financial Maths & Economics..CFA (Chartered Financial Analyst) Level 1..Susan is a Stock Market Educator,Investor and Commentator.