.png)
Ben Graham is famously attributed [1] for stating that the market was a voting machine in the short term, but a weighing machine in the long term. By that, I believe he may have meant that psychology and emotion can sometimes cause Mr. Market to overreact or underreact to fundamental (or other) information, thus affecting a share price, but that eventually, the fundamentals win out. [2]
We 100% agree with this, but admit there is a wonderful debate to be had about when “eventually” arrives.
Our guess is that “eventually” varies over time. In some market regimes, “eventually” is just a few days after the market overreacts to something, whereupon the stock regains its fair equilibrium. In others, narrative(s) can dominate a story for much longer. Might it take a week for Mr. Market to make things “efficient” again? Or maybe a year? Longer? [3]
I was lucky enough to study under Merton Miller before he died (yes I am old). Mert would accept there was a voting machine for about five minutes, and even then it was a big “maybe”. He called it “price pressure”. On the other end of the spectrum, I have a very smart friend (hi Ben) who thinks reconciliation of fundamentals to price never happens. He thinks the market is a voting machine, forever.
While I disagree, but will concede that it can take a lot longer than I originally thought. Yet I also believe that the answer can change. So it is up to us as investors to figure out which regime we are in.
FOOTNOTES
[1] Graham never actually wrote this, however, in either Security Analysis or The Intelligent Investor. He only refers to voting machines, in fact he states (twice!) that the market is not a weighing machine. However Warren Buffett says that Graham believed it eventually was a weighing machine, and Jason Zweig states that Buffett said that Graham used to often given the “voting vs. weighing” comparison in class.
[2] Graham said a lot of other great things about psychology, emotion, and behavioural investing, too: https://www.albertbridgecapital.com/drew-views/2018/9/3/the-grandfather-of-behavioural-investing
[3] Yes we are aware of the typical one month and three year overreaction windows in behavioral finance, as well as the intermediate term 12 month underreaction windows. That isn’t what we are talking about here, or at least it isn’t precisely. Here we are talking about (let’s call them) “equilibrium regimes” where the disconnect between fundamentals and valuation are reconnected, sometimes sooner, sometimes later.
DISCLAIMER
The views and opinions expressed in this post are those of the post’s author and do not necessarily reflect the views of Albert Bridge Capital, or its affiliates. This post has been provided solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The author makes no representations as to the accuracy or completeness of any information in this post or found by following any link in this post.
YOU MIGHT ALSO LIKE
Are American Companies Better than European Ones?
If we again go back and start the clock on January 1, 1980, and stop it thirty years later on December 31, 2009, we see that the S&P 500 generated annual total returns (with dividends) of 11.5%. During that exact same period, guess what the annual returns of the MSCI Europe were? Also 11.5%. This last decade, however, things have gotten out of whack.
Read MoreArchegos, Disclosure, and Price Discovery
This had a lot to do with bad banking, but most to do with an overzealous client. Meanwhile, it had very little to do with holdings disclosure. Sure, our kneejerk reaction is (always) for more regulation, because we want to believe that some regulatory response will immediately solve all our future problems. But we should question this intuition.
Read MoreIt's All About the Fundies
It wasn’t passive flows that mattered. It wasn’t interest rates that mattered. It wasn’t the multiple that mattered. It wasn’t an ever-expanding infectious narrative that mattered. No analyst on the buy or sell side came remotely close to understand the market opportunity, the share, the profitability. It was about better vision, modelling. and analysis. It was all about the fundies.
Read More
