The market is a voting machine in the short term and a weighing machine in the long term from "summary" of The Intelligent Investor, Rev. Ed by Benjamin Graham
In Wall Street, what matters most in the short run, as Benjamin Graham famously put it, is not the financial state of corporations, but the psychology of the people who buy and sell stocks. The market, he said, is a voting machine in the short term, where countless individuals express their opinions, hopes, and fears through their buying and selling decisions. This leads to daily fluctuations in stock prices that are often driven more by emotions than by underlying business fundamentals.
In essence, the stock market in the short term is like a popularity contest, where stocks go up or down based on investor sentiment rather than intrinsic value. This can create opportunities for savvy investors who are able to detach themselves from the crowd and think independently. By focusing on the long-term prospects of a company rather than its short-term stock price movements, these investors can take advantage of mispricings caused by market irrationality.
Over the long term, however, the market tends to be more rational and efficient in weighing the true value of a company. In the weighing machine phase, stock prices more accurately reflect the underlying fundamentals of businesses, such as earnings, dividends, and growth prospects. As a result, companies with strong fundamentals tend to outperform over time, while those with weak fundamentals eventually face the consequences of overvaluation.
For Graham, this distinction between the short-term voting machine and the long-term weighing machine is crucial for investors to understand. By recognizing that market prices can deviate from intrinsic value in the short term, investors can avoid getting caught up in market frenzies and focus on long-term value creation. In the end, it is the patient, disciplined investor who is able to see through the noise of the market and achieve sustainable success.
