Benjamin Graham – one of the fathers of value investing is credited with the following quote:

In the short-run, the market is a voting machine – reflecting a voter-registration test that requires only money, not intelligence or emotional stability – but in the long-run, the market is a weighing machine.

Benjamin Graham, as Quoted in 1993 Berkshire hathaway letter to shareholders

The quote is saying that day to day market participants are basically voting on what stock or fad is going to occur in the near term. Will inflation be higher or lower than expected? How high will the federal reserve raise interest rates? Are we headed for a recession in the near term? All good questions that the market incorporates into stock prices today. Time will reveal the answers to these questions.

The good news is that in the long run, stock prices work more like a weighing machine which does not concern itself with the opinions of the people weighing an object, but rather reflects the fundamental essence (or weight) of something. In the long run, stock returns are based on the more concrete elements of investing such as: What are the underlying earnings of a company? What is the constant/sustainable growth rate for a company? These questions avoid the day to day “opinion” questions and get to the heart of the matter.

We see the results of the “voting machine” vs the “weighing machine” in stock returns. On a daily basis, stock returns are positive about 1/2 the time (53% positive vs 47% negative)*. However, when we look at returns from a “decade perspective” instead of daily/monthly/yearly perspective, the results are much more favorable. Below shows the historical observations of 10 year rolling excess returns of the market minus Tbills!

The weight of decades can take away a lot of the stress and anxiety we see in the opinions of the week/month.


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