The Voting and Weighing Machines

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The Voting and Weighing Machines

The father of value investing, Benjamin Graham, explained this concept by saying that in the short run, the market is like a voting machine—tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine—assessing the substance of a company. The message is clear: What matters in the long run is a company's actual underlying business performance and not the investing public's fickle opinion about its prospects in the short run.

Things To Know

  • In the long run, the market is like a weighing machine—assessing the substance of a company.

Two illustrations

Over the long term, when companies perform well, their shares will do so, too. And when a company's business suffers, the stock will also suffer. For example, one company had phenomenal success turning coffee —a simple product that used to be practically given away—into a premium product that people are willing to pay up for. Over time, it has enjoyed handsome growth in number of stores, profits, and share price. It also had a respectable return on invested capital of over 20% at one point.

On the other hand, one department store had a difficult time competing with discount stores and strip malls, and it has not enjoyed any meaningful profit growth in years. Its return on invested capital rarely tops 10%. As a result, its stock has bounced around without really going anywhere in decades.