“In the short run, the market is a voting machine. In the long run, it’s a weighing machine.” – Warren Buffet.
Warren Buffet had made this statement while we were at the peak of the dot com bubble to explain the hubris in the market. This statement, along with the fact that he did not buy any “booming” stocks also showed his outlook on how the market is going pan out.
If a stock is going 5% up or down daily, and this happens for a few days, this behavior is like people voting the stock up or down. In the short run, the fundamentals of a company do not matter that much and the stock market behaves like a voting machine. Stocks are pushed up or down based on collective euphoria or frenzy. That’s the reason why you see many stocks making unbelievable peaks and equally unbelievable lows. In the short run the market behaves like a voting machine.
In the long run, however, the market behaves like a weighing machine. The stocks with the great fundamentals continue to rise over a 10 to 30 year period and keep growing. Great dividends are paid and great returns are made by the companies who themselves make a very handsome steady profit that grows over a number of years.
In the longer run, you do not find many fly by night companies doing well and you do not find many companies who have done well to have bad fundamentals.
The fundamentals of a company weigh in over the voting machine tendency and only businesses that carry weight generate handsome returns for their investors.
The carnage that is hitting the markets today is shying investors away from the market altogether, investors are voting down the entire market.
But looks like Warren Buffet is sticking to his philosophy. Recently Warren Buffet has picked up stake in GE, calling it the backbone of the US Industry. He is going for the well established weighty stocks and the market voting such stocks down does not seem to bother him much.