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Are you a voter or a weigher?

20th February, 2023

Published in The Sunday Times on February 19th 2023.

In other words, the market is not a weighing machine…rather we should say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion”.

That is a quote from one of the most famous investment books ever written, Benjamin Graham and David Dodd’s, Security Analysis. Published in 1934, its message resonates just as prominently in 2023.

Ben Graham’s protégé, Warren Buffett, captured the essence of this more succinctly in a 1987 letter to Berkshire Hathaway shareholders, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

The stock market as an electoral contest

I've often used that quote, believing it to be a remarkably accurate metaphor for market dynamics. My evidence for this was purely anecdotal. However, a recent report from the fund manager, Janus Henderson, provides data that objectively supports the voting machine metaphor.

The stock market can behave like an electoral contest in the short term, where a company’s share price is based on how popular or unpopular it appears at the time. In the long run, the market tends to act as a weighing machine whereby stock prices eventually reflect the fundamental characteristics of a business – earnings growth, financial strength, competitive advantages, etc.

It is reasonable to assume that the main driver of return from a company’s stock would be its earnings. This is true, but only in the long term. Janus Henderson shows the relationship between year-over-year changes in annual earnings and the S&P 500 Index for each year dating back to 1955. The correlation is as close to zero as would make no difference. 

Chart of S&P 500 annual earnings change vs. price range  

Source: Bloomberg, NYU Stern/Prof. Damodaran, as of 2 December 2022.

2022 was a salutary reminder of this dynamic. Aggregate earnings for the S&P 500 showed modestly positive growth in 2022. And the index return? Negative 18%. Even if you could predict this year’s earnings growth in advance, it provides remarkably little insight into what the stock price return will be.

The voters dominate the weighers in the short term 

Predicting the return from an asset usually requires two estimates – the cashflow that the asset will generate, and the valuation multiple that the market will ascribe to that cashflow. Through good fundamental analysis, the former is somewhat tractable, but the latter is far harder to estimate. And as 2022 attests, the part you must guess at can overwhelm the part you have a good chance of getting right through analysis.

Buffett has built an incredible track record in exploiting the difference between voters and weighers.

“The voters in the market referendum are overpaid know-it-alls whose opinions count for little relative to the shrewd assessment of the wise observer, who is not swept up in the intrigues of Mr. Market’s court.”

This is a bit of motherhood and apple pie. We can probably all agree that not getting swept up in the market’s ‘intrigues’ is a principal worth adhering to. To live by it is not as simple.

Stock market valuations say a great deal about prospective returns 10-15 years out, but the immediacy of those outcomes depends on the condition of market dynamics (speculative versus risk-averse investor psychology). Let’s say you estimate the market’s fair value equating to a projected 8% per annum return on average over the next decade. If you get a 25% return in year one (owing to speculative psychology) where does that leave you? Having achieved three years’ return in just one year, your prospective return is now lower all else equal.

In the short run, you can’t fight what’s in the heads of investors, but in the long run, you can’t avoid the investment returns that are embedded into valuations. If only we knew the point at which the short run becomes the long run, we would have the keys to a kingdom of riches.

What does this mean for short-term trading or market timing?

And therein lies the problem with short-term trading in stocks. It shouldn’t come as any surprise to you at this point to read that it’s a fool’s errand. If it works, you have won the coin toss. Expectations that you will get that consistently right are exceptionally low.

It doesn’t mean you have to completely forsake tactical positioning in stock markets. The market isn’t one homogenous collection of businesses – there are different sectors, styles, and themes which will present varied opportunities for leaning into what looks attractive value and away from the richly priced. But only at the margins, recognising the indeterminacy of the voting machine.

If you are preoccupied with the market’s every stumble or lurch, it should act as great relief to you to know your preoccupation is with crowd psychology. The fate of stock market returns in the year ahead rests with the outturn for valuation multiples, more so than earnings – the sizzle not the sausage.

If you are obsessing over this, please stop, and read again from the top.


Market Data: Calendar year returns 2017 2018 2019 2020 2021 2022
S&P 500 21.8 -4.4 31.5 18.4 28.7 -18.1

Source: Bloomberg. Figures in USD. 

Gary Connolly is Investment Director at Davy. He can be contacted at or on twitter @gconno1.

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