“In the short-term, the stock market is like a voting machine. In the long-term, the stock market is like a weighing machine.”
This is a quote the great investor Warren Buffett has attributed to his mentor Benjamin Graham, though it’s true origin is unclear. Regardless of its origin, the quote succinctly differentiates the short-term from the long-term.
Human psychology can trick us. We often become enamored by the here-and-now and eschew the future. Think of that chocolate bar, a tasty treat that releases endorphins, the “feel good” hormone. Once that dopamine boost subsides, a new chocolate craving commences. Yet too much chocolate for too long can contribute to weight gain and severe health issues such kidney disfunction, an irregular heartbeat or diabetes1,2.
The stock market is similar in that we, as human beings, can get caught up in recent stock and investing themes. This can work on the upside and the downside. Not too long ago, media and other pundits were exclaiming the virtues of technology-of-tomorrow stocks, Special Purpose Acquisition Companies (SPACs), or digital asset (such as cryptocurrency and NFTs). Many got caught up in the fervor and forgot the basics; how will these be areas actually be accretive to investor returns if they are not profitable nor projected to be profitable? Likewise, after the financial markets’ abysmal 2022 performance, it’s hard to see past the current milieu to better days.
The brilliant simplicity of the above quote speaks volumes. The quote basically means short-term movements/volatility tend to be based on subjective or emotional assessments, while the long-term is based on fundamental value. The human mind tends to be emotionally driven (short-term thinking), which is why the stock market moves from over-valued to under-valued back to over-valued… rinse, repeat. Short-term movements can last weeks, months or even a few years, but in the end, fundamentals can’t be ignored.
Our capital market research attempts to take this into consideration by focusing on the long-term while recognizing the short-term gyrations. We refer to this method as mean-reversion. A mean-reversion process assists investors from becoming too exuberant during go-go times and too despondent during no-go times.
Warren Buffett’s ability to ferret out his short-term subjective viewpoints and focus on the long-term fundamentals is one aspect that has propelled Warren Buffett to be regarded as one of the best investors of all time. Focusing on the long-term will help get through this current malaise.
1National Kidney Foundation
2Diabetestalk.com
S&P 500 index measures the performance of 500 stocks generally considered representative of the overall market. Bloomberg US Aggregate Bond index measures the performance of US investment grade bonds, including Treasuries, government agencies, corporates, MBS and ABS.
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