Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 247

The voting machine and the weighing machine

“In the short run the market is a voting machine but in the long run it is a weighing machine.” – Benjamin Graham

The father of value investing, Benjamin Graham, said it so eloquently. In the short run many different things seem to matter. Investors focus on reports from journalists, brokers, market commentators, and anyone else trying to explain short-term gyrations in markets and prices. The post hoc causes of the dramatic recent market sell-off that we have read about include rising bond yields, inverse volatility, exchange traded notes, rising wages, the US Government deficit, computers running complex algorithms, profit taking after strong global markets … the list goes on. In the short run, all of these factors seem to get a vote. The weighing machine of earnings and valuation can take a backseat as the market voting machine swings into action.

Ultimately, earnings matter

In the long run what is being weighed by the market are earnings, because ultimately earnings drive share prices. Earnings are what long term investors focus on. Short-term share price movements and gyrations in the broader market are hard to predict. Short-term movements in share prices are often random. They can be a function of an investor that decides one morning to buy or sell. They can be in response to someone leveraging or deleveraging their portfolio. They can move because of macroeconomic events. They can move on changes in investor sentiment. We are not aware of any person who has repeatedly and successfully predicted these short-term movements. We are, on the other hand, aware of many investors who have unsuccessfully tried to ‘time’ their investments.

Macquarie is an example of a high-quality business, with a strong return on capital, good cash generation, and a sensibly geared balance sheet. It has exposure to a number of financial sectors that are experiencing strong tailwinds. Its largest profit contributor is an asset management business centred around a global infrastructure portfolio.

However, its share price moves around wildly. During a recent market sell-off, Macquarie Group announced a near 10% upgrade to earnings, yet its share price fell over 8% in a matter of a few days. Did the value of Macquarie Group fall over 8% in this period? We suggest not. There will be many commentators espousing a post hoc view as to why Macquarie Group fell so significantly.

The simple fact is that more people wanted to sell the stock than buy the stock at a particular point in time so the price declined. What matters is what happens to earnings over time. And for very good reason. Ultimately the market will weigh the earnings of the company, which will be reflected in the share price. The evidence is clear in the fifteen-year chart below. Eventually the share price will follow the earnings of every listed company.

Click to enlarge. Source: Bloomberg, Auscap

Stock price volatility that is not a response to volatility in company earnings is an opportunity for the patient investor who understands that it is the weighing machine not the voting machine. Focusing on the medium to long-term earnings profile of a company is the most sensible approach to long term investing.

 

Tim Carleton is Principal and Portfolio Manager at Auscap Asset Management, a boutique Australian equities-focussed long/short investment manager. This article is general information and does not consider the circumstances of any individual.

 

1 Comments
Paul
April 05, 2018

There goes the efficient market hypothesis..

 

Leave a Comment:

RELATED ARTICLES

Feel the fear and buy anyway

The growth outperformance myth

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

Latest Updates

Investing

Designing a life, with money to spare

Are you living your life by default or by design? It strikes me that many people are doing the former and living according to others’ expectations of them, leading to poor choices including with their finances.

Investment strategies

A closer look at defensive assets for turbulent times

After the recent market slump, it's a good time to brush up on the defensive asset classes – what they are, why hold them, and how they can both deliver on your goals and increase the reliability of your desired outcomes.

Financial planning

Are lifetime income streams the answer or just the easy way out?

Lately, there's been a push by Government for lifetime income streams as a solution to retirement income challenges. We run the numbers on these products to see whether they deliver on what they promise.

Shares

Is it time to buy the Big Four banks?

The stellar run of the major ASX banks last year left many investors scratching their heads. After a recent share price pullback, has value emerged in these banks, or is it best to steer clear of them?

Investment strategies

The useful role that subordinated debt can play in your portfolio

If you’re struggling to replace the hybrid exposure in your portfolio, you’re not alone. Subordinated debt is an option, and here is a guide on what it is and how it can fit into your investment mix.

Shares

Europe is back and small caps there offer significant opportunities

Trump’s moves on tariffs, defence, and Ukraine, have awoken European Governments after a decade of lethargy. European small cap manager, Alantra Asset Management, says it could herald a new era for the continent.

Shares

Lessons from the rise and fall of founder-led companies

Founder-led companies often attract investors due to leaders' personal stakes and long-term vision. But founder presence alone does not guarantee success, and the challenge is to identify which ones will succeed in the long term.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.