In the Short-Run, the Market Is a Voting Machine, But in the Long-Run, the Market Is a Weighing Machine

Benjamin Graham? Warren Buffett? Ronald A. McEachern? Ben Bidwell? John C. Bogle? Apocryphal?

Dear Quote Investigator: A brilliant metaphorical framework for understanding the stock market can be summarized with the following cogent remark:

In the short-run, the stock market is a voting machine. Yet, in the long-run, it is a weighing machine.

Each purchase and sale of a security impinges on its perceived value. These transactions are similar to votes which increase or decrease the stock price. Transitory news and emotions may influence the price in the short run; however, in the long run, the stream of earnings or losses of a company cannot be ignored. Clarity regarding the fundamentals of a business emerges over time, and the market begins to properly weigh its value.

The pithy statement above has been credited to the famous value investor Benjamin Graham and to his well-known acolyte Warren Buffett. Unfortunately, I have been unable to find a solid citation. Would you please explore this topic?

Quote Investigator: The primary elements of this metaphorical framework were presented in the 1934 book “Security Analysis” by Benjamin Graham and David Dodd. But the precise remark above did not appear in the book.

The earliest close match located by QI was communicated by Warren Buffett during an interview in 1973. QI believes Buffett deserves credit for this saying although he was largely refining the insights presented by Graham and Dodd.

Below are selected citations in chronological order.

In 1934 “Security Analysis” included the following passage contrasting a voting machine versus a weighing machine. Boldface added to excerpts by QI: 1

In other words, the market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.

Importantly, the passage above did not contrast stock prices in the short-run versus the long-run. Thus, this passage did not contain a full match for the statement under exploration. The “Security Analysis” book employed the metaphorical framework a second time in the following excerpt: 2

Hence the prices of common stocks are not carefully thought out computations, but the resultants of a welter of human reactions. The stock market is a voting machine rather than a weighing machine. It responds to factual data not directly, but only as they affect the decisions of buyers and sellers.

Note that neither of the passages written by Graham and Dodd mentioned the key distinction between short-term and long-term. Admittedly, the success of the value investing strategy depends on convergence between a stock price and an accurate evaluation in the long-term.

The “Security Analysis” book was quite influential. In 1948 “Putting Your Dollars To Work” by Ronald A. McEachern contained the following: 3

The market is a voting machine, not a weighing machine. It registers and reflects the thousands upon thousands of personal opinions about tomorrow. It swings high and it swings low on the facts and fancies that move men to investment action.

In 1970 “The New York Times” published an article titled “Down, Up And Up—A Wild Week for Market”. The piece began with a reprint of the first passage from “Security Analysis” given above together with an acknowledgement to the co-authors. 4

In 1971 Ben Bidwell who was a Vice President at Ford Motor Company employed a compact version of the statement from “Security Analysis”: 5

“The excellent performance of the stock market, which surprised nearly all the experts, is a reading on consumer confidence. To put it another way, the stock market is a voting machine, not a weighing machine.

In 1973 a profile of Warren Buffett appeared in the “Sunday Journal and Star” of Lincoln, Nebraska. Buffett presented a full version of the saying although the journalist did not record an exact quotation. Buffett mentioned Benjamin Graham, but he did not ascribe the saying to him: 6

Buffett has attributed his success to the “statistical fundamentalist” method of his mentor and former employer. Benjamin Graham — whose book, “Security Analysis,” made “nothing but sense” to Buffett when he first read it while a student in Lincoln.

In other words, Buffett specialized in finding “undervalued” issues on the market. Such opportunities arise occasionally, he says, because in the short run the stock market acts like a “voting machine” (reflecting all kinds of irrational attitudes and expectations), while functioning in the long run more like a “weighing machine” (reflecting a firm’s true value).

In 1974 an article about Buffett appeared in “Forbes” magazine. The journalist asked Buffett whether the underlying value of a stock would eventually be reflected in its market price. Buffett replied with a concise version of the saying: 7

What good, though, is a bargain if the market never recognizes it as a bargain? What if the stock market never comes back? Buffett replies:

“When I worked for Graham-Newman, I asked Ben Graham, who then was my boss, about that. He just shrugged and replied that the market always eventually does. He was right—in the short run, it’s a voting machine, in the long run, it’s a weighing machine.

For many years Buffett has penned an annual letter to the shareholders of his company Berkshire Hathaway. In 1994 he included the saying in his missive, and he credited Graham: 8

As Ben Graham said: “In the short-run, the market is a voting machine — reflecting a voter-registration test that requires only money, not intelligence or emotional stability — but in the long-run, the market is a weighing machine.”

In 2005 investor and index fund creator John C. Bogle published “The Battle for the Soul of Capitalism”. Bogle ascribed the saying to Graham, but the footnote accompanying the statement only pointed to Buffett’s shareholder letter: 9

But succumbing to the wiles of Mr. Market allows the emotions of the moment to take precedence over the economics of the long term, as transitory shifts in prices get investors thinking about the wrong things. “In the short-run, the stock market is a voting machine,” Graham pointed out, “in the long-run, it is a weighing machine.”

In conclusion, Benjamin Graham and David Dodd presented the metaphorical framework of the quotation in 1934. However, the saying under examination did not appear in the “Security Analysis” book.

Whether Graham should receive credit for the saying is uncertain. The primary piece of evidence in favor of crediting Graham is the ascription in Warren Buffett’s 1994 letter. It is possible that Buffett heard the remark from Graham during a conversation, but Graham died in 1976, and 1994 is a rather late date.

There are a few pieces of evidence suggesting that Buffett should receive credit. First, Graham and Dodd’s 1934 citation states: “The stock market is a voting machine rather than a weighing machine.” This unequivocal remark implies that the stock market never becomes a weighing machine. The stock market is always a voting machine. This viewpoint differs from the stance expressed in the quotation.

Second, Warren Buffett presented the notion of a change in market function from a voting machine to a weighing machine over time in his 1973 and 1974 citations. Buffett’s quotation contained a distinction between lung run and short run market behavior that was absent in the 1934 statement. In fact, it contradicted the 1934 statement. Also, Buffett did not ascribe the remark to Graham in 1973 or 1974.

Overall, Benjamin Graham and Warren Buffett are the leading candidates for creator of this saying. QI leans toward crediting Buffett, but the evidence is incomplete. Perhaps future researchers will discover illuminating citations.

Image Notes: Illustration of prices changing over time from geralt at Pixabay.

(Thanks to John Cowan for his helpful feedback on this article. All errors and conjectures are the responsibility of QI.)

Update History: A conclusion with additional exposition was added to the article on January 10, 2010.

Notes:

  1. 1934 Copyright (Reprint 1996), Security Analysis by Benjamin Graham and David Dodd, (The Classic 1934 Edition), Part 1: Survey and Approach, Chapter 1: the Scope and Limitations of Security Analysis, Quote Page 23, Whittlesey House: McGraw-Hill Book Company, New York. (Verified with scans)
  2. 1934 Copyright (Reprint 1996), Security Analysis by Benjamin Graham and David Dodd, (The Classic 1934 Edition), Part 5: Analysis of the Income Account, Chapter 39: Price-Earnings Ratio for Common Stocks, Quote Page 452, Whittlesey House: McGraw-Hill Book Company, New York. (Verified with scans)
  3. 1948, Putting Your Dollars To Work by Ronald A. McEachern, Chapter 17: The Verdict of the Market, Quote Page 151, Geoffrey Cumberlege: Oxford University Press, New York. (Verified with scans)
  4. 1970 May 31, The New York Times, Down, Up And Up—A Wild Week for Market, Section 4: The Week in Review, Quote Page 1, Column 7, New York. (ProQuest)
  5. 1971 March 13, The Philadelphia Inquirer, Ford Official Predicts ‘Best Spring’ Sales, Quote Page 10, Column 5, Philadelphia, Pennsylvania. (Newspapers_com)
  6. 1973 March 18, Sunday Journal and Star, Warren Buffett, Omahan In Search Of Social Challenges by Sam Thorson, Quote Page 6F, Column 7, Lincoln, Nebraska. (Newspapers_com)
  7. 1974 November 1, Forbes, The Money Men: Look At All Those Beautiful, Scantily Clad Girls Out There! Start Page 41, Quote Page 42, Column 2, Forbes Inc., New York, New York. (Verified with scans)
  8. 1994 March 1, Letter to the Shareholders of Berkshire Hathaway Inc. from Chairman of the Board Warren E. Buffett, Topic: Summarizing 1993. (Accessed at berkshirehathaway.com on January 8, 2020) link
  9. 2005, The Battle for the Soul of Capitalism by John C. Bogle, Chapter 5: Why Did Investment America Go Wrong? Quote Page 95, Yale University Press, New Haven, Connecticut. (Verified with scans)