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

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Latest Updates

Economy

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Investing

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Property

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Shares

ASX reporting season: Room for optimism

Despite mixed ASX results, the market has shown surprising resilience. With rate cuts ahead and economic conditions improving, investors should look beyond short-term noise and position for a potential cyclical upswing.

Property

A Bunnings play without the hefty price tag

BWT Trust has moved to bring management in house. Meanwhile, many of the properties it leases to Bunnings have been repriced to materially higher rents. This has removed two of the key 'snags' holding back the stock.

Investment strategies

Replacing bank hybrids with something similar

With APRA phasing out bank hybrids from 2027, investors must reassess these complex instruments. A synthetic hybrid strategy may offer similar returns but with greater control and clearer understanding of risks.

Shares

Nvidia's CEO is selling. Here's why Aussie investors should care

The magnitude of founder Jensen Huang’s selldown may seem small, but the signal is hard to ignore. When the person with the clearest insight into the company’s future starts cashing out, it’s worth asking why.

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.