Voting Machine vs. Weighing Machine
Ben Graham once said that in the short-term, the market is a voting machine, while in the long-term it's a weighing machine. When I hear this oft-quoted line about the stock market, my initial inclination is to interpret this as saying: don't mind the daily price fluctuations of the stock market, in the end those will take care of themselves.
In thinking about today's uncertain economic times, however, I'm finding that this quotation perhaps goes quite a bit deeper than that.
As an example, anyone who has closely followed my CAPS record for a while knows that I've generally been bearish on the entire alternative energy sector. It's not that I'm against being green. Far from it. After all, I live in the greater L.A. area and we have more than our fair share of air pollution driven largely by the number of fossil-fuel burning cars out here. In short, when it comes to all the things that alternative fuels have the potential to do for us, as a society, I'm a big fan - I really am. But here's how I see it...
Voting Machine: I love the technology, it would have great societal benefit, and I want to invest in a socially responsible way.
Weighing Machine: Today, the techology hasn't progressed to the point where it is economically superior to fossil fuels. The infrastructure challenges are staggering, and no amount of wishful thinking, or government subsidy, is going to change this basic fact. We will hopefully get there someday, and hopefully sooner rather than later, but that day is not today.
This concept also applied to my bearish calls on satellite radio. I made my first thumbs-down calls on Sirius and XM back in May of 2006 - when a lot of people were still very bullish on these companies and the technology. But when I thought about these companies...
Voting Machine: Neat, new technology that has a lot of passionate fans. What's not to like about the programming choices, or the lack of commercials?
Weighing Machine: Satellites cost a lot of money to launch. The fixed asset base is huge. Companies with fixed asset bases are very volume-sensitive, so these companies need a lot of subscribers. The problem is that those with the potential to bring a lot of subscribers (i.e. Howard Stern) are in a position to extract much of the profit for themselves. The content providers have a viable alternative (syndicated terristrial radio), the satellite radio companies, much less of one.
While this has been an interesting trip down memory lane for yours truly, I think this principle can be applied to a lot of things going on in our economy and the market today. Case in point: the debate over the U.S. auto-maker bailout.
Voting Machine: These companies are simply too big to fail. The amount of jobs lost, not only at these companies themselves, but also throughout their entire supply base, and all of the businesses that all of these employees spend their paychecks at, is almost too staggering to comprehend.
Weighing Machine: The fundamental problems with the U.S. automakers stem largely from the fact that, for many years, they have been producing products of inferior quality, and at a higher cost, when compared to their industry rivals. No amount of bailout money is going to change this fact. Unless and until these companies solve their quality and cost problems, any bailout money is simply going to only serve to delay the inevitable.
My point here isn't that invesments in alternative energy, satellite radio, or U.S. automakers either is, or was, a bad idea.
My point is that in every investment decision there are pros and cons. Reasons why the investment or idea makes sense, and reasons why it might not. One thing I'll be trying to do, however, is to ask myself, "Which of these reasons are part of the 'voting machine' and which ones are part of the 'weighing machine'?" Not only will it help me separate the hype from the substance, but it may also help me find those contrarian opportunities that can make for some really nice returns.
Russell (a.k.a. TMFEldrehad)