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Voting Machine vs. Weighing Machine



December 12, 2008 – Comments (5)

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)

5 Comments – Post Your Own

#1) On December 12, 2008 at 6:23 PM, EnigmaDude (51.88) wrote:

yet another great post!  This is the sort of educational fodder that I love to glean from CAPS. 

For the record - I still like solar stocks though, even if just for the "voting" power - i.e. the emotional aspect of investing that drives up stock prices.

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#2) On December 12, 2008 at 9:01 PM, nuf2bdangrus (< 20) wrote:

Like the tech bubble of 1999 which was premised on the belief that the internet would change our lives.  It did.  But the stocks faded.


I was bearish way too early on the solar stocks, and got burned badly in real life.  Down the road, alternative energy must take a place, and I am all for it.  But without an energy policy, the free markets can't innovate at a profitable level until traditional energy becomes permanently expensive.  Too many people have been burned just to see oil fall.  And since we are oil based, the cost to change that is tremendous.  My solution would be a variable energy tax which would set a gradually rising target price on fuel, so when prices are low, we tax it to fund directly alternative fuels, and secondly, to discount the price in price shocks.

The oil producing nations need to keep the needle in our arm.  The longer it remains, the closer we are to bankruptcy.

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#3) On December 13, 2008 at 5:52 AM, saunafool (94.95) wrote:

Great post. I was just looking through my CAPS picks. I've been heavily overweight (particularly in CAPS) in the oil patch. Along the way, I've been adding what I consider to be value stocks--tobacco, big pharma, insurance, and other companies with high dividends, limited debt, and low P/E ratios.

This summer, my rating was very high due to all the commodity plays outperforming the market and my "value" plays were underperforming. I began to think I should focus on what I know (the oil patch) and not so much on value.

Now, lo and behold, a year into the recession, my commodity picks have killed my score, and my value stocks are the only thing keeping my head above water. (What I see is that my value plays which I picked a year ago are down 20% vs. the market being down 40%.)

I think the thing that's very crazy these days is that the voting machine is more volatile than ever. When people can buy leveraged ETF's, it just has to have an impact.

Ultimately, what it should mean is that the investors paying attention to the weighing machine should be able to find some nice shiny nuggets in the bargain bin during the current downturn.

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#4) On December 14, 2008 at 9:09 PM, ikkyu2 (98.57) wrote:

You know, I don't actually agree that the US autos produce an inferior good.  I drove about 20 different models of new American car in 2007 and 2008 - before buying a BMW 335i - and they were all great quality and cost-competitive.

Where the autos have screwed up is branding and marketing.  The car that directly compares to the car I bought, the Cadillac CTS-V, has 62 more horsepower, great handling, a hands-down-better nav system, and an even more beautiful interior - and it goes for about $10,000 less, when comparing similarly equipped models.

But I am a doctor.  I can't have people seeing that I drive a Cadillac.  They have a reputation of being shoddy quality gas-guzzlers driven by blind Florida nonagenerians.  The 1970s ruined every American car brand - except possibly the Chevy Corvette - and I would argue that this damage is permanent or irreparable.  Be that true or not, the Cadillac marque no longer commands any respect, except for people who want to imitate their favorite rappers in blinged-out Escalades.

Why can't we have a Lexus or an Infiniti for GM?  GM can make the cars people want.  They just don't seem to be able to get the message out the right way.

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#5) On December 28, 2008 at 10:57 AM, unvrsldeflation (63.70) wrote:

I think where the car makers are hamstrung is in their inability to sell directly. There is a system of dealers for domestic car sales that is legally and traditionally set in stone. Everything else has been effected by the internet, why not car manufacture and distribution? It is silly that the car makers are not allowed to take advantage of this. Their proximity to the largest customer base gives them advantage which is taken away by the dealership model. The feedback that the carmakers need in order to be properly responsive has been replaced by excessive marketing so that in the absence of choice people are expected to be told what they like. The whole thing has proven to be ludicrous and a particularly vulgar form of cronie capitalism.

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