By Christine of Small Cap Investing
Most of America was shocked last month by the announcement. No, not that the U.S. government debt got downgraded to “negative”. But that Pia got voted off American Idol. The votes came in (or in her case, they didn’t) and the public had spoken. I too, was among the millions with dropped jaw. How could this be? Clearly she has the strongest voice. How could the voters be so dumb???
Then it struck me how similar that show is to the stock market. As an investor, every day I experience a form of Idol, but instead of watching beautiful young people sing, I watch stocks sink or soar.
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Benjamin Graham, the father of value investing, described it best when he said in the short run, the stock market is like a voting machine – tallying up which companies are popular or unpopular. Every day, investors cast their votes for what they “like” and the stock price reflects the actions of millions of people who buy or sell based on a feeling.
But Graham also noted that in the long run, the market is like a weighing machine – assessing the substance of a company. In the long run what counts is the firm’s actual underlying business performance, not the investing public’s fickle opinion about the company’s short term prospects.
What makes the market more exciting is that unlike Idol where Pia has now been “delisted”, in the stock market you can always find companies that aren’t getting enough votes right now for whatever reason – either company specific (new product launch off to a shaky start) or secular (who wants to own sleepy utility stocks in a bull market). As a long term value investor, my job is to figure out if a stock is unloved for identifiable and temporary reasons, and if it has what it takes to become the next American Idol.