What Voting Booths and Scales Can Teach Us About Investing

Years ago, a technical glitch knocked out trading in all Nasdaq Stock Market securities for three hours.  If you are a true long-term investor with a good financial plan, then your attitude toward a market closure of three hours or three months should be one of indifference.  As Warren Buffett said, “If we aren’t happy owning a piece of a business with the Exchange closed, we’re not happy owning it with the Exchange open.”  This leads me to an important question that gets to the heart of how you think about investing and your portfolio.

Are You an Investor or a Speculator?
Warren Buffet quoted his mentor, Ben Graham, as saying, “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.”  What it is weighing is corporate earnings.  When the market closes like it did a little over a week ago, all that has happened is that voting has stopped as the voting booths are temporarily closed.

What doesn’t stop is the generation of earnings by the businesses whose stocks you own.  Think about it.  If trading stopped tomorrow in the stocks of Kellogg’s and Toyota, would people suddenly stop buying Frosted Flakes and Camrys?  Of course not.  People would still be eating breakfast and buying cars and going about their lives.  The earnings generated from the sales of Frosted Flakes and Camrys would be added to the scales of the weighing machine, eventually to be weighed and valued whenever the market reopened.

The critical question you must ask yourself is, “Am I trying to make money from the daily voting or from the eventual weighing?”  Speculators try to make money from the daily voting (i.e. the short movement of a stock) and would be quite concerned with a market closure.  Frequent trading is the speculator’s lifeblood.  A speculator tries to make money not by owning companies, but by trading the stocks of companies and trying to outsmart and second guess the voting machine.  As I have said in the past, I believe that is a fool’s errand.

In contrast, a long-term investor is not concerned with the short-term movements of stock prices.  An investor is interested in owning businesses rather than trading their stocks.  That is why a true long-term investor could have an attitude of indifference toward a market closure.  A market closure has no impact on the underlying value of the companies that the investor owns.  As I said earlier, if Kellogg’s stock stops trading, people are still going to be eating Frosted Flakes for breakfast.

I believe you will give yourself a better chance of financial and investing success if you think of the market as a long-term weighing machine rather than a short-term voting machine.  In other words, you should think like an investor and not a speculator.   You will be in good company if you follow this approach.  Warren Buffett is quoted as saying, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”