Benjamin Graham was a Wall Street legend who wrote two of the most revered books on investing in stocks---Security Analysis (1934) and The Intelligent Investor (1949).
Warren Buffett credits Graham with much of his early education in security analysis even going so far to refer to him as a "second father".
What did Graham mean with the quote above?
On a short run basis the stock market is driven by sentiment. Prices are determined by human beings with emotions who are attempting to project a company's future worth. It results in a very subjective valuation.
In the long run, stock prices will correlate with the actual financial performance and earnings of the company. An objective valuation for the stock will be reached based on data.
If we ever needed a real-life example of what Graham was referring to when he said the stock market was a voting machine, when he have seen it in 2025.
It has been a wild ride driven by sentiment and emotion as investors react to the Trump presidency.
It started before Trump took office.
Consider this chart of the performance of the S&P 500 between July 1, 2024 and December 31, 2024.
The sentiment of the market after the Trump-Biden debate seemed to be that Trump would win and it would be good for business in the United States.
Biden dropping out and being replaced by Kamala Harris and the unrelenting positive media exposure promoting her created uncertainty that pushed market sentiment negative for several weeks.
However, as that narrative died down and polling started to show Trump was holding his own against Harris throughout the remainder of the summer and early fall, sentiment turned positive again.
Last minute jitters caused a pullback in the last week before the election but Trump's election pushed sentiment higher immediately and led to all time market highs in the month after he was elected.
The following chart shows the performance of the S&P 500 from the beginning of 2025 until the market close yesterday (5/13/25).
A few takeaways.
The S&P 500 is up just under 1% since January 1.
It is down about 2% since Trump was inaugurated.
The S&P 500 is 4% higher now than when Trump first announced his tariff plan on April 2.
It is 20% higher than it was when the market reached its low on April 8 in the wake of the tariff announcements.
What does all of this tell us?
It confirms the truth of Benjamin Graham's quote.
In the short run the market is nothing but a voting machine reflecting current sentiments and emotions of human beings.
The underlying value of companies like Amazon, Tesla and Nvidia do not gyrate wildly from day to day or month to month. However, the stock price can vary dramatically based on sentiment as we have seen recently.
It should be remembered that the value of a company's stock does not necessarily equate to the true value of the company.
The stock price on any given day is based solely on the sentiments of buyers and sellers in the market as to what the value of Apple or Tesla is today.
However, its real value will only be revealed based on the future revenues to be generated, cash flow created and profits derived to the benefit of the shareholders over time.
Those objective measures over the long run will ultimately provide an objective value of the business enterprise the same as a weighing machine can provide the actual weight of an object.
Graham earned his reputation by understanding the difference between the stock price of a company and its real value and taking advantage of situations where companies were undervalued by the stock market.
For that reason he is considered "the father of value investing".
Warren Buffett and Charlie Munger carried that thinking even further which at one time made Buffett the richest man in the world without inventing, manufacturing or producing any tangible product or service.
I don't know where Trump's tariff, trade and economic policies will lead longer term any better than CNBC's market maven Jim Cramer knows where the stock market is headed in the short term.
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| Link: https://x.com/CollinRugg/status/1922342327508783506 |
Are stock prices today overvalued or undervalued compared to what we will find out in the future?
I do know that the United States cannot continue to run $2 trillion annual deficits forever.
I do know that being able to continue financing a $37 trillion national debt will be very challenging.
I know that the United States cannot continue to outsource manufacturing, mining, pharmaceutical and other critical functions to countries like China. That may be a sustainable national strategy with t-shirts and toys but it is not with those things necessary for long term national survival.
I also know that no other country in the world has the constitutional, political and economic system to be able to provide the necessary platform that provides anyone with the smarts, savvy and passion to succeed as easily as it can be done in the United States.
There is a reason why half the world wants to immigrate to the United States.
However, the success of the United States and its businesses is not assured nor automatic.
And we cannot even allow a fraction of those who want to enter the United States to just show up and walk across the border or have the Democrats fly them in so they can retain their political power.
It takes making the right decisions going forward.
And making some very tough decisions that will not be popular with everyone.
It requires a recognition that the United States did a lot more things right than wrong to make it the wealthiest and most powerful nation the world has even seen. We are not going to continue to advance by turning our backs on what made us great.
It means prioritizing merit rather than race or class in decisions about people.
It is necessary to understand that we are best when we are united to make America better rather than creating divisions to tear us apart.
Donald Trump understands all of this.
These principles are at the core of his Make American Great Again policies.
He may not succeed.
However, the voters have stated that he be given the opportunity to try.
Most of the establishment and elites didn't want to give him the chance the first time. They also did everything they could to make sure he did not have a second chance.
This was not because they feared he would fail. It was because they live in fear that he will succeed.
The votes have been counted but Donald Trump still must face the weighing machine with actual results that can be shown to the American people.
There are a lot of weighty issues to solve in the United States.
The United States also carries the weight for a good part of the rest of the world.
What Donald Trump does or does not do may not only determine the future course of the United States but of the entire world.
May God Bless the United States of America, President Trump and all our other elected leaders in making the right decisions that will be weighed for our benefit over the long term.
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