I think this idea that the business and stock price are 2 different things is best summed up by Ben Graham, Buffett's mentor:
"In the short run, the stock market is a voting machine, but in the long run, it is a measuring device. The short run reflects a popularity contest, but in the long run the stock price will properly reflect real value."
Of course, like Keynes said, in the long run we are all dead.
It is very clear that Graham is right, but it is helpful to realize that he went at this exercise as a cold blooded mathematician. He would never be drawn into discussions about anything other than what the companies underlying value was based on past numbers.
Here is another good quote from Keynes:
"We have reached the third degree where we devote our intelligences to anticipating what average opinion expects what average opinion to be."
I love that one. I have many old business and investment books, and they reflect these same discoveries time and again. I did not buy these manuscripts until I was investing for many years, and was shocked that things have always been the same: this time is no different. The market is acting in a strange fashion because it always does and always has. Yet, in the end, an individual stock will accurately reflect what the business is worth. I like to think of this as regression to the mean. Life works this way. Take oil prices: the historical mean is ~14.50, right Gottfried? So here we are at ~11, and there is all out panic that prices won't recover for years. Maybe they won't, maybe the crowd will be right for once....but I doubt it. |
