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Understand this quote, and you’ll understand the ASX share market

empty white quote bubble against blue background representing important quote regarding asx shares
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Benjamin Graham is not someone you hear being talked about with the same reverence as the legendary Warren Buffett. Yet Mr Graham is regarded as one of the greatest investors of all time, and the father of value investing. He was even Mr Buffett’s teacher and mentor for a time. Today, despite the fact Ben Graham died in 1976, Buffett still speaks very highly of him and cites his foundational work Security Analysis as one of the greatest books on investing ever written, even though it was penned back in 1934.

I have to admit, I haven’t read Security Analysis in full, although I have devoured a few of the seminal chapters.

A quote for the ages

But there is one of Benjamin Graham’s quotes that I think stands out above the rest. It’s a quote that I think all investors who want to build wealth through the share market should know, and even more importantly, understand. It goes like this:

The market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion. Hence the prices of common stocks are not carefully thought out computations, but the resultants of a welter of human reactions.

So perceptive was this quote, Buffett himself used a version of it in his 1993 letter to the shareholders of Berkshire Hathaway Inc (NYSE:BRK.A)(NYSE: BRK.B):

As Ben Graham said: ‘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.’

Ballots and scales

So what is it about this quote that makes it so helpful for ordinary investors like you or me? Well, I think the answer is perspective. It tells us what is happening on the markets on any given day — voting. It’s voting that has pushed up the Afterpay Ltd (ASX: APT) share price by 150% in 2020 so far. It’s voting that has condemned AMP Limited (ASX: AMP) to lose a third of its market capitalisation this year. And it’s voting that caused the American initial public offering (IPO) of Snowflake Inc (NYSE: SNOW) to spectacularly double last week. Over time, these moves will be ‘weighed’ by the market, and if they were based on fundamentals, the market will hold them true.

This quote helps us understand that it’s ok to ignore this ‘voting’ or noise and let the market do what it does best — weighing. As long as you buy good quality companies, and hang around long enough, the market will reward you for your patience. There might be some bumps, drops, corrections and crashes along the way. But if you make sound investing decisions and hold your nerve, Graham’s wisdom tells us things will normally work out in our favour. 

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Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Snowflake Inc and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares) and short January 2021 $200 puts on Berkshire Hathaway (B shares). The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Berkshire Hathaway (B shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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