I want to give an update to one of the major concepts of Ben Graham, in order to make it fit the modern era better. Ben Graham said:
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
https://www.goodreads.com/quotes/831517-in-the-short-run-the-market-is-a-voting-machine quoted from The Intelligent Investor
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So let me modify it: In the short run, the market is a casino, but in the long run, it is a scale. Is this an improvement? Probably not, but speculation has become so rampant that it may be a necessary modification to change voting machine to casino.
The voting machine makes sense, but typically we think of voting as being democratic. We only get one vote per person. Markets are different. Someone who brings a little money to the market will not have the same influence as the one who brings a lot of money to the market. Thus my analogy of the casino, though typically casinos will place limits on how much the casino will wager. They want to avoid random large losses so that they can live to extract money from rubes for many years to come. The winner can brag that he “broke the bank,” but the casino survived to play on.
Bill Hwang and his CFO were formally charged with fraud today. What did they do? They synthetically borrowed a lot of money from investment banks to own huge amounts of a few companies. Their buying pushed the prices of the stocks higher, allowing them to borrow more against the positions. But eventually as the stocks they owned had some bad results, the margin calls on his positions wiped him out as the stock prices fell. The scale trumped the casino.
The same is true of crypto and meme stocks. Cryptocurrencies require a continuing inflow of real cash (admittedly fiat money) in order to appreciate. If people stop buying crypto on net, and that may be happening now, cryptocurrencies will decline. The scale says crypto is a zero — no intrinsic value. The casino begs for more people to bring real money to buy fake money.
That applies to meme stocks as well. You can throw a lot of money at a stock and it will rise. But for it to stay there or rise further, it will need increasing free cash flows to validate the value of the firm.
Going back to crypto, it lacks any link to the real economy. Crypto will only become legitimate when you can buy groceries and gasoline at a fixed amount of bitcoin that varies less than the same price in US dollars.
As a final note on the Scale versus the Casino, I give you Elon Musk. He borrows against his shares of Tesla to buy Twitter.
He either did not realize or ignored the fact that he could lose his stake in Tesla if the price of Tesla falls enough. Do you really want the margin desk to control your fate? This may not totally impoverish Musk, but it is not impossible that he could the entirety of his holdings of Tesla in order to keep his holdings of the unprofitable Twitter. All it would take is for short sellers to push Tesla below $740, and then the margin desk starts selling his shares into a falling market. Momentum, aided by an agreement leading to forced selling.
The market abhors a vacuum. So it is for those who assume that things will continue to go right for them.
Article by David Merkel.
