It’s likely you’ve heard Benjamin Graham’s famous quote
In the short run, the market is a voting machine. In the long run, it is a weighing machine.
The stock market, unless you get to work directly in the field, might be yet just another one of those things we hear about and “pick up on” without ever internalising the meaning of it.
The same way a son picks up on his father’s cues and, since he’s young, doesn’t question every single thing.
That’s how we learn as humans. You get into a room with 100 people who clap every time someone joins — what do you do? You start clapping as well and take it as a fact.
Maybe in a few hours, you’ll drag someone aside and ask “Hey, why do we clap every time someone joins?”
Anyways, back to the stock market. We’ve picked up on it but in its’ most basic form it is without a doubt a voting machine.
We have a glass in front of us. You and I.
We have no clue how much it costs. So what do we do? I say it’s worth $5 and you say it’s worth $15. Now its real value is the mean of our “votes”.
I voted $5 and you voted $15.
Do this at scale and the price changes every second, given how many people hear about this now-$100 glass.
The guy in the back of the room comes in and says “A glass for $100? Wow, looks like it will rise easily to $120 so I’ll buy some and sell then.”
But stock markets pop and burst every now and then. And only then we see:
- Who really gets to use the glass
- Who got in because they heard from the other side of the room about how this is an investment opportunity
When the bubble bursts at $100-per-glass, that’s when the weighing machine function comes through. Point #1 above is what “weighs” a stock — i.e. how many of us actually need it.
What does that mean in the tech industry?
Slack is voted to be worth $15B as of today. People have voted on its value. Is it true? We don’t know — we’ll see when the weighing function is enabled.
But you can try to put on your investor suit on and judge. If the market is down, will companies keep on using Slack? Or will they say:
“Hmm, these $8/seat/month… do we really need them?”
“Just let them use email”
Some companies will say that, depending on size. Some won’t. And then you run your mental experiment with other companies:
“These $1500 we’re spending per month with Dropbox. Is it worth it?”
“There’s no other way we can keep these +100TB of files. There’s Google Drive and iCloud but DB has given us the best price. We can’t cancel it.”
If this is what your mental experiment tells you, you will vote harder for Dropbox and you will avoid Slack.
Your opinions will surely be different from those of these imaginary characters. But playing along with these two opinions, you see the point of the voting machine and the weighing machine.
In this example, the person thinks that Slack is not that “heavy” — the assumption is that too many people have voted above the real weight of Slack.
Then they also think that Dropbox has got real weight.
How is this relevant to me?
When you raise money, sell something or simply decide to start building something, the very product you’re pushing has got some value.
Show it to the wrong people, i.e. those who don’t want to vote for it, and you’ll think it’s worthless.
You’ve heard stories before of how famous projects were rejected for investment. I’m sure you’ve heard lessons about selling “to the right person”.
However, I think that if you’ve got this voting/weighing machine analogy in your mind, it’ll be easier for you to be on the right track.
If you do keep this in mind, you’ll understand who votes for you initially (and also how they vote for you) matters a lot.
About Ch Daniel
I’ve updated this signature in July 2020, so older mentions of the signature might not make sense.
I currently don’t write on this blog anymore. I wrote daily for 9 months on this very blog, but now I’m focused on building the CH Group.
If you want to follow my newer articles, check out the CH Group’s blog.
See everything I do here: Chdaniel.com