What You Are Really Buying with Stocks


John Micklitsch, CFA CAIA, President & Chief Investment Officer

Ben Graham was Warren Buffett’s mentor during his time studying economics at Columbia University Business School in the early 1950s. It was Graham who said, “in the short run, the market is a voting machine but in the long run, it is a weighing machine.” This mindset registered with Buffett and many other successful investors and became a competitive advantage in deploying capital. But let’s look closer at what this really means and how you can apply its simple wisdom to your own decision making.

The best way to explain something is often with a picture. The following chart shows the combined annual dividend payout of the S&P 500 Index companies over the last 21 years.

S&P 500 Dividends Per Share

S&P 500 Dividends Per Share
First Trust Portfolios L.P. Source: S&P Dow Jones Indices. As of 9/29/2023. Past performance is no guarantee of future results. This chart is for illustrative purposes only and not indicative of any actual investment. TTM = Trailing 12-months. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The index cannot be purchased directly by investors. 12-month real dividend per share. 2002 marked the end of a bear market and precedes the 2003 tax reform. There is no guarantee that companies will declare dividends in the future or that, if declared, they will remain at current levels or increase over time. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.

Over this period, the aggregate dividend of S&P 500 businesses grew from $16 in 2002 to $69 in 2023. There were some economic bumps in the road, such as in 2008-2009 during the global financial crisis and the pandemic in 2020-2021, but otherwise the increases were steady and remarkably consistent. In fact, if we measure the standard deviation of the growth of the dividend over that period, it comes to a mild 8% volatility. However, over the same period, the standard deviation of the actual Index was twice that. If the value of a stock is thought to be the present value of its future stream of cash flows (in this case measured as dividends which have been consistent and growing), why would there be such a difference in volatility between the cash flow of a collection of businesses and the short-term valuation of them?

This is where Graham’s short-term “voting machine” concept enters the picture. Along their own unique journey, various market participants with different objectives, time horizons, motives, etc. react differently to the news of the day. They are voting on the impact the next news item will have on their stocks through their own perspective, though they have no more ability to predict the short-term any better than the next person. Collectively, this additional volatility is the impact that the so-called Mr. Market effect has on the otherwise consistent long-term valuation of cash flows generated by a diversified collection of quality businesses. How else could you explain, other than Mr. Market’s short-term influence, that in 2022, when the S&P 500’s dividend increased from $60 to $67, we saw an 18% decline in price. Then in 2023, when the dividend rose at a lesser pace to $69, the markets came roaring back with a 26% return as the cycle turned from short-term fear to greed. These time periods show the short-term voting machine market in action versus the long-term weighing approach exercised by most successful investors.

Morgan Housel, the author of The Psychology of Money and The Same as Ever, recently said in a podcast that a stock is nothing more than a set of numbers we know today and a story about what those numbers could become tomorrow. Nobody knows for sure what the future will bring, but if your analysis of investment opportunities is rooted more on the weighing side of the equation and less on the voting side, we believe your odds of long-term success will increase dramatically. And you may have less stress and more enjoyment with the investment process to boot.

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