Knowledge Compounding: Graham was wrong ! Markets are slaves of entertainment

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These days most people are not interested in owning businesses; a basic premise Benjamin Graham argued for successful investing. Forget business, the "me too" crowd has coveted earnings per share for entertainment per share. That earnings is missing from the denominator (CMP/EPS = PE), and as a result, what we see today is a price-to-entertainment ratio (PE).

 

 

Jokes apart, stock market is not for entertainment. Stock market is too costly affair for the entertainment, instead, If you are looking for excitement, go to any casino, horse racing. Chasing to buy next winner, buying hot stocks, playing momentum, trying to make quick money might entertain you but would serve no other meaningful purpose.

 

  

 

Paul Samuelson once wrote -

 

"Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas."

 

Keynesian Beauty Contest

 

Benjamin Graham used the analogy of "Keynesian Beauty Contest" where participants were asked to pick the most beautiful faces from a set of photographs. The goal was not to choose the person they find most beautiful, but to choose the face you believe others will consider the most beautiful. As a result, participants don’t necessarily pick based on their personal preference but on their perception of the collective opinion.

 

In stock markets, this suggests that many investors do not base their decisions on the actual value of a company, but on their predictions of how other investors will value the company. This leads to a form of second-order thinking, where people are less focused on fundamentals like earnings or financial health, and more concerned with predicting the behavior of the majority.

 

Graham argued that markets are slaves of earnings and over the long term, they becomes a "weighing machine," where stock prices ultimately reflect a company's actual EARNINGS. On the contrary, today's market is slave of ENTERTAINMENT fueled by short term thinking, excessive liquidity and irrational exuberance or sentiments.

 

 

Happy Compounding

 

Jitendra Kumar Gupta

 

Caution: These are my personal views and shared only for the education and knowledge purpose.

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