From Security Analysis,
1940 edition:
“Undervaluations caused by neglect or prejudice may persist
for an inconveniently long time, and the same applies to inflated prices caused
by overenthusiasm or artificial stimulants. The particular danger to the analyst
is that, because of such delay, new determining factors may supervene before
the market price adjusts itself to the value as he found it. In other words, by
the time the price finally does reflect the value, this value may have changed
considerably and the facts and reasoning on which his decision was based may no
longer be applicable.
The analyst must seek to guard himself against this danger
as best he can: in part, by dealing with those situations preferably which are
not subject to sudden change; in part, by favoring securities in which the
popular interest is keen enough to promise a fairly swift response to value elements
which he is the first to recognize; in part, by tempering his activities to the
general financial situation—laying more emphasis on the discovery of
undervalued securities when business and market conditions are on a fairly even
keel, and proceeding with greater caution in times of abnormal stress and
uncertainty.
The Relationship of
Intrinsic Value to Market Price. The general question of the relation of
intrinsic value to the market quotation may be made clearer by the following
chart, which traces the various steps culminating in the market price. It will
be evident from the chart that the influence of what we call analytical factors
over the market price is both partial
and indirect—partial, because it frequently
competes with purely speculative factors which influence the price in the
opposite direction; and indirect, because it acts through the intermediary of
people’s sentiments and decisions. In other words, 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.”