Ben Graham is famous for stating that 'in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine (i.e. its true value will in the long run be reflected in its stock price).' < from wikipediaA lot of investment philosophies seem to be based on the fact that in the long term the market will determine the 'fair' value of a stock. People seem to take this as almost a natural law, like gravity.Why do people believe this, why is this taken as an axiom? After all the market is composed of nothing but people, and if they can act crazy in the short term, why not the long term? I really don't get why no on questions this, and just seems to take it as fact.

It's not an article of faith -- people study the markets. How do stock prices behave relative to earnings and revenues over the long run?How do indices like SPX behave relative to GDP and corporate profits in the long run? What makes economic sense?Go look at some data or review the *thousands* of such studies and draw your own conclusions.

Seeing as how i'm obviously pretty lazy...is there a review article you'd recommend?

Brealey's classic book, "An Introduction to Risk and Return from Common Stocks" has a chapt on earnings behavior -- you mightstart with that and then track down his references.

QuoteOriginally posted by: albertmillsWhy do people believe this, why is this taken as an axiom? After all the market is composed of nothing but people, and if they can act crazy in the short term, why not the long term?One reason might be that eventually supply meets craziness. The cost of making something does not get crazy even if people's perceived value gets crazy. And craziness is also volatile. It is free to, and therefore likely to, move on to a different stock or product more than once over the long term.