“In the short run the market is a voting machine, but in the long run it is a weighing machine.”

– Benjamin Graham, The intelligent Investor

It’s well established that people often assign a mental value to stocks based largely on the emotional imagery that companies evoke.

For example take Yahoo! and Yum!

Yahoo! got added to the S & P 500 Index and with some 90% of Yahoo!’s stock locked up in the hands of employees, venture capital firms and other restricted holder, just a fraction of shares could trade. So thousand of people bought stock only because they knew other people would have to buy it – and prices was no object.

Meanwhile, Yum! went begging.

A former division of PepsiCo that runs thousands of Kentucky Fried Chicken, Pizza Hurt, and Taco Bell eateries, Yum! had produced $8 billion in revenues over the previous four quarters, on which it earned $633 million, making it more than 17 time Yahoo!’s size. Yet Yum! stock-market value at year-end 1999 was only $5.9 billion, or 1/19 of Yahoo!’s capitalization. At that price, Yum!’s stock was selling at just over nine times its earnings and only 73% of its revenue.

Once the market stopped voting and started weighing, the scale tipped towards Yum! Its stock rose 25.4% from 2000 through 2002, while Yahoo!’s lost 92.4% cumulatively.

Don’t let the noise of what looks good from a high level perspective change your understanding of what really matters.