From Security Analysis:
Exact Appraisal Impossible. Security analysis cannot presume to lay down general rules as to the “proper value” of any given common stock. Practically speaking, there is no such thing. The bases of value are too shifting to admit of any formulation that could claim to be even reasonably accurate. The whole idea of basing the value upon current earnings seems inherently absurd, since we know that the current earnings are constantly changing. And whether the multiplier should be ten or fifteen or thirty would seem at bottom a matter of purely arbitrary choice.
But the stock market itself has no time for such scientific scruples. It must make its values first and find its reasons afterwards. Its position is much like that of a jury in a breach-of-promise suit; there is no sound way of measuring the values involved, and yet they must be measured somehow and a verdict rendered. Hence the prices of common stocks are not carefully thought out computations but the resultants of a welter of human reactions. The stock market is a voting machine rather than a weighing machine. It responds to factual data not directly but only as they affect the decisions of buyers and sellers.
Interestingly, I can't seem to find a direct source for the more popular version of Graham's weighing machine quote. Warren Buffett has quoted it a couple of times, including in his 1987 letter:
As Ben said: "In the short run, the market is a voting machine but in the long run it is a weighing machine."
And in his 1993 letter:
As Ben Graham said: "In the short-run, the market is a voting machine - reflecting a voter-registration test that requires only money, not intelligence or emotional stability - but in the long-run, the market is a weighing machine."
And in the revised edition of The Intelligent Investor, Jason Zweig writes:
As Graham liked to say, in the short run the market is a voting machine, but in the long run it is a weighing machine.
So I'd be curious if anyone knows where Graham used the weighing machine reference in regards to the long run. I don't see a direct source, but given the personal relationship Warren Buffett and others had with him—and considering that Buffett and Zweig used the words "said" and "say" in their references—it may have just been something he communicated verbally instead of in his written works.
And on a related note, this Seth Klarman quote from the Preface to the Sixth Edition of Security Analysis is one that I also think is worth re-reading, and including with the others in this post:
As Graham has instructed, those who view the market as a weighing machine—a precise and efficient assessor of value—are part of the emotionally driven herd. Those who regard the market as a voting machine—a sentiment-driven popularity contest—will be well positioned to take proper advantage of the extremes of market sentiment.