This week saw the market value Tesla at over 1 trillion US dollars or more than all the rest of the US auto businesses added together. That valuation makes no sense on any conventional accounting measure or the long standing principles of value. If you buy Tesla shares at the current price, you either believe it will corner the market in electric cars in way that will allow it to make super profits for years (highly unlikely) or you just think the shares are like crypto, so well loved that whatever the price, someone will want to buy them later at a higher price.
That reminded me of a proposition I heard expounded by Professor Schiller, the Yale ecomonist and market guru. He suggested that human behaviour was heavily influneced by stories. We all love to hear and tell stories, and it seems that all cultures have histories of folk tales, such as those incorpoarted into the collections of the Brothers Grimm, Hans Christian Anderson and others.
The Professor’s argument (as interpreted by me) was that the explosion of social media and the internet means that we are all exposed to an overload of information and we probably get comfortable with a tale that fits in with our personal biases that and we can maybe share with our social circle.
There has been many a comedy sketch show written on the basis of a national audience understanding what is the favoured topic for the gym, the pub, the dinner party and so on. Where I live every small social group will include someone who has ‘made a tidy sum’ from Bitcoin or similar (plus a few silent ones who have lost a tidy sum, I guess!).
In the UK, people legendarily talk about house prices and Brexit, and maybe vaccines these days. I can even report that a certain section of the community where I live is fascinated with the price and acquisition of vegetables and of course almost anywhere a mostly male group will tend to elaborate/fantasize on their favourite sport, hitting better golf shots, catching bigger fish and and making a great deal of having been at school with a famous footballer.
If this is a genetically embedded human characteristic, then maybe participants in the investment markets buy assets on the basis of what others tell them directly or indirectly, in other words what is an accepted popular assessment and not what makes strict financial sense.
I think we can see plenty of evidence of that.
We must however remember one of the most insightful stories of all times, credited to Anderson, but based on a 14th century Spanish tale from a collection of cautionary fables – The Emporer’s New Clothes. A story of 2 swindlers who tell such a good story everyone is scared of exposing it. It takes an innocent child to decry the fraud, but actually, the emporer still tries to bluff it out (‘fake it ’til you make it’?)
In my assessment, fundamentals come through in the end and a false valuation of assets, whether it be shares in a medical testing company, Twitter or an electric truck maker, all of which are said to have told tall tales, will revert to something that can be asessed on a factual, not a fictional basis
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