The Beautiful Stupidity of Buying the Future
Maybe the worst thing you can do for your returns is to actually care about the company?
Buying a stock just means you’re buying a slice of a company's future profits. You hand them $100 today, and wait for the business to make enough money to hand you $150 later.
But if you spend any actual time looking at the stock market, you quickly realize that math matters, but emotion drives.
Because of that, there are two types of investors:
Group one: Investors who want to make money.
Group two: Investors who want to make money, but who also want to believe in the underlying business
Group One is simple. These are the pure capitalists who view stocks as math problems. If you ask a Group One investor what their largest holding actually does, they probably won’t know! “I think they manufacture the plastic tips on shoelaces? Maybe they sell insurance? Who cares - their free cash flow yield is 9% and EBITDA grows 1% year over year.”
Group One doesn’t care about the soul of the company. If a company pivots from building mining equipment to issuing parking tickets to hospital visitors, Group One just updates its spreadsheet to reflect the higher gross margins of medical extortion. They’re there for money alone.
Group Two are the romantics.
Group Two investors want a return, sure, but they also want to feel good. They want to invest in a company that is solving climate change, or colonizing Mars, or uses the words “democratizing” in their marketing. They tell their friends about it. They defend the CEO online. They describe earnings misses as opportunities to buy more. They say things like “I’m not even worried about the stock price” while checking the stock price every 11 minutes. If the stock goes up, they think, “At last. The universe has rewarded me not just for being smart, but for being good.”
This creates a very funny dynamic for public companies, because executives have to simultaneously cater to both groups. A CEO goes on a quarterly earnings call and has to switch between two completely different languages.
Group One Analyst: “Can you walk us through your EBITDA margins, and how you’re servicing debt relative to cash flow?”
Group Two Analyst: “How does your Thing™ help accelerate the awakening of human consciousness?”
And the CEO just has to sit there, smoothly transitioning from talking about money to the existential trajectory of humankind. Everyone writes down what they say as if it meant something.
The problem for Group Two is that the same emotion that makes them good believers also makes them terrible sellers.
Imagine you’re a Group One investor. You buy a stock at $10 because you think it’s worth $15. Then the stock goes to $50 because a large number of people on the internet decide the company’s going to cure aging.
You sell.
Of course you sell.
The math has mathed, the valuation is high, you take your profit, and you go buy shares in a Latvian cement company.
If you’re a Group Two investor, however, you cannot sell.
Selling would be a betrayal of the mission! If you truly believe the company’s going to cure aging, then a $50 stock price is cheap. “It’s just getting started,” you tell your friends. So you hold the stock. You buy it at $50, you hold it when the regulatory approvals fail at $20, and you hold even harder it all the way down as it passes $1.50 to bankruptcy.
When a bankrupt shoe company pivots to doing AI, or landing on Mars, the Group Two investors rush in, their hearts full of hope and their wallets open, eager to fund the future of humanity. Meanwhile, the Group One investors quietly wait for optimal revenue conditions before doing anything.
It’s incredibly easy to make fun of Group Two. They grip their shares tighter with every missed earnings report, convinced that their moral high ground will eventually pay off.
But without them, the engine of innovation stops. Group One is far too rational to ever fund a genuine revolution. It takes the emotional devotion of Group Two to finance the impossibly expensive, highly speculative leaps forward that change the world.
Often they’re wrong.
Spectacularly wrong. Generationally wrong. “My grandchildren will inherit these tax losses” wrong.
But sometimes they’re right!
And that’s the part that makes this whole thing difficult.
If you’re 22, maybe you should be a little romantic. Take the big swing. Buy the absurd company with the impossible mission. Back the future before it has margins.
You have time to be wrong.
But if you’re 62, maybe buy the Latvian cement manufacturer? Let some other genius fund the flying taxis. You have grandchildren to disappoint in more traditional ways.
The trick is knowing which season of life you’re in. Because every portfolio needs a little delusion. Just don’t bet your retirement on it.