Market value vs. the illusion of real value
I used to struggle to make sense of why the S&P 500 delivers long-term returns that are, oddly, similar to gold’s. I eventually figured out why: I was confusing market value with a company’s actual intrinsic value.
This is exactly what pushes people to treat the stock market as something closer to gambling: when you buy a stock, you’re not really buying the company’s current assets — you’re buying people’s expectations about that company’s future cash flows.
Here’s an example that makes it stick better.
The Üsküdar kiosk example, and the P/E illusion
Say I own that famously busy, reliably profitable little kiosk in Üsküdar — the one that never loses money. One day I decide to sell shares in it on the stock market. Of course, in a properly regulated market, you can’t just say “I want to go public” and get instant approval — regulators will ask what you actually plan to do with the money. If you can convince them it’s going toward genuine new investment, you get approved. (Parking the money in a savings account, or using it to buy a house abroad, isn’t considered a legitimate reason.)
No matter how profitable this kiosk is, an investor buying shares will rarely see an annual dividend yield above roughly 10%. That’s because investor demand is what inflates the share price. Whether you buy the share for 3 lira or 300 lira, the actual profit the business generates stays roughly the same.
If the kiosk earns 100,000 lira in net profit a year, and an investor values the whole business at 10,000,000 lira, that’s effectively a P/E (price-to-earnings) ratio of 100 — meaning it would take 100 years for that investment to pay for itself through profit alone.
- Buy cheap, and you get a high return relative to what you paid.
- Overpay, and you settle for a low return relative to your investment.
So the price you pay for a share matters enormously. Company P/E ratios are public information. The obvious next thought is: “Then let’s just buy the lowest P/E stocks and get rich!” In finance, this is called a value trap. If it were that easy, everyone would do it. A very low P/E often signals the market expects a serious future drop in profits, unusually high debt, or some structural problem investors already know about.
Conversely, a high P/E doesn’t necessarily mean investors are foolish — it usually reflects genuine belief that the company’s future earnings will grow so much that today’s high price will look cheap in hindsight.
Hype, fashion, and the “greater fool” theory
There’s also a social, trend-driven dimension to all this. Take Tesla, for example — the company could keep posting losses, and people would still buy the stock as long as they believe others will keep buying it and pushing the price up.
The more scientific (if blunt) term for this in finance is the greater fool theory: fundamentally, the logic doesn’t hold up under serious analysis — you’re betting that someone even more “foolish” than you will pay more for it later. It’s similar to how Bitcoin works in some ways: if Bitcoin is worth $75,000 today, it’s largely because enough people have decided that’s a fair price. A lot of popular stocks carry this same crypto-like dynamic.
The role of funds, and the SpaceX example
The most common advice you’ll hear in investing is to buy funds rather than individual stocks — because a fund gives you partial ownership in hundreds of companies at once, selected by professionals. You might not get rich quickly, but your risk of total loss drops significantly. That said, funds operate under strict mathematical rules, and picking the single most profitable company isn’t always their top priority.
For example, there’s been recent talk of SpaceX going public at a $1.7 trillion valuation. Financially, while Starlink and launch operations do generate real cash, the costs of AI infrastructure (Grok/xAI integration, massive data centers) and Starship development eat into most of the profit. Net profit, relative to that valuation, is still a drop in the bucket.
So what is SpaceX’s $1.7 trillion valuation actually resting on?
- Institutional funds: large index funds and pension funds are required by their own rules (based on market cap and liquidity thresholds) to add a company this large to their portfolios.
- Future expectation: massive hype builds, and people buy in anticipating that future profitability will grow exponentially.
The flip side: when you say “I’m buying a tech fund,” that fund will also be forced, by its own rules, to include unprofitable-but-large-cap companies you might never choose to invest in yourself.
Bottom line: getting the strategy right
Ultimately, buying or selling any stock comes down entirely to expectations about the future. Handled without proper analysis, the stock market can turn into a gambling table.
The American stock market looks extremely profitable from the outside, but you need to genuinely understand what you’re buying and why. Yes, you can see 60% annual gains — but the flip side can be brutal. A tech stock like Wix, for instance, can lose 65% of its value in a year when interest rates or growth expectations shift, while a cyclical company like Ardmore Shipping (ASC) that catches the right cycle can gain 100% in the same period.
To wrap this up with a professional portfolio principle:
- Check whether the company is cyclical. Sectors like shipping, energy, or defense move in tight sync with economic cycles. When freight rates or commodity prices peak, the stock soars — and when the cycle reverses, profits get cut sharply. The most dangerous moment to buy a cyclical stock is exactly when its P/E looks lowest (i.e., when profits are at their peak).
- If it’s not cyclical, look for the combination of value, growth, and a reasonable price — known in finance as GARP (Growth At a Reasonable Price). It’s arguably the only genuinely durable long-term investing strategy.
In short: the American stock market is highly profitable over the long run — but only if you know precisely what you’re buying and why, so you don’t lose your bearings the day the wind shifts.
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