What is reality, anyways?

How an old psychologist might help explain the valuation gap

A couple of weeks ago, I had an interesting conversation with a colleague. We were discussing private market valuations. He was incredulous at the numbers being touted in major VC deals. At one point, a bit exhausted he said:

“Billions of dollars for an app? For a company with no history, very few employees and no profits. None of this is real, man”

Over the weekend, I saw this tweet on JC Penny’s valuation and was reminded of my discussion:

Let’s dissect the tweet a bit further. While the company might not be familiar to my European audience, those who have lived in the US know JC Penney. JC Penney is an institution. It is a permanent retail fixture in almost every mall across the country. Often it is the anchor tenant in a building. The company was founded in 1902 and has been around for over 100 years. Millions of customers still visit its outlets each year. And yet, the company only trades at only $176 million.

For comparison, Snapchat - an app popular among teens is worth about $23B. This is a company that has been around less than ten years and has never made a profit. It doesn’t have a niche. And it faces intense competition from the likes of Facebook, Twitter, Instagram and TikTok. Despite all this, the public market gods have somehow decided that Snapchat is worth over 12 times JC Penney.

Many other stories exist like this. Consider Deustche Bank. A company worth slightly less than $13B today. This is a bank with over ~28 million customers. It has 90,000+ employees. Most importantly, it has assets of €1.34 trillion. To put that into perspective, the asset figure exceeds the GDP of all but fourteen countries in the world.

Seeing this, you might also be tempted to ask:

What the hell is going on?

I have a theory. But first, a related concept and a story.

Carl Jung was widely considered one of the most brilliant minds of the twentieth century. Alongside Freud, he is probably the most important figure in modern day psychology. However, one of Jung’s most interesting ideas gets very little attention. Echoing ideas from the ancient occult, Jung believed in something he termed synchronicity. Put simply, it says that human beings create their own reality. As such, all of us collectively create a force field that actively shapes the reality around us. Events that are deemed coincidences or chance events are merely a case of synchronicity in action. Some individuals have just willed them into existence. Even though synchronicity provided an interesting bridge between quantum and classical mechanics, the theory never caught on.

I know relatively little about psychology or physics to comment on whether synchronicity manifests itself in the physical world. However, I think we see its effects in the world of finance. The stock market is one great example. Every day, we as a species, collectively decide the value and fate of a set of hand-picked companies. Along the way, we have invented accounting and ratios as a shared language. But, even interpretations of this language do vary and change over time. Consider the CAPE ratio and how it has tracked over the past century.

If you are a hard-nosed value investor, all this talk might be a bit annoying to you. And yet, synchronicity in financial markets isn’t about individual stocks or value vs. momentum as an investment strategy. It is about our collective madness as a species. It is about the fact that adding blockchain to your name can help double your value overnight. It is about the fact that WeWork will IPO soon for $50B. At a time when IWG trades for less than one-fifteenth that value. It is about the fact that hundreds of billions of ‘wealth’ can be created based on the size of an individual’s briefcase. It is about the fact that even today, millions of people invest money based on bullshit candlestick charts. Ultimately, it is about the fact that much of modern day finance is simply ketchup economics.

Jung might be dead but financial markets are proof that synchronicity is alive and kicking.

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