This article by Tim O’Reilly ‘Two economies. Two sets of rules‘ bounces back on the question about why Elon Muks is so rich to conclude that there are really two different economies: the real economy and the gambling – stock market economy. And betting on the stock market leads to unrealistically high valuations.
In effet, stock valuation today is generally very high, and for some companies like Tesla it is unrealistic by any measure. I also observe this trend in (unlisted) start-up valuation, which are sometimes quite unrealistic – it is very difficult to expect a real economic payback in the foreseeable future.
We also know that the valuation of a company being listed is always significantly higher than when it is privately held – some of it the value of floating shares that can be sold at any moment, and some of it simply the effect of the market and a large number of possible buyers.
This is quite strange because at the same time we always underestimate exponential growth, which is what we could expect in this case ; but we tend to overestimate future company economic return in a situation where demand far exceeds supply of scarce stock or shares. I would tend to agree with Tim O’Reilly that there is an element of irrational gambling behavior in those cases (possibly compounded by the fear of missing out one of life’s greatest opportunities).
Stock market and high-growth start-up valuations being thus generally exaggerated, either one keeps away from it, or one sales before reality catches up again. Those are the only possible strategies!
