When it comes to equities, people make the big mistake of believing in the notion of rational intrinsic value. They think that although the price of a stock may vary day to day, there is a fundamental worth to the company that can be measured by such factors as forward looking PE, cash on hand, market cap, dividend yield etc… Classically this was true, in a Faustian civilization, like the one we live in today, it is not. There are only two measures that count; the first is the ratio of positive news to negative news, the second is the number of true believers behind the company’s narrative – and the more magical the story line (i.e. the less grounded it is in rationality) the better. Soros pointed out a corollary to the first measure with his notion of reflexivity, i.e. when a stock price goes down in reaction to some bad news, the event itself is bad news causing it to go down further.
The reason such stocks as Apple, Google, and Whole Foods are up is precisely because of the number of true believers they garnish. Comparable companies in the same line of business such as Microsoft, Yahoo, and Kroger are in the doldrums. Why, because their stories are not captivating, nor are they convincing enough to counter the far more believable negative narratives of their competitors. In the case of Whole Foods, it is the non rational fear of the industrial food supply that matters, not the profits of the company per se. In the case of Apple, it is the religious experience that comes from buying their gadgets. In the case of Google it is the magic of search and the illusion of empowerment that it provides.
