Stocks don’t trade on facts. They trade on opinion.

That’s the only way to explain how Tesla is the most valuable automaker in the world, despite delivering a fraction of the industry’s profits.

Or how Palantir has surged 6x in a year, even though its business hasn’t scaled anywhere near as fast.

If you’ve ever felt confused watching a “cheap” stock stay cheap — or an overhyped one keep climbing — you’re not alone.

Almost all market pundits accept that the fundamentals are the most important thing to understand about a stock.

Well, they have it dead wrong.

Truth be told, fundamentals don't matter for stock prices most of the time. This may fly in the face of everything you've heard, but it's the reality.

Today, I want to explain why fundamentals often don’t matter to help give you an edge as an investor.

You’re Buying Stocks, Not Companies

First, it's essential to understand the difference between a company and a stock.

In the real world, an investor would buy a company. For instance, you buy a gas station. Now that you own the gas station, you can access the cash flow that the business generates and do whatever you want with it. You could keep the cash in the bank, transfer it to your bank account, or use it to invest more in the business.

The owner, though, owns these cash flows, which have real value.

Stocks may represent public equity ownership in a company. But when it comes down to it, they're just pieces of paper.

When you buy a stock, you don't contractually have access to the business's cash flow.

A publicly traded company can choose to pay out cash flows as dividends. It can also use cash flows to buy back stock and reduce the total number of shares outstanding. Or it can use these cash flows to pay out management and make good on bad investments.

While company boards and management have a fiduciary duty and a legal obligation to protect investors, these are seldom really put into play.

Whatever the Next Investor Will Pay

I used to tell my analysts that the value of a company and a stock only converge in two scenarios. If Company A buys Company B, Company B is worth what Company A was willing to pay for it. Or if it goes bankrupt, it’s worth nothing.

The rest of the time, the value of the stock is simply a matter of opinion. Dividends and buybacks may influence this opinion, but the stock is worth whatever the next buyer will pay.

This is one of the biggest disconnects – and frustrations – that “smart” investors have with stocks. They determine a value for the underlying company and its cash flows and then expect the stock price to (eventually) match up with that analysis.

The reality, however, is that this is seldom the case. Instead, the analogy I often used with my analysts was to think of stocks as art pieces.

Fundamentally, these items don't have any economic value, yet buyers may pay exorbitant amounts of money to buy them. They can also go up and down in price quite a bit.

So then, what are the drivers of their “value” and these price movements?

Fundamentals ➡️ Opinions ➡️ Price

The primary driver is simply supply and demand. If more people want to buy than sell, the asset's price has to increase until the sellers are willing to sell it.

Investors' "opinions" of many factors determine this demand, including the artwork's scarcity and "quality." Potential future demand for the piece of art also sets these expectations.

Note that all of these factors are impossible to prove.

The same can be said of the factors used when investors set their opinions on the value of stocks. They may have views on a company’s future revenue growth, cash flows, or merger and acquisition potential, but these can be difficult to prove.

They don't matter in many ways because the stockholders will not see any of these cash flows anyway.

The reason the stocks go up is when more buyers than sellers have an increasingly positive view of these factors and therefore, are willing to pay more. They are opinions, not facts.

Does this mean that no relationship exists between fundamentals and stock prices?

Not at all…

In addition to the binary outcomes we mentioned, buyout or bankruptcy, for the most part, market opinions closely align with the development of fundamentals. But this is because investors choose for this to be the case. Any specific equation is not forcing it.

This is perhaps the most crucial concept in stock investing. It’s also the most frustrating one for many investors to understand.

The accepted view is that valuation and fundamentals drive share prices. Still, they are factors that can drive opinions about the underlying companies.

Since they're only opinions, you can see stocks "decouple" tremendously from these factors.

Suppose an investor thinks that stocks should closely reflect the value and value creation of the underlying companies. In that case, this doesn't make sense to him.

The most important thing for a stock investor to do is have a firm grasp of the factors driving the opinions of the buyers and sellers of an individual stock. These may be the factors of valuation and cash flow. Still, sometimes, they could be utterly unrelated to any of these measures.

For long-term success, you must understand the difference between a company and its shares, the true value of a stock, and what actually drives price.

Remember this when buying stocks (since we aren't actually purchasing the companies), and you can avoid frustration and potentially losing a lot of money!