Imagine two companies.

They have identical revenues, identical margins, and nearly indistinguishable growth rates.

In theory, efficient markets should price them broadly the same. In practice, one trades at a forward multiple of 40x earnings while the other lingers at 12x.

Why?

Investors (supposedly) prize fundamentals. But if you spend time in any market, you’ll find out pretty quickly that valuations float on a current of narrative. The story that surrounds a company, the way it frames its trajectory, and the cultural resonance it holds mean as much or more than discounted cash flows.

In his history of financial crises, Charles Kindleberger observed how booms and busts turn less on spreadsheets than on shared stories. Railroads in the 19th century, dot-coms in the 1990s, electric vehicles today - all were valued less as present businesses than as the packaging for a narrative // arc.

Valuation is a collective act of storytelling, with investors deciding for which “tales” they’re willing to pay a premium.

Think of multiples as a kind of literary device.

A price-to-earnings ratio is a gauge of belief. Some companies are allowed to defy gravity because their story provides a framework investors want to inhabit.

Tesla’s prospects have looked laughably precarious for years: thin margins, ballooning capital expenditures, persistent skepticism from analysts and an unreliable and variously fascistic steward in Elon Musk. But the market attached (and incredibly, continues to attach) a valuation that assumes not only eventual profitability but the reinvention of every industry under the sun.

Tesla’s narrative - an audacious founder, a mission of planetary salvation, a halo of technological inevitability - is still powerful enough to override traditional caution.

Compare that to legacy automakers who produced steady profits yet could not command similar multiples.

They had numbers, but not a story.

We caricature the Dutch tulip mania of the 1630s as an irrational frenzy, but we miss the forest for the bulbs: valuation was driven by a narrative of rarity, prestige, and speculation in a newly globalizing world.

The value was in the stories people told about what owning them meant.

In the 1840s, British railway companies saw their valuations soar to stratospheric levels.

Investors poured in because railways embodied the future.

They compressed time and space (as the internet later would.)

Share prices showed off a belief that owning a piece of railway companies meant owning a piece of modernity itself. Dickens, in Dombey and Son, wrote of trains as forces that “tore up the very earth on which they moved.” The imagery took hold in the market, and investors attached premium multiples to enterprises that symbolized speed, power, and destiny.

The same goes for the telegraph. Samuel Morse’s technology was valued as an emblem of instant connectivity. Investors and policymakers alike described it in damn-near mystical terms.

For good reason.

And the multiples inflated accordingly.

Also, arguably, for good reason.

Narratives matter because they serve as coordination devices. A company’s valuation isn’t a prediction of what other investors will believe in the future - It aligns // colludes expectations. Keynes’s famous “beauty contest” metaphor, where investors try to guess which faces others will find attractive, applies neatly here. The narrative gives us a script, allowing investors to anticipate each other’s reactions.

Call it a prisoner’s dilemma walkthrough.

The coordination function explains why some narratives endure long past the point of empirical plausibility.

In the dot-com bubble, companies with zero revenue were valued in the billions because the narrative of the internet as a new economic substrate was widely shared. Investors weren’t foolish, no matter how ridiculous Razor and Pets.com appear in hindsight; they were responding rationally to the belief that others would keep paying up for the same story.

Founders are vessels for narratives.

Steve Jobs epitomized this dynamic. Apple’s valuation premium has long been tied to the mythos of its founder: the visionary returning from exile, reshaping the industry with aesthetic and technical brilliance. The narrative mattered less to consumers (pre iPod) than to investors, who priced in a continuity of magic.

Investors are willing to attach premium multiples to “Unicorn” companies because they believe they are buying into an archetype of the Promethean founder. In literature, these figures bend the arc of history. In markets, they bend multiples.

Contrast that with companies run by anonymous managers, interchangeable and uninspiring. Even if they produce competent results, they rarely command the same valuations.

Narratives require protagonists.

Narratives gain power when they resonate with broader cultural currents. In the 2010s, software companies promising to “disrupt” legacy industries aligned with a societal fascination with technology as a force of liberation.

Investors rewarded them accordingly.

Uber and Airbnb were avatars of a cultural mood that prized breaking rules and reimagining norms. Their multiples expanded because the narrative felt inevitable.

By contrast: companies out of step with the zeitgeist struggle to attract narrative premiums. Tobacco firms, despite being highly profitable, trade at low multiples. Their story clashes with prevailing social narratives of health and responsibility.

Energy companies dependent on fossil fuels face similar headwinds. Markets discount stories investors find distasteful // discordant.

The thing about narratives: they can unravel at speed and at scale.

Enron built its premium on a story of innovation, energy trading, and financial wizardry. Once cracks appeared, the narrative collapsed, and so did the multiple.

WeWork shows off much of the same: Adam Neumann spun a tale of “elevating the world’s consciousness,” persuading investors to value a real estate subleasing company like a tech platform.

The IPO process punctured the story, and the valuation crashed.

Narrative premiums are fragile because they rest on belief. Once investors cease to find the story credible, multiples revert toward fundamentals. The shift can be sudden - like the curtain dropping in a play.

One day a tech co is a protagonist in a sweeping saga.

The next it’s revealed to at best, be no more than an ordinary business.

The shame of it.

Ignoring narrative risks missing out on enormous upside; relying too heavily on it risks catastrophic losses when the story fades. Some hedge funds have built strategies explicitly around “shorting the story” when they see narrative and fundamentals diverge.

Others try to ride narratives early and exit before disillusionment sets in. Neither approach is easy.

Complicating matters further: sometimes narratives come true. Amazon in the late 1990s looked like a story stock detached from financial reality.

For years its valuation seemed to rest on faith rather than numbers.

But the narrative (eventually) proved accurate. Investors who dismissed it as hype missed out on one of the greatest compounding machines in history.

Does this mean fundamentals don’t matter?

Hardly.

Companies must eventually generate cash flow. Earnings can’t be held at bay indefinitely. But the path between present numbers and future returns is mediated by narrative.

A company’s story shapes which future states investors consider plausible and how much they are willing to pay for them. Narratives don’t replace fundamentals; they stretch and refract them.

Think of it as two layers. Fundamentals set the floor. Narrative sets the ceiling. Between them = the market’s willingness to believe.

Why do some companies get premium multiples? Because their narratives supply meaning, coordinate belief, and capture the zeitgeist. This dynamic is perennial. Tulips, railways, dot-coms, electric vehicles - the cast changes, but the plot repeats.

And as always, the power of narrative is that it shapes the world it describes.