How Expectations Determine Reality, Really
Why the cliche quote of "Our beliefs determine our reality" might just have some truth.
Our beliefs determine our reality. This is not some cliche quote, either. They do.
Imagine believing so deeply in something that you sold your $3 million home. And one could argue that part of deeply believing in that thing resulted from the money flowing into it. The more money people put in it, the more everyone believed. Even though the basis may have not been there!
Jason Debolt is the person who believed in something so much that he sold his $3 million home. The thing he believed in was Tesla’s stock.
He made an initial investment in March of 2013. He bought 2,500 shares at $7.50 per share. Today, those have morphed into 37,500 shares, thanks to two Tesla stock splits, and the stock last closed at $262.33. That initial investment of $19,000 is now a cool $9,837,375.
But it has not always been that way. Since 2021, Tesla has not had a linear path up. It has been quite bumpy. Tesla once traded in the $400 range.
In 2021, EVs were the craze. Hertz Rent-A-Car announced, with much fanfare that included Tom Brady, that they would be buying 100,000 Tesla Model 3. From 2020 to 2022, we saw Tesla’s stock price go from $30 to $407. People believed that electric vehicles were the next big thing and they would revolutionize the car industry! This is not to say it hasn’t either, but this led to quite the valuations for some electric car companies.
On November 10th 2021, Rivian, an American electric vehicle manufacturer, IPO’d at $78 per share, valuing the company at $66.5 billion. On its first day of trading, the stock closed at $100.73, putting the company at around a $100 billion valuation. The stock would go up to $172.01 on November 16th, more than doubling in under a week. Today, the stock sits at $15.71 and has a market cap of $15.64 billion–quite the swing.
Lucid Motors, another electric car company, had quite the run with its stock price too:
February 2021 the price reached $52.94 → September 2021 it slumped to $19.56 → November 2021 the stock rose from the dead to $55.21 → Today it sits at $3.09
Despite Rivian or Lucid never being profitable, we saw increasing valuations. Investors thought that electric vehicle stocks were the next revolutionary technology, which helped to drive their prices up. Investors weren’t alone in this either.
In 2021, Joe Biden signed an executive order to make 50% of all new vehicle sales electric by 2030. California took it a step further and adopted the “Advanced Clean Cars II”, which would require 100% of new cars sold in the model year 2035 to be electric vehicles.
This was great for electric vehicle companies and we saw more and more money flow into this space. It reinforced the idea that electric vehicles were the future and that it was truly the next big craze, just like the internet. The sky-high valuations of these electric car companies were thought to be justified. It led to people like Jason in 2021 calling for Tesla to be $20,000 to $30,000 per share, assuming no more stock splits. Cathie Wood, a famous stock-picker, would set a $7,000 price target for Tesla in 2024, split-adjusted that would be $467.
No one wanted to miss out on these crazy calls and at the time, all these stocks did was go up, attracting even more investors. However, the realization that these companies would not all be profitable and would not forever go up eventually set in. The electric vehicle space began to have its challenges as well.
Tesla experienced issues with worse than expected growth, Elon Musk bought Twitter, and Tesla bought $1.5 Billion of Bitcoin but had to sell most of it at a loss.
There were also infrastructure issues with the manufacturing capacity not being able to meet the increasing demand.
Rivian and Lucid have yet to turn a profit.
In 2023, Lucid reported a net loss of $2.83 billion and as of year-end in 2023, their accumulated deficit was $10.2 billion.
Rivian incurred net losses of $4.7 billion, $6.8 billion, and $5.4 billion in 2021, 2022, and 2023 respectively.
Not to mention, Rivian lost $39,000 per car sold in Quarter 1 of 2024.
And in 2023, EV sales represented 7.6% of all new vehicles sold, well off the 50% we need by 2030, but up from 5.8% in 2022.
The companies attracted huge investments thanks to the expectation of future profitability. But this was based more on the craze and EV mania than the objective analysis of the companies and the EV space. Was the stock price mooning because the companies had the metrics to support it or did the stock price go up because it was thought it couldn’t go down?
It is all part of George Soros’s theory of reflexivity. We have beliefs and expectations of what will happen. Then those beliefs and expectations come true, creating a positive feedback loop, and influence what ultimately happens later. In the case of EVs:
People thought the electric car space was criminally undervalued because it was revolutionary. This helped these companies get wild valuations.
The stock price of those electric car companies went up just as we expected. The market confirms those beliefs and expectations, at least for now.
More money begins to flow in from everywhere pushing these stock prices to sky-high levels. The expectations were confirmed, which encouraged more people to flood in.
The bubble eventually bursts when reality sets in. Companies have yet to turn a profit, capacity issues, increased demand can’t be met, etc.
The same thing is happening today with Artificial Intelligence (AI). Mention AI in your company’s earnings call, and you see a 5% increase in your stock price. Yes, it is not that way, but AI is the jetpack that can propel a company’s stock price forward.
Nvidia is a living, breathing example. Over the past year, the stock has gone up 211.47% because AI is coming to take over the world, so some people say. They are one of two companies, the other being Microsoft, that has made a profit off AI. So when you see other companies up close to 100% on the year thanks to AI, despite having not yet been profitable off of it, you begin to wonder.
Some will make it, but the expectation that this will always continue is a tough one. Not every company can make millions and billions of dollars on electric vehicles or AI. But just like it was the expectation that electric cars would become the dominant vehicle very soon, it has become the expectation that AI will dominate this world starting tomorrow. I fondly remember all the threads on Twitter talking about preparing for AI to take your job in late 2023, and here we are still employed.
This is not to say AI won’t eventually dominate either, but sometimes our expectations get confused, and we like to move on much faster timelines than are humanly possible. It is a bit dangerous because our expectations determine our reality. It is a trickle-down effect. What we expect to occur ends up playing out, which will then determine what later happens down the line.
This is best explained by being a University of Kentucky basketball fan.
Every year, it is the expectation to get the best high school basketball players in the nation. The expectation is typically met, or they get very close to it. This then ultimately determines what happens next. With the best recruiting class, you are expected to have the best players, and with the best players, you should have the best team. And of course, with the best team, you are expected to win the championship. But as we all know, you can’t win a championship every year, and just because you have the best players doesn’t mean you will be the best team.
This creates a cycle of the fanbase just constantly being miserable. It is like the New York Yankees in the MLB, Manchester United in the EPL, or the Los Angeles Lakers in the NBA. The expectations multiply across the fanbase and the feelings compound, creating one large bucket of tortured fans. The expectations and reality have now diverged when inevitably the team doesn’t win the championship.
The teams received the projection of winning it all based on the assumption of their future greatness. This helps these teams, every year, get an edge in getting the best talent. Who wouldn’t want to wear the Kentucky Blue, rock the Yankees Pinstripe, or get to play at Old Trafford? This creates higher and higher expectations to the point where they are unreasonable.
When expectations become unreasonable, we become unhappy. Jimmy Carr has a nice quote,
“Happiness is expectations exceeded.”
When we continue to have rising, unrealistic expectations that surely can’t be exceeded it lends us to becoming unhappy. We had convinced ourselves it would happen, and part of it does, but then reality sets in. It is similar to the placebo effect.
Placebo effects are our brain’s ability to place an expectation on what is about to happen and change what is going to happen. Our brain is a prediction machine. Placebo effects play into the reactions when you take a drug or supplement and the anticipation of what it will do. Andrew Huberman says,
“In every case, the placebo effect is a biological effect. It’s not just our thoughts tricking us into thinking something happened that didn’t happen. It’s our thoughts, our minds creating real biological effects.”
Our brain and thus our expectations are a powerful tool that has influence on how things unfold in our lives. If we take a pill or supplement that does nothing for us, but we expect it to, we might just get cured. If we get the best players on our favorite team or the stock price of the next big thing continues to go up, we think it will forever remain this way and can get caught believing of only good things from here. Thus, it is important to be wary of our expectations because what we believe, might just come true. However, expectations and reality will eventually converge.
This also dismisses the idea of having zero expectations. A life of zero expectations demands nothing of us. And no matter how much we think we can avoid it, the world never stops demanding stuff from us.
Of course, unrealistic expectations exist too. Look at what Cathie and Jason expected Tesla’s stock price to be. At some point, the bubble bursts, and left is reality. Hold reasonable expectations, and we will come to find it. If we continue to fill our lives with good things in the world, we will come to see the good in the world.
If you believe it and expect it, it will determine how your future unfolds. Just ask Jason Debolt. He expects Tesla to push this world in a direction it has never seen before so much he sold his house. So yes, the quote that our beliefs determine our reality might be cliche but there are real biological effects, and behaviors that support it. It is part of the reason why a man is homeless today.
Appreciate you reading.
-Scantron
This was truly a great read. Thanks, Scantron!