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If you're trying to model investor behavior, it's pretty hard to start with any assumption other than that investors are all trying to make money. But for that model to say anything useful, you need a little variation: some of them are close to pure wealth-maximizers, but many of them are trying to smooth their lifetime consumption by accumulating risky assets when they're young, slowly shifting their portfolio into safer ones, and then drawing down that portfolio once they retire. By far the easiest way to do this is to index, but some investors—a growing fraction of them—like to pick individual stocks.

If you're trying to understand professional stock-pickers who are following some kind of mandate, what you're looking at is a basically an annoying dynamic programming problem: an analyst has a finite amount of attention, each trade requires some time investment to determine whether or not it's worth doing and an ongoing time investment to decide when to exit. And knowing how long it will take to exit the position (and how volatile it will be, and therefore how closely you’ll have to watch it) is a separate source of uncertainty. So it's a constant process of guesswork in order to produce a coherent collection of... guesses about which way a stock will move! Big funds have gotten pretty good at optimizing this kind of thing, and a healthy research cadence ends up being a natural output of targeting a particular level of volatility and factor exposures. Conveniently, funds have a sensible way to set a goal for this optimization process: they want to fire anyone whose contribution to returns isn't commensurate with the risk budget they've been given.

All of this is hard to implement and has all kinds of pitfalls and perverse incentives, but the goal is clearer. For individual investors, the goal can be fuzzier. Someone might buy individual stocks because:

• They think they have an edge, either because they're looking at smaller companies that institutions wouldn't cover, because they have special knowledge about some industry (like someone in AI who spotted the demand spike for GPUs, memory, CPUs, etc.), or because they believe they're better analysts.

• They might just enjoy the research process and not necessarily expect to win, but still feel that it's a good use of time to understand companies—and that their returns are a measure of how well they actually do understand them.

• They might have some mental threshold for net worth, such that they'd rather have a lower EV but a higher chance of escaping the permanent economic underclass.

• Gambling is fun, and retail investing platforms have various ways to pay extremely high transaction costs in order to get leverage via options.

• Sometimes, owning an asset is a cosmetic or quasi-religious choice (like being a diehard fan of a sports team). Someone who buys Tesla stock today is making a partly-political statement; ten years ago, they were doing that, too, but it was roughly the opposite political statement. Meme stocks are partly a way to say that finance is too stuffy, too rigged, or too boring.

It's these last few that start to distort markets a bit. Usually, a company with more volatile cash flows has a higher cost of capital; it's less likely to be able to return capital through buybacks when it's cheap, and also less likely to survive the next cycle. But some kinds of volatility now maximize fun. If you own shares in a company that diversifies in goofy ways, launches a crypto treasury strategy, or just issues some peculiar press releases, that's probably a tailwind to valuation right now even if it's usually a headwind.

Some other decisions companies make are meant to appeal to investors who are rolling their own ESG mandate: Tesla fit this description, Beyond Meat did, too, and back before they pivoted to AI datacenters, Allbirds had a sustainability angle. A few companies also comply with B Corp rules (Warby Parker, Lemonade), or have a policy of donations, like Salesforce's 1% pledge. All of these give investors a nice sense that they're making a difference while making money, and it's probably a nonlinear one—there just aren't that many people saying that Salesforce is just short of their hurdle rate right now, but when you factor in the extra 1% that they're donating, the returns-plus-charitable-utility calculation suddenly pencils out.

In general, these companies aren't doing purely performative charity just to reduce their cost of capital. They might not maximize impact, and it might be more optimal for companies to focus on maximizing profits while leaving the charity part up to their shareholders.¹ But these companies are run by human beings, who have interests beyond wealth-maximization, and these companies also hire people, who will have to spend a lot of time together. There are many ways that corporate evolution selects for companies being a bit nicer beyond purely sourcing capital. But the whole situation means that when you look at individual investor outcomes, you can't just compare their returns to the S&P. Sometimes, the returns gap just means that they used the market as a vehicle to pay for something that matters to them more than the last dollar. But these companies are run by human beings, who have interests beyond wealth-maximization, and these companies also hire people, who will have to spend a lot of time together. There are many ways that corporate evolution selects for companies being a bit nicer beyond purely sourcing capital. But the whole situation means that when you look at individual investor outcomes, you can't just compare their returns to the S&P. Sometimes, the returns gap just means that they used the market as a vehicle to pay for something that matters to them more than the last dollar.

In The Diff, there are a few places where we've covered the nuances of cost of capital and what shareholders are really trying to earn:

• Democratizing financial products always happens, and it's never without some problems.

• When a Korean boy band company went public, it was partly a form of price discrimination to capture more money from superfans ($).

• There are many things we mean when we talk about stocks.

• Shareholder activism has gone through a few distinct eras ($).

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1  This is especially true because some strategies are tax-inefficient by default, but can be done within a pass-through entity whose limited partners are nonprofits. Short-term capital gains taxes slowly move more of the world's financial assets to foundations and pensions.