There is an uncomfortable truth in the stock market: the easiest companies to understand are rarely the ones that spark the most excitement. A food retailer like Carrefour (a nod to my colleague Patrick), a cement manufacturer, an insurer (such as Allianz, which even campaigns on its "too serious" image), a packaging manufacturer, or a toll road operator can be excellent businesses. Their business models are transparent, their margins are analyzable, and their risks are identifiable. We understand what they sell, to whom, at what price, and with what capital intensity. But they suffer from a terrible flaw: they limit the imagination.
Conversely, a company positioned in artificial intelligence, robotics, biotechnology, quantum computing, advanced semiconductors, or cybersecurity can trigger a much more powerful fascination. Even when few investors truly grasp its products, technological advantages, or monetization prospects, the market may grant it a generous valuation. Why? Because lack of understanding creates space. And in the stock market, narrative space is sometimes very expensive.
Ambiguity allows for bigger dreams
A simple company imposes limits on the analyst. If it sells tires, elevators, or cleaning products, one can quickly estimate market size, potential margins, competition, cycles, and production costs. This does not mean the analysis is easy, but the framework is concrete.
A company that is difficult to understand operates differently. It sells a technology, a platform, an option on a future market, a potential disruption. Its current revenues do not tell the whole story. Its losses can be framed as investments. Its addressable market seems immense. Its competitors are sometimes poorly identified. Its future margins are assumed to be very high. Its narrative can expand almost without resistance.
When investors cannot precisely measure an opportunity, they may be tempted to imagine it. And imagination, unlike earnings, has no natural ceiling. This is how the narrative premium is born: that extra valuation granted to companies whose story is more powerful than their immediate figures (the Palantir story is, in this respect, quite interesting). The market no longer pays only for what is proven. It pays for what could happen if everything goes right.
Great revolutions always begin in discomfort
It would be too easy, and wrong, to scoff. After all, it is often the misunderstood companies that end up changing the world. The greatest stock market winners were often misunderstood at the start. Their market seemed too small, their model too strange, their valuation too high, their losses too worrying, or their technology too abstract. The most cautious investors sometimes waited for such solid evidence that the bulk of value creation had already passed.
This is the fundamental dilemma of innovative companies: when everything is clear, it is often too late to buy at a bargain.
An investor who demands to understand every detail of a technological disruption risks never buying it. They will wait for visible customers, established margins, a validated model, a clean balance sheet, and reassured analysts. By that time, the market will likely have already done most of the work.
The uncertainty premium is also the price of opportunity. Investors therefore sometimes love companies they do not understand because they know that major disruptions are, by definition, difficult to understand at the moment they are born. The problem begins when this humility in the face of innovation turns into intellectual laziness.
Not understanding is not an investment thesis
There is a difference between recognizing that a company is complex and buying because it is complex. The former attitude can be intelligent. The latter is dangerous.
Many investors confuse technological depth with economic quality. A company can develop a fascinating product and remain a poor investment. It can be indispensable to its customers but unable to generate high margins. It can grow quickly while destroying capital. It can possess impressive technology but no pricing power. It can be in a sector of the future while being a mediocre player within that sector. It is a classic mistake: buying the theme instead of buying the company.
Artificial intelligence may be a revolution, but not every company that utters "AI" will deserve a champion's valuation. The energy transition is real, but many green players have so far mostly destroyed shareholder value. Cybersecurity is essential, but that does not mean every specialist in the sector possesses a durable competitive advantage.
A trend can be right and still produce bad investments.
The market loves shortcuts. It sticks labels on certain companies. These labels simplify the story, attract flows, and sometimes justify generous multiples.
Complexity sometimes protects valuations
A company that is difficult to understand is also more difficult to contradict. When a classic industrial group is priced very dearly, one can quickly compare its margins, growth, return on capital, and multiples to those of its peers. If the numbers do not follow, the market punishes it.
With a highly complex company, contradiction is less immediate. Investors who doubt can be accused of not understanding the technology. Absent profits can be justified by massive investments. Extreme valuations can be defended by the assumed size of the future market. Delays can be presented as normal in an industry under construction. Complexity creates a buffer zone between the narrative and reality.
This period can last a long time. As long as investors agree to judge the company on its promises rather than its results, the valuation can remain high. Capital raises are done at a good price, talent is attracted by the rising share price, brand awareness increases, and customers take more interest in the company. The narrative can even become self-fulfilling for a time. This is clearly visible currently with AI.
But this protection is fragile. The day the market demands proof, being complex is no longer enough. One must be profitable, defensible, and measurable. Companies that lived in the future must then answer to the present.
The investor sometimes buys their own sense of intelligence
There is also a psychological dimension. Buying a complicated company sometimes gives the impression of being ahead of the curve. The investor does not feel like someone buying a stock. They feel like someone who has understood the world before everyone else. They are no longer just investing in a company; they are investing in a vision. They can tell a sophisticated story, cite gargantuan markets, talk about disruption, platforms, ecosystems, scalability, proprietary data, network effects, and new architectures. It flatters the intellect.
Simple companies do not always provide this pleasure. Saying "I bought a company that sells bolts with a stable margin and a good return on capital" is less impressive than explaining that one holds an option on the next computational revolution. Finance likes to believe it is rational. Yet it is full of social desires: the desire to be early, to be smarter than the consensus, to belong to the circle of those who "get it."
Misunderstood companies feed this desire. This is why they can become objects of faith. They are no longer just evaluated; they are believed in. And as soon as an investment requires faith, the risk increases.
So what?
Should one avoid all companies that are difficult to understand? Obviously not. That would be condemning oneself to missing out on some of the great economic transformations. But one must always seek to increase their level of information: the more understanding grows, the more risk is reduced. Filtering out false positives is already a healthy exercise. After that, it is all a matter of timing. By entering later than the first explorers, investors certainly miss the beginning of the adventure, but they can capture the rest under better-controlled conditions.
It is not necessary to understand everything. But one must understand enough to know what they do not know, what they are paying for, and what might make them change their mind.
