“Even as I approach the gambling hall, as soon as I hear, two rooms away, the jingle of money poured out on the table, I almost go into convulsions.”

FYODOR DOSTOEVSKY, The Gambler

There are a myriad of intellectual problems and contradictions inherent in valuing public-traded equities. Given this valuation conundrum, why is there always a massive mountain of money thrown at stocks if there is apparently no logically coherent system to value these stocks, in theory?

This is a question that has occupied my mind for years, and becomes especially acute during long Market corrections. How does one find the courage to buy stocks when the margin of safety of publicly-traded stocks is unknown? Why does a margin of safety exist?

Today, it occurred to me that the answer to this conundrum is quite simple: The Gambling Instinct. Human beings have a propensity to gamble and the stock market provides a perfect outlet for this gambling instinct.

So where is there a margin of safety? It’s not because of earnings, book value, or any of the other myriad of explanations given to support public stock prices.

The real basis for a margin of safety is based on the sound prediction, supported by basic human psychology that the gamblers will be back.