Author: Wang Chuan
This article is a Wang Chuan: How can one not feel anxious after Wang next door made thirty times profit by investing in storage stocks? (VI) - The trap of homogeneous products 's sequel.
1/ In the software service industry, there is a term called Net Dollar Retention rate, which translates literally to "net dollar retention rate." It refers to how much a customer continues to pay you monthly after initially starting at one dollar. If the NDR exceeds 100%, it indicates that revenue from customers is increasing; if it is below 100%, it means it is decreasing. However, when this term becomes "annualized" net dollar retention rate, some people begin to play tricks. For example, if an AI company sees a 50% revenue growth from the same customer in three months, the net dollar retention rate is 150%. Company executives can boldly claim that my net dollar retention rate is 500%, assuming a 50% growth every quarter, calculated with the fourth power of 150%, and also assuming this will continue annually, even though the real growth lasted only a few months. Anyone who has done business knows that any rapid growth cannot be sustained over the long term; sudden stagnation and reversal of growth are common. From the perspective of these companies, since everyone is exaggerating, as long as they can secure financing first and boast, who cares if there's a flood afterward.
2/ A very subtle point is that during the rise of industry bubbles, a significant portion of demand is not long-term rigid but exploratory, driven by panic and liquidity. This kind of demand has a characteristic of "reflexivity": it means that if others are exploring and panicking and liquidity is flooding in, then I also feel the urge to follow suit and spend money. Once someone goes bankrupt, the situation completely reverses, and when liquidity tightens, I will immediately cut my budget and investments, and the previously exploratory demand will quickly dissipate.
3/ Corresponding to this "reflexive" demand for products, there are also a group of "reflexive" speculative buyers in the stock market. During the upward phase, they follow trends and leverage, pushing stock prices to extremes; they are not long-term holders. If the situation reverses and many people panic sell, they will also quickly flee. The transaction price is ultimately determined by marginal buyers and sellers, the high price in the most frenzied bull market and the low price during the most panicked bear market are produced by this group of "reflexive" speculators.
4/ Therefore, we simultaneously have a "reflexive" structure on both the physical and financial levels. During the industry growth period, the reflexive product demand on the physical level generates a tsunami-like strong positive feedback, attracting reflexive speculators in the financial realm to enter, creating enormous positive feedback at the financial level, further pushing asset prices up. These two levels of positive feedback will only stagnate and reverse when they encounter rigid constraints on both the physical level and financial liquidity. Once a reversal occurs, there will also be positive feedback in a downward direction that intensifies like an avalanche or mudslide.
5/ In the storage industry, semiconductor industry, and the entire data center supply chain, there is an even greater risk: unlike Bitcoin, which has a precisely defined four-year halving cycle in its code, there are no legal rules to ensure that after stock prices fall, they can definitely make a comeback within four years. In fact, several old giants, Micron in 2024, Intel and Cisco in 2026, are only now breaking through their stock price highs from the year 2000, having experienced more than 80% and even 95% catastrophic price retracements in the last quarter of a century. Before his death, Ah Q left a saying, "In eighteen years, I will still be a good man!" For the high-tech industry, especially hardware industries, Ah Q was too optimistic.
6/ Why does this phenomenon occur? One reason is the "bullwhip effect" on the hardware industry supply chain mentioned earlier. (Wang Chuan: How can one not feel anxious after Wang next door made thirty times profit by investing in storage stocks? (V) - The bullwhip effect) When the industry completely reverses, the disappearance of demand is instantaneous, but the output of supply has delays and rigidity; overcapacity will become increasingly severe for a time, and fully digesting this to reach a new balance can take several years. Even achieving balance, the previously severe shortage during the up period cannot return to its original state.
7/ Another more subtle reason comes from the narrative shifts caused by the downward bullwhip effect. The construction of narratives is essentially a recruitment mechanism to find more people to pick up the pieces. When liquidity is high, many dubious high-valuation narratives are immediately believed by people, leading them to invest real money. It’s like when starving refugees are everywhere, it is very easy for heroes to recruit soldiers. The crazy high valuations during the up phase are not only about supply exceeding demand, but they also accelerate the supply-demand gap, leading to short-term multiple overlapping "reflexive" factors, resulting in a situation where the acceleration itself is accelerating exponentially. Such large-scale high growth stories are rare, attracting vast amounts of speculative funds to support fantastical high valuations. And once growth slows down, the "reflexive" speculative capital immediately leaves to chase after the next good story with high growth in another industry.
8/ Taking the profit and stock price comparisons of three major companies over twenty years as an example: Intel's profit in 2020 was double that of 2000 (20.9 billion USD vs 10.5 billion USD), but the highest stock price in 2020 was 69 USD, lower than the peak of 75 USD in 2000; Micron's profit in 2020 was 2.69 billion USD, nearly 80% growth compared to 1.5 billion USD in 2000, yet the highest stock price in 2020 was 75 USD, still 20% lower than the peak of 97 USD in 2000; Cisco's profit in 2020 was over four times that of 2000 (11.2 billion vs 2.67 billion), but the highest stock price of 50 USD in 2020 only corresponds to about 60% of the highest stock price of 82 USD in 2000. Twenty years later, although these companies are stronger in body, their revenue and profits are significantly higher than twenty years ago, the essence of the super high valuation narrative has long departed.
9/ When someone first touches investment and repeatedly profits during the rising phase of the investment bubble, two major mental stamps are formed:
One is to equate current strong demand with ongoing strong demand; a brief period of rapid growth of one or two years equates to ongoing uninterrupted rapid growth in the future. In the up phase, stock prices continue to rise; even if there is a brief decline, they generally rebound quickly. All negative information is ignored (or rationalized with bullish explanations), and any temporary downturn is seen as an opportunity to buy; as time passes, this mental stamp continues to strengthen. In these people's mental models, when prices are rising, do not lecture me on reasoning, rising prices are the hard truth. With all the reasoning you’ve presented, why haven’t I seen higher returns?
10/ The second is that making quick money and making big money is easy. Here "quick" means within a year, with a return of at least double within one year. A thousand years is too long; one must seize the day! It’s said that SanDisk has increased sixfold from the beginning of the year until now; those fund managers who are happy with an annual return of 20% are truly too old-fashioned and out of date.
11/ Buffett once said: "The boundary between investment and speculation is never clear and bright, but if most market participants are making profits recently, this line becomes even more blurry. Easily making big money is the fastest way to lose one's rationality. After experiencing such intoxicating experiences, normally rational individuals gradually start to behave like Cinderella attending a ball. They know that staying too long at the banquet – meaning continuing to speculate on companies with significant valuation and future cash flow gaps – will ultimately result in pumpkins and mice. Yet, they still do not want to miss even a minute of the revelry. The buoyant participants all want to leave before midnight, but there’s one problem; the clock on the dance floor has no hands."
12/ At this stage, you can view it as a game with asymmetrical returns and risks. Continuing to play in it may yield double, or even higher returns? But once the situation reverses at some unpredictable point in time, the entire valuation system collapses, and the risk is an 80% price retracement and the outcome of waiting 25 years to break even. "Reflexive" speculators cannot even wait two or three years, let alone another twenty years; how could that be possible?
13/ As for the neighbor Wang who claims to have made thirty times profit? In a sudden price decline of over 30% in the future, if he used three times leverage, he is very likely to be completely wiped out. If he hasn’t used leverage, given the mental stamp of "making quick money and making big money is easy," he may feel that setbacks are just due to bad luck and that he can quickly make a comeback with his courage. Didn't Zhang Dashuai once educate his son, "When the moment comes, you must be bold"? Thus, neighbor Wang didn't wait a few weeks and added more positions, heavily entering the market. But the previous experience that a big drop must rebound suddenly no longer works, and what awaits him will be a slow, painful decline. The narrative of high-speed growth belongs to the "world of yesterday"; eager to turn the tables, neighbor Wang will frequently attempt various complex operations until he eventually spends all his resources and has no choice but to stop.
14/ This reminds one of what Schopenhauer once said, "Those who have experienced two or three generations of life are like people sitting at a magician's booth at an exhibition, watching the same performance two or three times. The trick is only meant to be seen once. When it no longer produces freshness or can deceive you, its effect vanishes into thin air."
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