Author: Wang Chuan
This article is a continuation of Wang Chuan: After Investing in Storage Stocks and Seeing a Thirty-Fold Return, How to Remain Unanxious (Part 6) - The Trap of Commoditized Goods .
1/ There is a term in the software service industry called Net Dollar Retention rate, literally translated as 'Net Dollar Retention Rate.' It means if a customer initially pays you one dollar per month, how much they still pay you per month after a period of time. If the NDR exceeds 100%, it indicates revenue from the customer is increasing; below 100%, it's decreasing. However, when this term becomes 'annualized' net dollar retention rate, some start playing tricks. For example, if an AI company's revenue from the same customer grows 50% over three months, the net dollar retention rate is 150%. Company executives can claim with a straight face that their net dollar retention rate is 500%. This is calculated by raising 150% to the fourth power, assuming each subsequent quarter will also grow by 50%, and further assuming this will continue year after year, even though the actual growth only spans a few months. Anyone who has run a business knows that any high-speed growth cannot be sustained long-term; sudden stagnation and reversal of growth are common occurrences. From these companies' perspective, since everyone is exaggerating, as long as they secure funding first, they can boast wildly, regardless of the potential deluge later.
2/ A very subtle point is that during the rise of an industry bubble, a significant portion of demand is not long-term and rigid, but rather exploratory, driven by panic and liquidity. This demand has a 'reflexive' characteristic: if everyone else is exploring, panicking, and liquidity is pouring in crazily, then I also feel the urge to follow the trend and spend money investing. Once someone goes bankrupt and the landscape completely reverses, and liquidity tightens, I will immediately cut budgets and investments. That part of exploratory demand then swiftly vanishes into thin air.
3/ Corresponding to this 'reflexive' demand for products, there also exists a group of 'reflexive' speculative buyers at the stock market level. During the uptrend, they follow the trend, add leverage, pushing stock prices to extremes; they are not long-term holders. If the situation reverses and many panic-sell, they quickly scatter like a flock of birds. Transaction prices are ultimately determined by marginal buyers and sellers. The highest prices at the peak of a bull market and the lowest prices during the most panicked bear market are created by these 'reflexive' speculators.
4/ Therefore, we have a 'reflexive' structure at both the physical (industry) and financial levels. During an industry uptrend, the reflexive product demand at the physical level forms a tsunami-like positive feedback, attracting reflexive speculators at the financial level to enter the market, creating massive positive feedback at the financial level as well, pushing asset prices even higher. These two levels of positive feedback only stall and reverse when they simultaneously encounter rigid constraints at both the physical level and financial liquidity level. And once they reverse, there is also a positive feedback—a downward, intensifying positive feedback like an avalanche or mudslide.
5/ However, the storage industry, semiconductor industry, and the entire data center supply chain face an even greater risk: unlike Bitcoin, which has a precisely defined four-year halving cycle in its code, there are no legal rules guaranteeing that stock prices will make a comeback within four years after a decline. In fact, several established giants—Micron in 2024, Intel and Cisco in 2026—only surpassed their 2000 stock price highs, having endured bone-chilling price drawdowns of over 80% or even 95% during that quarter of a century. Ah Q had a dying wish, "In eighteen years, I'll be a hero again!" For the high-tech industry, especially hardware, Ah Q was still too optimistic.
6/ Why does this phenomenon occur? One reason is the previously mentioned 'bullwhip effect' in the hardware industry supply chain. (Wang Chuan: After Investing in Storage Stocks and Seeing a Thirty-Fold Return, How to Remain Unanxious (Part 5) - The Bullwhip Effect)When an industry completely reverses, demand disappears instantly, but supply output has delays and rigidity. Overcapacity worsens for some time, and it takes several years to fully digest and reach a new balance. Even when balance is achieved, the severe supply-demand imbalance of the uptrend era is gone for good.
7/ Another more subtle reason comes from the migration of narrative during the downturn of the bullwhip effect. The construction of a narrative is essentially a recruitment mechanism to find more people to take over. When liquidity is high, many high-valuation narratives that can't withstand scrutiny are immediately believed, attracting real money. It's like heroes find it easy to recruit soldiers when famine and refugees are everywhere. The crazy high valuations during the uptrend aren't just about supply-demand imbalance or accelerating imbalance; they result from multiple layers of 'reflexive' factors superimposed in a short time, causing an exponential rise where acceleration itself is accelerating. Such widespread, high-speed growth stories are rare, attracting a flood of hot money to support dream-like high valuations. Once growth slows, 'reflexive' hot money immediately leaves to chase the next high-growth story in another industry.
8/ Take the comparison of profits and stock prices over two decades for three major companies as an example: Intel's 2020 profit was double that of 2000 ($20.9 billion vs $10.5 billion), but its 2020 peak stock price of $69 was lower than the 2000 peak of $75; Micron's 2020 profit was $2.69 billion, nearly 80% higher than 2000's $1.5 billion, yet its 2020 peak price of $75 was still 20% lower than the 2000 peak of $97; Cisco's 2020 profit was over four times that of 2000 ($11.2 billion vs $2.67 billion), but its 2020 peak price of $50 was only about 60% of the 2000 peak of $82. Twenty years later, although these companies' bodies are stronger, with much higher revenues and profits than 20 years ago, the soul of the super-high valuation narrative left long ago.
9/ A person newly exposed to investing, who repeatedly succeeds during an investment bubble's uptrend, forms two major mental imprints:
First, equating current strong demand with sustained strong demand; equating one or two years of rapid growth with uninterrupted, sustained high growth in the future. During the uptrend, stock prices keep rising, and even brief dips usually rebound quickly. All negative information is ignored (or rationalized with bullish explanations), and any temporary drop is seen as a buying opportunity. Over time, this mental imprint is continuously reinforced. In these people's mental models, when prices are rising, don't talk reason to me; rising prices are the ultimate truth. You've said so much, but why isn't your return as high as mine?
10/ Second, it's easy to make fast, big money. Here, 'fast' means less than a year, with returns at least doubling annually. Ten thousand years is too long; seize the day! Speaking of which, Sandisk has already gone up sixfold since the beginning of the year. Those fund managers happy with a 20% annual return are simply too old-fashioned and outdated.
11/ Warren Buffett once said: 'The line separating investment and speculation is never bright and clear, but it becomes blurred most noticeably when the market participants are amateurs recently receiving windfall gains. Making big money easily is the fastest way to lose one's senses. After that intoxicating experience, normally sensible people drift into behavior akin to Cinderella at the ball. They know that overstaying the festivities – that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future – will eventually bring on pumpkins and mice. But nevertheless, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room where the clocks have no hands.'
12/ At this stage, you can view it as a situation with asymmetric returns and risks. Continuing to play might still yield double or even higher returns? But once the situation reverses at some unpredictable point, the entire valuation system collapses. The risk is a price drawdown of over 80% and the outcome of waiting 25 years to break even. How can 'reflexive' speculators, who can't even wait two or three years, wait over twenty more?
13/ As for that neighbor Lao Wang who supposedly made thirty times his money? During a sudden future price drop of over 30%, if he used triple leverage, he'll most likely be liquidated to zero. If he hasn't used leverage yet, given the mental imprint 'it's easy to make fast, big money' in his brain, he'll think the setback is just temporary bad luck, and he can quickly recoup losses with his own guts and insight. Didn't Marshal Zhang once teach his son, "When faced with a critical moment, one must be bold"? So, after a few weeks, neighbor Lao Wang increases his position heavily and re-enters the market. But the previous experience of big drops followed by rebounds suddenly fails. What greets him is a slow, agonizing, persistent decline. The high-growth narrative belongs to the bygone "world of yesterday." Eager to turn the tables, neighbor Lao Wang will frequently attempt various complex operations until finally exhausting his resources and having no choice but to stop.
14/ This brings to mind what Mr. Schopenhauer once said: 'Those who have lived through the experiences of two or three generations are like people sitting in the conjurer's booth at a fair, seeing the same performance two or three times. The trick only meant to be seen once. When it no longer gives a sense of novelty and can no longer deceive, its effect is gone.'
