Author: Wang Chuan
This article is a continuation of Wang Chuan: How to Avoid Anxiety When the Neighbor, Lao Wang, Made Thirty Times His Investment in Storage Stocks (6) - The Trap of Commoditized Goods .
1/ In the software service industry, there is a term called Net Dollar Retention rate, literally translated as 'net dollar retention rate'. It means how much a customer who started paying you one dollar per month can still pay you per month after a certain period. If NDR exceeds 100%, it indicates increasing revenue from the customer; below 100% means decreasing. However, when this term becomes 'annualized' net dollar retention rate, some begin to act dishonestly. For instance, if an AI company's revenue from the same customer grows by 50% over three months, the net dollar retention rate is 150%. The company's executives can unabashedly claim to the public that their net dollar retention rate is 500%. This is calculated assuming a 50% growth each quarter thereafter, raised to the fourth power (150%^4), and further assumes this will continue year after year, despite the real growth lasting only a few months. Anyone who has done business knows that no high-speed growth can be sustained long-term; sudden stagnation and reversal of growth are common. From the perspective of these companies, since everyone is exaggerating anyway, as long as they secure financing first by brazenly boasting, who cares about the deluge that follows.
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 type of demand has a "reflexive" characteristic: if others are exploring, others are panicking, and liquidity is pouring in wildly, then I'm also anxious to follow the trend and spend money to invest. Once someone goes bankrupt, the situation completely reverses, and liquidity tightens, then I immediately cut budgets and investments, and that part of exploratory demand quickly vanishes.
3/ Corresponding to this "reflexive" demand for products, there also exists a group of "reflexive" speculative buyers in the stock market. During the uptrend, they follow the trend, use leverage, and push stock prices to extremes; they are not long-term holders. If the situation reverses and many panic-sell, they also quickly scatter. The final transaction price is determined by marginal buyers and sellers. The highest prices at the peak of a bull market and the lowest prices during the panic of a bear market are created by these "reflexive" speculators.
4/ Therefore, we have a "reflexive" structure simultaneously at both the physical (real economy) and financial levels. During the industry uptrend, the reflexive product demand at the physical level forms a tsunami-like strong positive feedback, attracting reflexive speculators at the financial level to enter the market, creating massive positive feedback at the financial level and further pushing asset prices higher. The positive feedback at these two levels will only stall and reverse when encountering rigid constraints at both the physical level and the financial liquidity level. And once it reverses, there will also be a positive feedback loop—a downward spiral that intensifies 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 statutory rules guaranteeing that stock prices will definitely rebound within four years after a decline. In fact, several established giants like Micron broke through their 2000 highs only in 2024, and Intel and Cisco in 2026, experiencing soul-crushing price drawdowns exceeding 80% or even 95% over this quarter-century. Ah Q, before his death, famously said, "In eighteen years, I'll be a hero again!" For the high-tech industry, especially hardware, Ah Q was far too optimistic.
6/ Why does this phenomenon occur? One reason is the previously mentioned "Bullwhip Effect" in the hardware industry supply chain. (Wang Chuan: How to Avoid Anxiety When the Neighbor, Lao Wang, Made Thirty Times His Investment in Storage Stocks (5) - The Bullwhip Effect) When an industry completely reverses, demand vanishes instantly, but supply output is delayed and rigid. Overcapacity worsens for a period, and it takes several years to fully digest and reach a new equilibrium. Even after reaching equilibrium, the severe supply shortages seen during the uptrend are gone forever.
7/ Another more subtle reason comes from the migration of narrative during the downward phase of the Bullwhip Effect. The construction of a narrative is essentially a recruitment mechanism to find more people to take over positions. When liquidity is high, many high-valuation narratives that cannot withstand scrutiny are immediately believed, with real money invested. It's like recruiting soldiers is very easy for heroes when famine refugees are everywhere. The疯狂 high valuations during the uptrend are not just about supply-demand imbalance, nor just its acceleration, but an exponential situation where the acceleration itself accelerates due to the叠加 of multiple layers of "reflexive" factors in a short time. Such widespread, high-speed growth stories are rare, attracting大量 hot money to support梦幻般 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 the $1.5 billion in 2000, but 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 price of $82. Twenty years later, although these companies' shells are stronger, with much higher revenue and profits than 20 years ago, the soul of the超高估值 narrative left long ago.
9/ When a person first接触 investment and屡屡 succeeds during the rise of an investment bubble, two major mental imprints are formed:
First, equating current strong demand with持续 strong demand; equating one or two years of短暂高速增长 with未来持续不间断的高速增长. During the uptrend, stock prices持续 rise, and even brief declines usually反弹 quickly. All negative information is ignored (or rationalized with bullish explanations), any temporary drop is seen as a buying opportunity, and this mental imprint strengthens over time. In these people's思维模型, don't reason with me when prices are rising; rising prices are the ultimate truth. You've said so much, why isn't your回报 higher than mine?
10/ Second, believing that making快钱, making大钱 is easy. Here, "fast" means less than a year, with returns at least doubling annually. Ten thousand years is too long; seize the day! After all, SanDisk has already sextupled from the beginning of the year until now. Fund managers happy with a 20% annual return are simply too outdated and out of touch.
11/ Buffett once said: 'The line separating investment and speculation is never bright and clear, but it becomes significantly blurred when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of 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 they nevertheless hate to miss a single minute of what is one helluva party. Those who are陶醉 all want to leave before midnight. The problem is, there are no clocks on the wall of the ballroom.'
12/ At this stage, you can view it as a situation with asymmetric回报 and risk. 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, with risks being over 80% price drawdown and an outcome of waiting 25 years to break even. "Reflexive" speculators can't even wait two or three years; how could they wait over twenty more?
13/ As for that neighbor, Lao Wang, who claimed to have made thirty times his money? In a future sudden price drop exceeding 30%, if he used triple leverage, he would most likely be liquidated and清零. If he hasn't used leverage yet, given the mental imprint of "making快钱, making大钱 is easy" in his brain, he would feel the setback is just暂时 bad luck, and he could quickly recoup losses凭自己的胆识. Didn't Marshall Zhang once teach his son, "When the time comes, one must be bold"? So, without waiting a few weeks, neighbor Lao Wang re-entered the market with increased positions and重仓. But the previous experience that big drops必反弹 suddenly失效. What awaits him is钝刀割肉持续阴跌. The high-growth narrative belongs to the逝去的 "world of yesterday." Eager to翻盘, neighbor Lao Wang will频繁尝试各种复杂的操作 until he ultimately exhausts his resources and不得不 stops.
14/ This reminds one of what Professor Schopenhauer once said: 'A man who has lived through two or three generations is like someone sitting in the conjuror's booth at a fair and seeing the tricks two or three times in succession. The sleight of hand is meant to be seen only once. When it no longer has the power to surprise and deceive, its effect is gone.'
