Stock Market's Seven Blades Part 4 — Killing Expectations

The first session discussed killing valuations,

the second session covered killing logic,

the third session talked about killing performance.

Today, I want to talk about killing expectations,

even if the current data performance looks good,

but market expectations for the future turn worse,

for example, believing that macroeconomics will contract,

interest rates will rise,

leading to fewer orders, and so on,

causing stock prices to decline first.

This is due to concerns about future uncertainty,

which is what we call killing expectations.

Killing expectations can be said to be the most covert and bizarre type of stock price decline in investing.

Before bad news is announced,

before financial reports are released,

or when financial reports look decent,

the stock price inexplicably begins to fall.

This situation, where financial reports are good but stock prices fall, indicates that

market expectations for the future are decreasing.

So why do market expectations fall? Some believe it is because the investment logic has changed,

and this change only exists in the cognition of some people,

ordinary retail investors are unaware.

For example, fund managers believe there is a problem with the investment logic,

and they start selling off.

When everyone discusses this,

and confirms this idea with each other,

this logic begins to strengthen,

and a second wave of killing logic may follow.

Therefore, the first wave of killing expectations,

is often initiated by the smartest people selling first,

and once they have sold enough,

this situation begins to gradually manifest.

This is not conspiracy theory,

usually, those who kill expectations are also the earliest buyers,

killing expectations is also about earning from expectations.

This is how killing expectations works,

when everyone thinks stock prices are falling sharply,

believing the company is not good,

or the industry is not good,

for example, cross-border e-commerce stocks fall to a certain level,

some think it’s about time,

believe the situation won’t get worse,

and expectations actually improve,

while others are in panic,

and this person might buy in.

And those who sell,

usually start acting when everyone is greedy.

So, these people are often the smartest in investing,

buy early and sell early,

which makes killing expectations a covert and cunning act performed by seasoned investors.

It often happens that: the financial report looks good,

but the stock price is still falling.

When everyone realizes that the investment logic has changed,

and begins to kill the logic,

a few months or half a year later,

if the performance indeed deteriorates,

they start to kill performance.

Killing performance is a late realization,

while killing expectations is a premonition.

So, killing expectations means that the company’s current performance is not obviously deteriorating,

but market expectations for its future growth,

profitability, or even policy environment have turned negative.

For example,

the company’s upstream mainly involves energy,

if there is a belief that war or similar situations will occur,

energy prices will rise,

and people will think this energy-dependent company is no longer viable,

even if the company’s operations seem fine at the moment,

but due to increased cost expectations,

the stock price may plummet.

Another example,

when the overall industry stock prices fall sharply,

people think many companies might go bankrupt,

but some believe the remaining few companies will have pricing power,

this judgment about expectations is opposite to the public,

but this is often also a late realization.

Here, I mainly discuss stock price declines,

not rises for now.

In other words,

the company’s current performance is not obviously worse,

but market expectations for future growth,

profitability, and policy environment have turned negative,

causing investors to start selling stocks,

and often after the stock has already risen significantly.

In other words,

it’s not that the company is doing badly now,

but that the market no longer believes in the company’s future,

which is a typical feature of killing expectations.

Just like what was mentioned earlier,

current data looks good,

but stock prices are falling,

no issues with financial reports,

yet the decline is substantial,

analysts are quietly lowering target prices.

Of course,

some analysts will raise prices,

but those are usually late analysts.

Often, even before major announcements,

their research tone has already started to change.

You can’t blindly trust analysts’ opinions,

you need to focus on those with real quality,

such as analysts who have been in the industry for 10-20 years.

Unfortunately,

most analysts are graduates from prestigious schools,

working a few years then switching to fund managers,

leaving the analyst industry,

especially on Wall Street,

the turnover rate is very high.

So,

very few analysts stay for more than twenty years,

these analysts are like seasoned veterans,

having gone through many mistakes,

their analysis reports are still worth reading,

many other analysts’ views can be directly discarded.

When checking evaluations of US analysts online,

first look at their age,

if under 35,

you can generally ignore them,

even if occasionally right,

they are not reliable.

Killing expectations also manifests in the overall cooling of sector sentiment,

the entire industry is viewed pessimistically,

which then drags down stocks within that industry.

Additionally,

long-term expectations will also be adjusted,

for example, markets believe that high-growth industries will shift to mediocre growth.

Some internet platforms,

which used to grow rapidly,

slow down in growth,

and companies like Alibaba have experienced this.

Everyone can see that,

even if Alibaba manages well,

has a good corporate culture,

as a platform company,

once customer acquisition costs increase,

or market penetration exceeds 80%,

there’s only about 20% growth left,

unless they expand overseas,

growth expectations become unsustainable.

Although current growth rates might still be around 40%,

and a high P/E ratio of 40 times is assigned,

future growth over the next three years might only be 25%,

then the P/E ratio might only be 25 times,

this change in expectations leads to killing expectations,

prompting investors to adjust their investment decisions.

So, what are the triggers for killing expectations? First,

a decline in industry prosperity is often a trigger.

For example, new energy vehicles,

in first-tier cities in China,

the penetration rate of electric vehicles might have already reached one-third,

but in the US, the penetration rate is not that high.

When market penetration reaches a certain level,

it may indicate that industry prosperity is beginning to decline,

which then triggers killing expectations.

Take the semiconductor,

consumer electronics industries as examples,

their current financial data still look okay,

but investors may analyze macroeconomic data,

population usage, and market surveys,

to deduce that industry growth is slowing down from the bottom-up,

even before specific financial data are released.

On the eve of industry downturns,

such expectation changes may occur.

Additionally,

management performance also influences market expectations.

If management is conservative,

and their speeches reveal caution,

the market may interpret this as a lack of confidence.

However,

cautious management can also have its merits.

Policy uncertainty can also bring about unpredictability,

such as whether export subsidies will continue,

or if regulations will tighten.

For example, platform monopoly issues,

were mentioned 15 years ago,

but at that time, regulation was not strict,

and the real estate market was also warned to tighten,

but no immediate action was taken,

when measures are finally implemented,

it triggers various uncertainties,

leading to adjustments in market expectations.

Some can anticipate and react early,

these are often large institutional investors.

Those who can stay as large institutional managers,

are usually quite successful,

because large institutions have significant choice in selecting managers,

and will choose experienced, highly knowledgeable individuals.

So, they take the lead,

selling the most aggressively.

Unless there are special circumstances,

these managers can often infer industry changes before data is released,

not relying on inside information.

This kind of killing expectations,

is like the Chinese saying “divergence between price and news.”

When a company releases good news,

looks profitable,

but the stock price still falls,

it’s a very alarming signal,

indicating that ahead-of-the-curve players have acted early,

and these people often hold large funds,

having significant influence on the market.

A few months later,

performance begins to decline,

latecomers realize the reason,

and find that they overestimated the company’s value,

causing the stock price to fall step by step.

The stock market is like pyramid schemes,

some people are ahead of the curve,

others are lagging behind.

Those ahead of the curve, with higher cognition,

profit from their superior insight.

In the stock market,

making money doesn’t necessarily depend on capital,

but on superior cognition,

and it doesn’t require connections,

which is a key feature of the stock market.

In terms of data changes,

attention should be paid to whether new orders are slowing,

whether inventories are starting to rise, etc.

When studying a company, you should not only look at its own data,

but also pay attention to the economic situation of its upstream and downstream industries.

If downstream economy begins to deteriorate,

and development slows,

upstream companies may also be affected.

At the same time,

it’s important to monitor whether upstream cycles are changing,

since this will determine costs,

and thus impact profits.

Although these situations may not yet be reflected in reports,

they will eventually have an impact.

Therefore, when researching expectations,

you need to consider the entire industry chain,

not only the competition within the industry,

but also use tools like Porter’s Five Forces,

by observing peer reports,

expectations,

and upstream and downstream cycles (including upstream costs,

downstream demand, etc.),

if the industry chain is long enough,

these factors can provide foresight for investors,

allowing them to make early decisions.

Factors like interest rate hikes,

declines in consumer indices,

or international political fluctuations,

will also influence market expectations,

I won’t go into detail here.

There are many cases of killing expectations.

For example, in 2023–2024,

many Chinese companies engaged in Apple industry processing,

like Luxshare Precision,

Lens Technology,

their performance is stable,

but stock prices keep falling.

The reason is market expectations that Apple product sales will decline,

with iPhone market saturation globally,

and slowing growth in the global consumer market,

since most people already own smartphones.

This is essentially killing confidence in future blockbuster product-driven growth.

Therefore, when studying companies like Luxshare or Lens Technology,

it’s crucial to pay attention to the saturation of downstream Apple phone markets,

to better understand market changes.

Looking at the liquor industry,

in 2022–2023,

Guizhou Moutai,

Wuliangye,

still hold strong market positions,

but their valuations keep declining.

Previously, Moutai might have been valued at 35 times,

but now the market assigns about 25 times.

This is because the market believes that high-end liquor has approached a growth ceiling,

sales channels are becoming harder to expand,

and consumer confidence is affected by US-China trade tensions,

the pandemic, and other factors.

Moreover, the real estate market cooled down,

and the Chinese liquor industry is closely linked to real estate,

which was also impacted.

Meanwhile,

the main consumer force born in the 1960s is aging,

their purchasing power has declined.

These factors have changed market expectations for long-term stable growth in liquor,

not completely reversing it,

but significantly lowering growth expectations,

leading investors to adjust valuations of liquor stocks.

In the Hong Kong stock market,

in 2021–2022,

Alibaba,

Tencent,

still reported high profits,

but their stock prices were halved.

This is because the market believes e-commerce and social platforms are saturated,

with limited room for online expansion,

and confidence in unlimited future growth of these platforms has waned.

Additionally,

stricter regulation,

international environment changes,

and competition from companies like Pinduoduo,

all lowered market expectations for Alibaba and Tencent’s future,

killing this expectation space,

not their current profitability.

From the financial reports,

their profits are still growing.

Thus, it’s clear that

killing expectations is the most difficult to judge,

requiring a comprehensive and macro understanding of the entire industry chain,

not only focusing on competition and development within the industry,

but also grasping the industry’s own and upstream/downstream cycle changes,

many factors need to be considered.

Compared to killing valuation,

killing logic,

and killing performance,

they each have their differences.

Killing valuation is more common,

because the market feels the stock price is too high.

Killing logic involves the breakdown of the original investment logic,

like a collapse of faith,

often leading to severe consequences.

Killing performance is a late realization,

when the company’s performance deteriorates and is impacted,

stock prices may plummet in the short term.

Killing expectations is also common,

and it occurs before the company’s fundamentals are questioned,

with stock prices gradually or prematurely declining,

this is the most covert warning signal.

As an investor,

whenever you see good news,

and good financial reports,

but the stock price still falls,

you should ask yourself: who is selling? It’s definitely not retail investors,

because they usually don’t sell when good news comes out.

Then, who is selling? It must be those with more foresight,

and higher cognition.

It’s like betting in a casino,

A and B are betting,

you definitely want to bet on the one with higher skill.

In the stock market,

when everyone is optimistic,

and the data looks good,

but the stock price falls,

it involves expectations,

and you need to re-examine the logic.

I’m not talking about value investing here,

just about game strategies.

Even if you don’t understand the stock itself,

at least you should understand the concept of “smart money.”

Besides smart money,

there is also “dumb money.”

“Dumb money” often floods in when the market is hottest,

they don’t sell,

they buy,

they are the last to enter,

and you must be especially cautious about this,

because the market involves significant game elements.

So, what strategies can be used to counter killing expectations? First, look at the expectation gap.

If the actual situation of the company is not as bad as the stock price suggests,

but the decline is too large,

it might be a misjudgment; conversely,

if the market’s expectation is very good,

but the stock price suddenly drops sharply,

and the market performance isn’t that bad,

you should also be cautious,

don’t easily assume the stock is over-sold,

unless these stocks are in the hands of nearly gambling-minded investors,

then it’s a different story.

Additionally,

you need to judge whether expectations can be restored.

For example, if the company launches a new product,

management gives positive guidance,

or industry reversal signals appear,

these factors can help restore expectations,

and this is also worth considering.

When facing such situations,

don’t panic too much,

but it does remind you to re-examine your investment logic.

If the stock is highly overvalued,

then you need to be even more cautious,

because it may face both valuation and expectation killing risks.

Killing expectations is like a slight tremor before an earthquake,

while killing performance is like aftershocks after the quake.

Before a major crisis (killing performance) occurs,

there may be some subtle changes (killing expectations),

which at the time seem insignificant,

but subsequent developments are unpredictable,

so for overvalued stocks,

when expectations are being killed,

you must be especially alert.

If your investment logic isn’t very clear,

especially when your ability is lacking,

it’s best to sell early or reduce your holdings.

Because after killing expectations,

there’s a high chance of killing logic,

which you might not have noticed yet.

Those who are ahead of the curve understand the logic,

but won’t openly tell you the intrinsic logic of stocks,

when new logic appears, you can only understand it slowly yourself,

by the time you see related analysis articles online,

you’ve probably already missed the opportunity.

However,

during the killing expectations phase,

if the company’s fundamentals remain strong,

it might sometimes be an opportunity to build a position,

but that’s hard to say,

and patience is required.

Killing performance, to some extent, is like reality “slapping” market expectations,

the ahead-of-the-curve investors realize that market expectations don’t match reality.

Killing expectations is the collapse of the ahead-of-the-curve investor’s confidence,

and after killing performance, it might be recoverable,

but killing expectations requires waiting for a new story.

Is the decline too much,

or just beginning?

**$KAS **$RVN **$HBAR **