The second of the seven blades of the crypto and stock market decline—The killing logic

Let’s continue our discussion today on the seven knives of the stock market,

Previously, we talked about the first knife, “killing valuation,”

Today, we discuss the second knife, “killing logic,”

This is a concept related to investment logic.

“Killing logic” is deeper and more deadly than “killing valuation.”

When valuation is high,

Prices may fall,

But they might bounce back later.

However,

Once the investment logic is broken,

It’s like the foundation of a house collapsing,

Even if the house’s surface hasn’t fallen,

No one dares to live in it,

This is a very vivid metaphor.

The so-called “killing logic” refers to investors originally optimistic about a certain company or industry,

For example, optimistic about a company’s growth story,

Like LeEco in the past,

Or companies like Enron in the US,

Or industry logic.

In fact, many industries may be pseudo-industries,

I will talk about this later.

At that time, people were not sure whether a new emerging thing had long-term vitality,

Or was just a flash in the pan,

Most new things are often just a flash in the pan.

Otherwise,

Our world should be filled with all kinds of industries.

But later,

The growth stories of companies or industry logic that investors believed in proved to be wrong,

Or they wavered,

At this point, the market will abandon these products,

No longer giving valuation premiums.

Usually, these companies originally had high valuations,

And once the logic is broken,

It ultimately leads to a complete collapse of valuation and expectations.

Therefore,

If “killing valuation” means price decline,

Then “killing logic” is a collapse of cognition.

The main reasons that trigger “killing logic” include the following.

One is policy crackdown,

This is a very powerful factor.

For example, the “double reduction” policy in the education sector,

The country, based on real circumstances,

Does not allow certain education models to continue,

This is a typical “killing logic.”

Game time restrictions are also a form of “killing logic,”

It’s not that people’s cognition of it is wrong,

But that the logic has changed.

For example,

If one day it is said that electric vehicles will no longer be used,

And people switch to hydrogen energy,

This also belongs to “killing logic.”

For instance, platform anti-monopoly,

The country prohibits Alibaba from doing “choose one of two,”

This gave Pinduoduo development opportunities,

And the centralized procurement in the pharmaceutical industry,

All are cases triggered by sudden policy changes, leading to “killing logic.”

Some are due to initial misconceptions,

And the difficulty of investment lies in this:

On one hand,

Your understanding of current things may be limited by insufficient information or misunderstandings,

Making it impossible to understand correctly; on the other hand,

You simply don’t know what will happen in the future,

Just like the “double reduction” policy in education,

Platform anti-monopoly,

And centralized procurement in medicine,

And game time restrictions,

If the country, considering internet issues,

Regulates game companies.

Someone asked me whether to invest in Tencent,

I said Tencent faces significant political risks,

That’s the reason,

Because you don’t know when policies will be introduced,

Maybe never,

But this risk always exists,

This is some aspect of “killing logic.”

Especially in China,

The risks related to political policies are greater.

First is the failure of technological routes,

This is common among high-tech companies.

Take new energy as an example,

In battery technology,

There are options like solid-state batteries,

Hydrogen fuel cells,

Liquid batteries (such as lithium batteries,

acid-base batteries, etc.).

If a certain battery technology fails,

Or is difficult to commercialize,

It may trigger “killing logic.”

In fields like LED technology,

Similar situations can occur due to technological failure or commercialization difficulties.

Additionally,

Changes in user or consumer habits can also cause “killing logic,”

For example, young people no longer like carbonated drinks,

For products like Coca-Cola,

This presents a challenge.

Second is the disappearance of track dividends.

For example, some companies focus on overseas expansion,

Many invest in related enterprises,

But if the overseas logic fails,

Problems will arise.

Similarly, the end of real estate dividends,

Stagnation of Baijiu consumption upgrades,

For example, people considering the harm of alcohol to the liver,

Reducing alcohol consumption,

Or no longer choosing Moutai for gifts,

All fall into the category of track dividend disappearance.

Once popular gift items like Brain Platinum,

Are now rarely seen,

This also reflects the disappearance of track dividends.

Third is the collapse of business models.

For example, LeEco’s ecological model failed to materialize,

And some P2P platforms collapsed,

These are all examples of business model collapse.

Fourth is data face-slapping.

If a company’s claimed key indicators like click-through rate,

Traffic,

User revenue and profit,

Fail to meet expectations,

And continue to decline,

Problems will occur.

Fifth is industry fundamental changes.

For example, declining birth rates,

Decreasing marriage numbers,

Will impact the long-term development logic of education,

Real estate,

Healthcare, and other industries.

There are countless cases of “killing logic,”

Take LeEco as an example,

It went from building an ecological dream to a black hole of funds.

The initial logic was to create an ecosystem of content,

Platforms, and hardware,

Launching LeEco phones,

TVs, and other products,

Aiming to be China’s version of Netflix + Apple,

But ultimately, due to excessive spending,

Funding difficulties,

The ecological chain was dragged down at each link,

Leading to a collapse of logic,

Originally, there could be a synergistic effect,

1+1 greater than 2,

But the final result was 1+1 equals -2.

It’s like Pang Tong in the Warring States period using the chain strategy to nail ships together,

Intended to make ships more solid,

But ended up with a fire that couldn’t be escaped.

This is a collapse of logic,

Stock prices hit continuous limit-downs,

Market value rapidly drops to zero,

This is a characteristic of LeEco.

Another example is the P2P industry,

Initially promoting inclusive finance,

Encouraging ordinary people to support startups,

And achieve interest rate marketization,

Bypassing banks, etc.

But in the end, many platforms collapsed,

With widespread defaults,

Regulatory intervention led to a one-size-fits-all crackdown,

Cleaning up all, regardless of good or bad,

Many related companies were affected,

Like Lufax,

Paipaidai, and others, all either failed completely or were forced to transform,

Some are better off,

But many were simply wiped out without distinction.

Looking at Chinese concept stocks in the internet sector,

Before 2021,

Companies like Alibaba,

Tencent,

Baidu,

Due to their data, platform, and monopoly advantages,

Had long-term growth potential,

And were favored by US investors.

However,

With China’s anti-monopoly measures,

Restrictions on algorithm recommendations,

And controls on minors’ gaming,

Market logic changed,

These companies’ market caps were halved,

And some fell by 70-80%,

Valuation systems were redefined.

Another example is the new energy battery swapping logic,

Initially promoted by NIO,

Claiming to save time,

And be as convenient as refueling,

While extending battery life,

Their stock price rose accordingly.

But soon,

Due to infrastructure issues,

Unstandardized batteries,

And increased financial burdens,

Market doubts arose,

Impactting NIO’s valuation,

And investors’ confidence waned.

" Killing logic" is often very cruel,

To distinguish “killing logic” from “killing valuation,”

One is the root cause,

Killing valuation means the market thinks the price is too high; while killing logic,

Means the market believes the previous ideas and logic are fundamentally wrong.

In terms of stock rebound,

When killing valuation occurs,

Because of high P/E ratios leading to price drops,

The stock may rebound when prices return to reasonable levels; but with killing logic, it’s not necessarily the case,

It may fall to extremely low levels,

Like LeEco, which simply disappeared,

Unless new logic emerges,

The damage is huge.

While killing valuation is also powerful,

It has a chance to rebound,

Because it’s just overvaluation; but killing logic can be fatal,

Once it happens,

Principal may be lost entirely.

From investors’ reactions,

When killing valuation occurs, investors usually panic and sell then wait; but during killing logic,

Investors tend to liquidate all holdings,

Whether actively or passively,

Especially large funds,

Once they believe an asset has no investment value,

They will sell everything,

And are unlikely to turn back.

From a company’s financial report perspective,

Killing valuation often involves growth companies,

Whose revenue and profits are still increasing,

Just not keeping pace with stock price rises; but during killing logic,

The company’s data may have already deteriorated or become distorted,

For example, in online education,

Once policies are introduced,

Future growth potential may disappear immediately.

The key to killing logic lies in the extent of logic damage.

To respond to killing logic,

First, assess whether the invested logic is truly reliable,

Or just an illusion triggered by hot topics.

Real logic should have long-term industry support,

Policy continuity, and technological implementation basis; false logic often relies on PPT storytelling,

Raising stock prices to attract retail investors,

This situation is the most dangerous.

To counter killing logic,

One must adopt a dynamic verification perspective,

Regularly review,

Check whether the core logic still exists,

And whether it is impacted by macro environment,

Regulatory policies,

And technological changes.

Once the logic wavers,

Don’t hold illusions,

Exit immediately and clear all positions,

Because investment is based on logic,

If the logic doesn’t exist,

Value disappears along with it.

Additionally,

Distinguish between logic fluctuations and logic bankruptcy.

For example, in the pharmaceutical innovation drug sector,

Under centralized procurement policies,

Part of the business model’s logic may collapse,

But not entirely bankrupt,

There are still opportunities.

In summary,

Avoid fully investing in stocks supported mainly by stories,

Because their performance support is weak.

For example, pickled vegetables are less affected by policies,

Traditional Chinese medicine is also,

Unless one day it is proven that Chinese medicine is completely ineffective,

(At 12:50 in the audio,

Some are just placebos,

Some people are still willing to buy placebos,

Like vitamins in the US,

They only have placebo effects,

Some are willing to buy, which is fine,

This paragraph about Doubao has been deleted,

I also think deleting it makes it more concise and coherent,

Needs review) Otherwise, there is still a market.

But online education is different,

The country wants to control the discourse power in education,

And the online education industry faces difficulties.

Logical investment requires extra caution,

The more wonderful the story told,

Especially in emerging industries,

The less in-depth people’s understanding,

And the less stable the logic,

Future policies may also be uncertain,

So the more beautiful the story, the more skepticism should be maintained,

To avoid falling into logical traps.

However,

Killing valuation and killing logic are not mutually exclusive,

Many companies may have both,

LeEco is a typical example,

Lacking solid logic,

And with overvaluation,

Once crises occur,

It’s hard to recover.

Therefore,

A cautionary summary:

Killing valuation is a price issue,

Killing logic is a cognition issue,

As the saying goes,

Killing valuation might bounce back,

But killing logic often means forever goodbye.

This concludes the related content on killing valuation and killing logic,

With examples.

I checked online,

Because I personally do not invest in the A-share market,

I summarized typical “killing logic” cases from 2015 to 2024 over these ten years.

The relevant tracks or companies in these ten cases,

Were all favorites in the Chinese market at that time,

But ultimately, due to the collapse of core logic,

They were abandoned by the A-share market,

And still haven’t recovered to this day.

The first is P2P online lending platforms,

Like Lufax and Yirendai.

They claimed to promote inclusive finance,

Trying to bypass traditional financial institutions,

To serve small and micro enterprises,

But later, widespread defaults and illegal fundraising occurred,

Regulators intervened,

And the entire industry’s stock price dropped to zero.

The second is New Oriental Education among Chinese concept stocks.

Originally, relying on the demand for school advancement,

With advantages like scalability,

The prospects looked promising.

However,

Once the “double reduction” policy was introduced,

The education training industry was severely hit,

And New Oriental’s stock plummeted over 90%.

But later,

New Oriental successfully transformed into live-streaming e-commerce.

The third example is LeEco.

LeEco promoted an ecological and fully integrated industry model,

But faced financial fraud,

Cash flow issues,

And its car-making plan also failed,

Finally delisted,

Jia Yueting’s personal credit collapsed.

He then involved himself in new ventures,

I personally invested in a so-called “PPT car-making” project of his.

Faraday’s cars are actually quite good,

Trying to seize the smart electric vehicle market,

But due to Jia Yueting’s credit issues leading to insufficient funds,

Mass production failed,

The supply chain broke,

And the stock became a penny stock,

Investors almost lost everything,

And I was not spared.

Although from an entrepreneurial spirit perspective,

I think he has some commendable qualities,

But his personal credit indeed has issues.

The fifth example is the live-streaming short video MCN economy.

Initially, it relied on private domain traffic monetization,

Achieving infinite fission,

With abundant dividends,

The outlook seemed bright.

But later, the market saturated,

Dividends declined,

Regulations tightened,

And the return on investment (ROI) decreased,

Most MCN agencies engaged in short video live streaming saw profits shrink,

And development faced difficulties.

The sixth example is the NFT field.

A few years ago,

A net friend of mine was also starting in this field.

In 2021-2022,

The metaverse concept surged,

Digital assets were seen as a revolution,

And virtual asset investments were hot.

But NFTs lack real practical use cases,

Hard to standardize,

And thus impossible to scale,

Leading to difficulty in increasing market value.

After the bubble burst,

Trading volume plummeted 90%,

And now, few mention NFTs anymore.

Perhaps they will reappear in the future,

But scale will be hard to reach previous expectations,

Most related projects have already become worthless.

The seventh is the sharing economy,

Like shared bikes,

Shared power banks,

Initially, people thought they were light-asset expansion,

Valuing traffic above all,

With good prospects.

But in actual operation, profitability was difficult,

Competition fierce,

And government restrictions on related industries,

For example, ofo’s bankruptcy,

Mobike’s acquisition,

This business model was questioned,

And eventually, it faded away.

However, some sharing economy ventures have developed well,

Like Airbnb.

The eighth is Chinese concept stocks,

Some internet platforms among Chinese concept stocks,

Like Alibaba,

Tencent,

Didi,

Originally relied on data, network effects,

Building an borderless enhancement ecosystem,

Seemed to have unlimited prospects.

But as regulators began anti-monopoly actions,

And restricted data outflow,

This was a key reason Didi later ran into trouble,

Leading to a sharp drop in market value,

And many related companies were affected.

The ninth is innovative drugs and the CXO outsourcing sector,

Some leading companies initially performed well.

They could import many technological breakthroughs from abroad,

And US pharmaceutical companies outsourced R&D to them.

However,

On one hand, domestic policies implemented price caps through centralized procurement,

Drugs developed had to undergo negotiations with medical insurance,

Greatly compressing profit margins; on the other hand,

The US-China trade war erupted,

The US introduced biosecurity laws (though not fully implemented,

But created pressure),

Leading to a decrease in overseas orders,

And the entire sector’s stock prices plummeted 70-80%.

But,

I personally remain optimistic about the development logic of this sector.

The tenth is the solid-state battery concept in new energy.

Solid-state batteries are regarded as the future core of energy,

Supported by policies,

With strong market expectations.

But commercialization is still a distant goal,

Especially since hydrogen energy costs are high,

And investment routes are unclear,

Investors pursue short-term gains,

And with such a long investment cycle,

Enthusiasm gradually wanes,

And stock prices naturally fluctuate.

Summarizing these “killing logic” cases,

Mainly include the following points: First,

If the stock market tells a story that is too perfect,

For example, claiming to be revolutionary,

Monopolistic, or substitutive, etc.,

The implementation process is often very complicated,

Appearing impressive on paper,

But actual operation requires caution.

Second,

Projects overly dependent on policies,

Have a higher chance of “killing logic,”

Once policy directions change,

The logical foundation will shake.

Third,

Some business models lack a complete commercial loop,

The model itself is unclear,

Remaining in long-term losses without seeing profit avenues,

This situation requires extra caution.

Fourth,

Excessive capital chasing can also cause problems,

During peaks, valuations far exceed reasonable ranges,

" Killing logic" and “killing valuation” appear simultaneously,

LeEco is a typical example.

And,

When too many blindly believe in a certain investment,

And are reluctant to exit,

Losses can be even more severe.

Moreover,

Some investment logic does not collapse in the short term,

But may take a long time to reveal problems.

Like the steel industry needed for high-speed rail,

Initially, it was thought that state-backed steel companies would profit,

But Baosteel is not profitable,

And its valuation is low; conversely,

Moutai has created a stock myth,

Its stock price has risen dozens of times over the years.

This shows that whether people’s beliefs are aligned with actual business logic is two different things,

The more people believe,

The higher the risk of business logic failure,

After all, the stock market is a game arena.

In summary,

If investment logic cannot continuously self-validate,

It is very easy to develop collective illusions,

Which is extremely dangerous.

Therefore, constantly verify the logic itself,

And considering policy risks,

Continuously confirm whether the logic still holds,

For example, high-end Baijiu like Moutai,

Whether the previous stock myth logic still exists,

It’s hard to say.