Written by: Theclues
I. Fixed Cognitive Traps
For a long time, I held a deeply ingrained ranking of market difficulty in my mind: Commodities > A-shares > US stocks > Crypto. The logic behind this ranking seemed rigorous:
- Commodity trading requires in-depth industry research, macroeconomic judgment, and geopolitical understanding.
- The A-share market is rife with policy maneuvering and information asymmetry.
- The US stock market is a mature market with high institutional pricing efficiency.
- Crypto is the youngest, most transparent, and "simplest."
However, this logic has a fatal flaw: it equates the complexity of the market with the difficulty of making a profit from investing. As a result, people hesitate to enter "complex" markets and only dabble in "simple" markets.
II. Reflections at the End of 2025
Those markets considered "the simplest" often have the highest returns; those considered "the most complex" and requiring in-depth research often struggle.
I used to keep asking, "How much expertise does this market require?"
The question we should be asking now is: "What determines the prices in this market?"
Third, retail investors are not noise, but the main theme.
Misleading traditional financial education
From the very first day we got involved in investing, we were instilled with a narrative of a "rational market":
- Prices reflect fundamentals
- The market will eventually correct its mistakes.
- Retail investors are noise traders and will be educated by the market.
This narrative may hold true in institutionally dominated markets, but it completely fails in markets dominated by retail investors.
The true operating logic of the retail investor market: In markets dominated by retail investors, such as Crypto, Meme Coin, and A-share speculative stocks, prices are not determined by fundamentals, but by the collective sentiment of retail investors.
This is not a "flaw" in the market, but rather an essential characteristic of the market. When 1 million retail investors simultaneously believe that a certain coin will rise to $1, their buying behavior itself will drive up the price, and the price increase will attract even more retail investors to enter the market—this is what Soros calls reflexivity.
Key cognitive shift:
- Previously: The irrationality of retail investors is a mistake that needs to be corrected.
- Currently: The collective behavior of retail investors is itself the strongest price driver.
In a retail market, sentiment is not a distraction to prices, but rather a decisive variable.
IV. Reflexivity: The Core Mechanism of Retail Markets
What is reflexivity? Soros's theory of reflexivity simply states that cognition influences reality, and reality, in turn, reinforces cognition.
In the retail market, this cycle is amplified to its extreme: price rises → retail investors notice → FOMO (fear of missing out) leads to entry → price continues to rise → more people FOMO → price accelerates upward.
This cycle will not stop because of "overvaluation" because there is no stable valuation anchor in the retail market.
Why is institutional market reflexivity weak?
In a market like the US stock market, where institutions dominate:
- Valuation model constraints on price (PE, DCF, industry benchmarking)
- Quantitative arbitrage strategies (price deviations are immediately corrected).
- Fundamentals ultimately come into play (a stock will plummet if earnings fall short of expectations).
Reflexivity is suppressed by rational forces, resulting in limited price fluctuations.
Why is the retail market so reflexive?
In retail-dominated markets like Crypto and Memecoin:
- There is no universally accepted valuation system (how much is one Meme coin worth? Nobody knows).
- There is a lack of effective arbitrage mechanisms (retail investors will not sell because of "overvaluation").
- Emotions can persist for a long time, detached from fundamentals (until the emotions are exhausted).
Reflexivity can persist to absurd degrees, with astonishing fluctuations.
V. Sources of predictability: Sentiment is more predictable than fundamentals.
The unpredictability of fundamentals necessitates forecasting when researching commodities or US stocks.
- Macroeconomic trends (What will the Federal Reserve do?)
- Industry supply and demand changes (When will the demand for new energy explode?)
- Company performance (Can next quarter's results exceed expectations?)
These variables are fraught with uncertainty, and even top institutions often make incorrect judgments.
In the retail investor market, the predictability of emotions boils down to understanding just one thing: human nature. The emotional trajectory of retail investors is highly predictable.
- Ignoring period: When new things appear, most people don't pay attention.
- Curiosity period: Limited discussion, slight price increase
- Trial period: Early adopters enter the market, prices rise steadily.
- FOMO (Fear of Missing Out) period: Social media buzz, prices skyrocket.
- The Frenzy: Nationwide Participation, "Financial Freedom" Dominates Social Media.
- Panic period: Prices plummet, cries of "I've been scammed"
- Despair period: No one cares, rumors of going to zero
This cycle repeats itself with every major trend, the only difference being the duration and magnitude. The evolution of sentiment is easier to track and predict than changes in fundamentals.
VI. Opportunities exist for both bulls and bears: Volatility itself is value.
In the traditional investment framework:
- Find a good company → Hold it for the long term → Wait for its value to be realized
- The core concept is "long,"short is considered speculation.
This works in long-term upward markets (such as the US stock market), but it is a huge waste of opportunity in highly volatile retail markets.
Two-sided opportunities in retail markets, in retail-dominated markets:
- Certainty of Price Increase: When sentiment shifts from negative to positive, reflexivity drives prices up.
- The certainty of a decline: When emotions reach their extreme, a collapse is inevitable.
The certainty is equally high in both directions.
Key takeaway: In a retail investor market, one should not only focus on "rising prices," but also understand the pendulum of emotions—the complete cycle from one extreme to another.
7. Why is it a retail investor market?
The dilemma of institutional markets, in institutionally dominated markets (US stocks, commodities):
- Information barriers: Individual investors cannot obtain in-depth information about the industry chain or first-hand research data.
- In-depth research: Institutional investors have professional teams that are difficult for individual investors to match.
- Pricing efficiency: Price deviations are quickly exploited by arbitrageurs, resulting in limited potential for excess returns.
Retail investors are at a significant disadvantage here. Equality in the retail market is rare in retail-dominated markets (Crypto, Meme Coin):
- Information transparency: On-chain data is publicly available, and social media sentiment is traceable.
- Emotion-driven: No in-depth research required, just an understanding of human nature.
- Huge volatility: Reflexivity creates huge opportunities for both long and short positions.
Retail investors and institutional investors are on the same starting line, and retail investors are even more flexible.
Essential difference:
- In the institutional market, the competition is about information and research depth (which I don't have an advantage in).
- The retail investor market is all about understanding human nature (everyone has a chance).
VIII. The Essential Leap of Cognition
From "market selection" to "market selection," which market's prices are determined by sentiment? Which market is dominated by retail investors?
- We should focus on "predictable" markets, moving from "researching targets" to "understanding sentiment."
- What stage of the emotional cycle are retail investors currently in?
- How long can reflexivity last?
From "Seeking Value" to "Following Certainty"
- Identifying the turning point in retail investor sentiment and following reflexivity
- Understanding the operating rules of the market
IX. Conclusion: Redefining the Difficulty of Investment
The difficulty of investing lies not in the complexity of the market, but in whether the factors determining prices are predictable. In a market dominated by retail investors, the deviation of sentiment is predictable, and both bulls and bears have opportunities.
This is not about "defeating the weak" or "harvesting the weak," but about understanding the true operating mechanism of the market:
- In institutional markets, rationality is the dominant force.
- In a retail investor market, sentiment is the dominant force.
The essence of investing is not finding the "right" market, but finding the "right" logic.
When we let go of our obsession with "professionalism" and "complexity" and instead embrace "emotions" and "reflexivity," we come to understand what certainty is.
