[Summary]
Network effect is a structure in which the value increases as the number of users increases.
What is most likely to lead to failure due to network effects is not the lack of knowledge itself, but the fact that a hasty decision is later justified.
In actual investment, we first start by measuring the strength of the platform company. However, we cannot overlook the fact that it is easy to overlook the distance between growth investment and profitability.
In this article, we will organize network effects not as "knowledge" but as steps to check before buying or selling. Don't rush to conclusions, read according to your financial amount and time horizon.
First, we need to differentiate based on network effects.
When looking at network effects, first determine what you want to judge. The information you need will change depending on whether you want to know the meaning, confirm before buying or selling, or review your current holdings.
Especially for beginners in investing, the easier the words are, the more they tend to take them as a conclusion. Network effects are not the only factor in determining decisions. If you want to check it, it is more realistic to look at it in conjunction with fund management, holding period, and opposing materials.
Situations where network effects are likely to cause failure
If we look at network effects as a failure pattern, we must first make narrow assumptions. It is important not to mix up whether you are talking about the market as a whole, individual stocks, NISA or long-term funds.
If you check the following points, things will be much more organized.
| Axis to check | What to see in network effects |
|---|---|
| purpose | What do you use to judge? |
| Time axis | Which is closer to short-term trading, long-term holding, or NISA? |
| basis | Which one is more important: price, business performance, interest rates, exchange rates, or psychology? |
| risk | When things go the other way, where should you look again? |
| action | Will it lead to buying, selling, or doing nothing? |
Points that can easily cause trouble in making decisions
Network effects don't only stumble when you lack knowledge. In fact, there are situations where we interpret something conveniently because we know a little bit about it.
- Don't decide whether to buy or sell the moment you see the network effect.
- Do not mix your own holding period with the time frame that suits network effects.
- Don't increase your position to recoup your losses
- Don't make a decision just based on SNS or rankings.
The important thing here is not to rely solely on network effects as the correct answer. In investment, the meaning of the same material changes depending on the market, holding period, and amount of funds. When in doubt, prioritize confirmation over conclusion.
Checklist before buying and selling
Before using network effects as a basis for making decisions, check at least these five points.
- Can you explain in one sentence the purpose of looking at network effects?
- Have you confirmed one or more countermeasures or failure conditions?
- Are you investing your living funds or money that will be used soon?
- Have you decided in advance the criteria for cutting losses, taking profits, and continuing to hold stocks?
- Are you making judgments based only on social media or short headlines?
Checklists are simple, but they prevent you from adding reasons after making a decision. The purpose of checking network effects is not to act faster, but to reduce unnecessary errors in judgment.
Summary
Network effects are an ingredient for organizing investment decisions. Even if you read it as a failure pattern, treating it as a standalone buy/sell signal will lead to poor judgment.
The points to keep in mind are as follows.
- Decide first the purpose of looking at network effects
- Do not mix time axis and amount of funds
- Check not only good materials but also negative materials
- When using NISA and long-term funds, consider how to handle losses
- When in doubt, reduce your position or postpone it.
The more knowledge you have, the safer it seems, but in the market it can become dangerous if you use it incorrectly. It is realistic to treat network effects as a tool to pause before buying or selling, rather than a word that forces you to make a hasty decision.