【summary】
If you want to apply the idea that ``the one who kills the warhorse is the child of the roadside'' to investing, you should not jump on the news or price movements that are right in front of you, but rather think about the underlying flow of funds and market structure.
Really strong investors don't stop at just "what happened." We think about "who gained," "why the trade occurred," and "will the trade continue?"
In this article, we will examine the idea of looking at supply and demand and capital flows, rather than looking at the surface of the news, through four cases: a sharp decline after good financial results, a rise after bad news, a sudden rise in theme stocks, and a market crash.
This article is general investment educational content and does not recommend buying or selling specific stocks or financial products. Stock investing involves risks such as price fluctuation, liquidity, margin trading, short selling, leverage, taxes, and fees. Please review performance, financials, disclosure materials, investment period, and risk tolerance when making investment decisions.
Read “Those who kill warhorses are roadside children” in investment
Every day, the market experiences sudden rises, falls, good results, and bad news.
And the larger the price movement, the easier it is to understand the reason later.
*Because interest rates have risen
- Because the financial results were disappointing
- Because we have run out of materials
- Because the theme was evaluated
- Due to awareness of geopolitical risks
None of these are necessarily wrong.
However, this alone cannot fully explain stock price movements.
What I would like to remember here is the legend that says, ``He who kills a warhorse is a child of the roadside.''
If we only look at what is visible, it is the rider who made the horse run. However, it may have been the people who provoked him on the street that messed up his judgment.
The same goes for investing.
Sometimes the news we see right in front of us is nothing more than voices on the street. What actually moved stock prices may be institutional investors' profit taking, margin buying, buybacks of short sellers, ETF sales, and index rebalancing.
What is important for investors is to look at the structure, not the phenomenon.
Articles you may also want to read: Who is Killer Horseman Dokyoji? Investment thinking that looks at the structure without being influenced by market news
Case 1: Stock price plummets despite good financial results
What happened
A company announced strong financial results that exceeded market expectations.
Sales and profits are growing. The company's explanation isn't bad either. Normally it will go up.
However, the next day, the stock price fell 12%.
On social media and news, explanations such as the following are lined up.
- Materials are exhausted
- Concerns about slowing growth
- Market disappointment
- Lack of guidance
This is a common situation.
Roadside child
The easiest explanation is this.
Although the results were good, the market was disappointed.
Certainly, it looks that way.
However, if you end with this explanation, you are only looking at the surface of price movements.
Find the background
What we want to check is the supply and demand before and after the closing rather than the closing itself.
- Did the stock price rise significantly before the financial results?
- Were margin purchases increasing due to expectations for financial results?
- Wasn't the stock price position easy for institutional investors to take profits?
- Are there any changes in the large holding report or short sale balance?
- Is the trading volume larger than usual?
For example, let's say that the stock had risen by 40% in anticipation before the settlement of accounts.
In that case, even if the financial results are good, they may be perceived as "within expectations." Profit from short-term funds is determined when the financial results are settled. If there is a lot of margin buying, there will be some fire selling when the stock goes down.
As a result, stock prices fall despite good financial results.
In this case, what was wrong was not the financial results, but the expected value and supply and demand before the financial results.
learning
Stock prices do not change based on business results alone.
Expectations, stock position, holder's time horizon, credit balance, and volume also determine the price.
If you feel that the price has gone down even though the financial results were good, first look at how much was factored in before the financial results. This is the first checkpoint.
Case 2: Stock prices rise despite bad news
What happened
The company announced a deficit.
Normally it's going to go down.
However, stock prices rose on the contrary.
At this time, a superficial explanation may be given as follows.
The market liked the deficit.
That's a pretty rough explanation.
Rather than saying that the deficit itself was favorable, it would be more natural to see that the deficit was lighter than the market expected, or that the position was biased.
Find the background
What you need to look at are short sales and short positions.
- Has the short sale balance increased?
- Wasn't the backlog of credit sales increasing?
- Were there any bearish reports or bad news factored in before the financial results?
- Hasn't the stock price already fallen significantly?
- Are there any repurchases with trading volume?
Suppose that many investors are short selling in anticipation of a decline.
However, the announced deficit was smaller than expected. There is no additional negative material. The company's explanation also suggests that the worst is over.
The short seller then buys back the stock.
A repurchase is a "buy." The more people sell, the more concentrated the buybacks, the higher the stock price will be.
learning
Stock prices can move not only depending on the state of the company but also on the positions of market participants.
When the market goes up due to bad news, it is sometimes more appropriate to read it as a bearish position has been undone rather than reading it as ``the bad news has been favorably received.''
Case 3: Rapid rise in theme stocks
What happened
A certain small-cap stock suddenly attracted attention as it was related to AI, quantum computers, and space.
Stock price tripled in one month.
The future is talked about in the news and on social media.
*Next growth theme
- National policy related
- Great monster candidate
- Aim for the global market
These words are quite strong. I understand the feeling of wanting to buy it.
Roadside child
The easiest explanation is this.
It's going up because it has a promising future.
However, a good theme and good investment timing are two different things.
Find the background
It's not just thematic stories that you should look at.
- Is there a sudden increase in trading volume?
- Is there a sudden increase in margin purchases?
- Are the materials valued too high relative to the market capitalization?
- Are there any sales of major shareholders or executives?
- Have there been repeated spikes and declines in the past due to similar themes?
Rising theme stocks start with the material.
However, from midway through, the inflow of funds pushes up the stock price more than the materials themselves. Trading volume increases, short-term funds gather, and margin purchases accumulate. Early participants take profits, and individual investors who join later capture the high price.
This trend is not uncommon.
learning
The future potential of the theme and the company's profit contribution need to be considered separately.
Furthermore, even if the profit contribution is genuine, the stock price has already factored in several years' worth of expectations.
It's not enough to buy a theme just because it's a good one.
Who buys first and who buys later? That's what I want to see.
Case 4: The true nature of the crash news
What happened
The entire market plummeted.
The following reasons are mentioned in the news:
- Interest rate rise *Geopolitical risk
- Concerns about economic recession
- Sudden exchange rate changes
- Central bank statement
Of course, these are important ingredients.
However, the news itself doesn't necessarily explain everything about the crash.
Find the background
In a market-wide sell-off, we look at capital flows.
- Deleveraging
- Selling ETFs for cash
- Margin call
- Risk parity position adjustment
- Hedge fund loss-limited selling *Personal credit buying pitch
- Reduction of risk assets of foreign investors
News is a trigger.
However, what makes the crash bigger is the funds that have to be sold.
Investors who are using leverage will drop their positions when losses increase. Margin charges occur in margin transactions. When ETFs experience capital outflows, they must sell their holdings.
These types of sales do not carefully consider corporate value.
Sell because you have to.
This is different from normal profit-taking selling.
learning
In a market-wide crash, reading the news alone is not enough.
We need to look at which funds and how much were mechanically sold in the wake of that news.
The main cause of a market crash is often not the news, but the flow of funds.
What would Guo Ziyi see?
When looking at price movements, the first thing you should think about is not just "looking for the reason."
Bad questions are:
*Why did it go down? *Why did it go up? *What news made you move?
Of course, this is also necessary.
However, if you stop there, it will become shallow.
A good question is one step further down.
- Who sold it?
- Who bought it?
- Who benefited?
- Who was forced to cut losses?
- Is this trade temporary or will it continue?
- Is it a change in corporate value or a change in supply and demand?
Investing is not about finding the culprit.
There is no need to conclude that there is a mastermind.
However, market price movements always involve buying and selling entities and incentives. The habit of looking at this will lead to investment decisions that are less susceptible to being influenced by the news.
Investor growth stage
When stock prices move, where you look will depend on your investment experience.
| Level | What you see | Common reactions |
|---|---|---|
| Beginners | News | Find the reason and feel safe |
| Intermediate | Performance | Read financial results and guidance |
| Advanced users | Supply and demand | View credit balance, trading volume, and stock price position |
| For professionals | Fund flow | Thinking about who will continue to buy and sell |
It's not bad for beginners to watch the news.
The problem is that we stop judging by the news.
Intermediate people look at achievements. Let's get a little deeper here. However, even if a company's business performance is good, its stock price may fall.
Advanced people look at supply and demand. Professional investors look further at capital flows.
This difference is more a matter of how to read price movements than knowledge of stock selection.
Checklist you want to check
When you see sudden rises and falls, it will be easier to organize them by checking them in the following order.
| Items to check | Reasons to watch |
|---|---|
| Stock price position | Was it already rising or falling before the material |
| Trading volume | Did a larger amount of money move than usual? |
| Trading value | Did you just move on a thin board or did you receive a large amount of money? |
| Backlog of margin purchases | Isn't future selling pressure building up |
| Unsold on credit | Is there room for repurchase |
| Short selling balance | Is there an increase or decrease in large bearish positions |
| Comparison with peers | Individual factors or overall sector movements |
| Company disclosure | Are there any changes to the business performance forecast or risk explanation? |
Even if you look at these questions, there is no single answer.
Still, you can make decisions much more calmly than if you were to reflexively buy or sell based only on the news.
summary
``He who kills the warhorse is a child by the wayside'' does not teach us to doubt every explanation we see.
Don't judge based on the explanation you see.
Rather than knowing the reason for the sharp decline in stock prices, thinking about the following will directly lead to investment results.
- Who sold it? *Why did you sell it? *Will the sell-off continue?
- Who needs to buy back?
- Is it a change in corporate value or a change in supply and demand?
Every day, ``roadside children'' appear in the market.
Easy-to-understand news, plausible explanations, strong themes, and the excitement of SNS.
Each time, I think, ``Which funds actually moved?''
This habit will train you to sharpen your eye as an investor.
source
- ``Fuzoku Tsugi'' by Yubun (quoted in ``Taihei Goran'') ``Killer Horseman Luoji''
- Japan Exchange Group “Margin trading balance”
- Japan Exchange Group “Information regarding short selling balance”
- Japan Exchange Group “Margin trading balance”