【summary】
``Satsugunba Sha Doubou-no-ji'' is a story told as a lesson in not making judgments based solely on the culprit or reasons that appear on the outside.
Translated into investment terms, when you see stock prices plummet or skyrocket, don't be convinced by the first news that comes out.
However, make no mistake here. This is not a conspiracy theory that ``all news is an afterthought'' or ``there is always a big-money plot behind the scenes.'' In the actual market, stock prices move due to a mix of news, business results, interest rates, supply and demand, margin trading, index rebalancing, margin calls, fund redemptions, etc.
If you use this story for investing, the conclusion will be like this.
見えている原因に飛びつくな。
現象の背後にあるインセンティブと資金の流れを見よ。It's not enough to just look for reasons why stock prices have fallen. Who sold it? Why did I have to sell it? Is this sell-off temporary or will it continue? Only after thinking this far can you treat news as material for making investment decisions.
This article is a general investment education article that uses historical events to organize the way of thinking about market analysis. It does not recommend specific stocks, financial products, or buying or selling timing. Stock investments are subject to risks such as price fluctuations, credit, liquidity, foreign exchange, interest rates, margin trading, short sales, and margin calls, which may result in loss of principal.
Who is Dogoji, the horse killer?
``The Killing Horseman Dao Xu'zi'' is sometimes told as a story about Guo Ziyi, a famous general of the Tang Dynasty.
A precious warhorse was killed. The culprit that the officials brought in was a child found on the roadside.
However, common sense suggests that it is unnatural for a child to kill a warhorse. Therefore, Guo Ziyi did not jump to the ``culprit'' in front of him, but instead thought about who would benefit from the incident.
The moral of this story is not to be satisfied with superficial explanations.
What you see is not necessarily the real cause.
This is very similar to investing.
``Dougouji'' that occurs in investment
In the market, reasons are given after stock prices move.
If there is a sudden drop, the media and social media will be immediately filled with explanations.
- Rising interest rates were disgusted
- Awareness of geopolitical risks
- The financial results have run out of material.
- Comments from prominent investors led to selling
- Expectations related to generative AI have increased
This does not necessarily mean that these explanations are wrong.
In fact, sometimes the news is the cause. Sometimes they are sold due to bad financial results. Valuations may also be adjusted due to rising interest rates.
The problem is that we tend to settle for the first explanation we find.
When stock prices move significantly, what investors should look at is not ``words that seem to be the cause.'' The question is how market participants received that explanation and what kind of buying and selling it led to.
Don't believe the news, don't believe it
When using this story for investment, the most dangerous thing to do is to think that all news is lies.
That too is a stoppage of thought.
The following three types are mixed in the market:
| Background of price movements | Examples | How to read |
|---|---|---|
| News is the main cause | Downward revisions to financial results, scandals, and regulatory changes | See details and impact on performance |
| Main cause is supply and demand | Index replacement, credit restructuring, margin calls, fund cancellation | View trading volume, buying and selling entities, and credit balance |
| A mixture of both | Bad news is compounded by deterioration in supply and demand | Separately look at materials and capital flows |
What's really important is not to deny the news.
Don't let news be the only answer to price movements.
``Is this decline appropriate based on these factors?'' ``Is the trading volume increasing?'' ``Has the selling ended in one day?'' ``Is the backlog of margin purchases heavy?'' ``Is there room for short sellers to repurchase?''
If you look at it that far, you can separate the news on the surface from the supply and demand on the other side.
Three specific examples in the stock market
Sharp decline after strong financial results
A stock that announces strong financial results may plummet the next day.
A common explanation is that they have run out of materials.
Certainly, there are times when that is true. Even if the financial results are good, if market expectations were higher, the stock price would fall. If the stock has already been bought, it would not be surprising if some profit-taking sells after the announcement.
However, there is more than just one point to look at.
- How much did the stock price rise before the financial results?
- How many times higher than normal trading volume?
- Has the sell-off been completed?
- Has the balance of margin purchases been accumulated?
- Is market capitalization and liquidity easy for institutional investors to buy?
Merely saying, ``The financial results were good, but it went down'' doesn't tell us anything.
Even if the financial results are good, if a stock is overbought due to anticipation, it will be sold. On the other hand, if short-term selling has just run its course, it may calm down after a few days.
In the end, what we should look at is the combination of financial results and supply and demand.
Plunge due to short selling report
Stock prices sometimes plummet when short-selling funds issue reports pointing out a company's alleged fraud, accounting practices, or overvalue.
At this point, investors should be doubly careful.
First, don't underestimate the content of the report. If the allegations are true, it could have a major impact on corporate value.
At the same time, I would like to see the position of the entity that issued the report. For investors with short positions, falling stock prices can lead to profits. So there's a clear incentive there.
Here's the order to watch them:
1. 指摘内容は事実か
2. 会社側の反論や開示はあるか
3. 空売り残高は増えているか
4. 出来高を伴って売りが続いているか
5. 買い戻しが入りやすい位置かIt would be sloppy to conclude that it's bad because it's a short selling fund.
It is also dangerous to believe that everything is correct because it is written in the report.
The important thing is to separate facts, incentives, and supply and demand.
Unnatural spike in theme stocks
AI, national policy, semiconductors, defense, space, inbound.
The stock prices of theme stocks may move ahead of performance. Especially in small-cap stocks, it is easy to get a wide range of prices even with a small amount of capital.
In this case, ``Dogoji'' is the word ``future potential''.
Even if a theme has a promising future, not all related stocks will increase profits. It takes time for it to be reflected in sales. Sometimes the gross profit is thin. There may also be risks of capital increase or dilution.
What you should be looking at during a surge is not the sound of the theme.
- Is the trading value rapidly increasing?
- Is the number of outstanding shares and free float low?
- How much of the theme is included in the company's actual sales
- Can profit contribution be confirmed in the latest disclosure?
- Is there any evidence that the price was heavily stocked before the sudden rise?
The theme is the entrance, not the answer.
The faster the price moves, the better investors should think about who owns the stock first and who sells it to.
Guo Ziyi's insight that investors should have
If we were to translate Guo Ziyi's discernment into investment, it would be his ability to see structure rather than looking for causes.
When stock prices move, I want to think about the following three things first.
| Observation Steps | Questions to Ask | Data to See |
|---|---|---|
| Notice something strange | Are the price movements and trading volume natural for this material? | Stock price position, trading volume, trading value |
| Identifying interests | Who benefits from this price movement and who suffers | Ownership ratio, short selling balance, credit balance |
| Look at continuity | Are the buying and selling temporary or will they continue? | Trends by buying and selling entity, index events, reactions after settlement |
The important thing here is not to single out one person as the culprit.
The market is not simple.
Dismayed selling by individual investors, rebalancing by institutional investors, outflows from ETFs, shorting by hedge funds, tossing on margin, and position adjustments by foreign investors. Multiple funds move at the same time.
Therefore, what investors should do is not ``identify the real culprit.''
It is about estimating which funds are moving and how strongly they are moving over which time axis.
See “Who Sold”
When you see a sudden drop in stock prices, the first thing to think about is who sold.
Of course, it is not possible to completely understand everyone's buying and selling by looking at individual stocks. Still, there are some things that can be seen from the public data.
- If there is a large amount of margin buying left, consider the room for individual fire sales.
- If the short selling balance is increasing, consider the pressure from short sellers.
- If trading volume is rapidly increasing, consider concentrating short-term funds
- If there is an index reshuffling, consider mechanical trading
- For large stocks, consider the flow of funds from overseas investors and ETFs.
Don't forcefully conclude what you can't see.
Create a hypothesis from visible data.
This attitude is important.
See “Why I had no choice but to sell”
There are two types of selling: selling with intention and selling that has no choice but to sell.
The latter can be an investment opportunity. This is because companies are sold for reasons other than corporate value.
A typical example is as follows.
| Selling where you have no choice but to sell | Situations that are likely to occur |
|---|---|
| Selling by margin call | When unrealized losses increase in margin trading |
| Dealing with fund cancellation | When there is an outflow of funds to investment trusts or hedge funds |
| Selling due to index exclusion | When you are no longer eligible for index management |
| Rebalance selling | When adjusting market capitalization or investment ratio |
| Tax and period-end factors | Profit and loss totals and period-end position arrangement |
Such selling may occur for reasons other than the company's intrinsic value.
However, even here, it is prohibited to jump to conclusions too quickly.
If you buy thinking that you're just being sold, you may find that the company's performance has actually started to deteriorate.
When you find a distortion in supply and demand, be sure to look at performance, financials, guidance, and the competitive environment together.
See “Will the sell-off last?”
The most important thing after a sudden drop is continuity of selling.
If it's a one-day fire sale, it's likely that there will be a rebound once supply and demand settles down.
However, if it is a structural sell-off, the story is different.
- Business outlook worsened
- Dividend policy has changed
- There is still a heavy backlog of credit purchases. *Major shareholders are selling continuously
- Funds are being drained from the entire industry.
- Valuations have fallen due to rising interest rates
In this case, the initial plunge may not be the end, but the beginning of a reassessment.
It's not "cheap because it's lowered".
Has the selling cycle come to an end, or has it just begun? Just by separating this point, unnecessary contrarianism can be reduced considerably.
Difference between beginner, intermediate, and advanced
Even if you look at the same price movement, your investment decision will change depending on the depth of the question.
| Stages | Frequently Asked Questions | Deeper Questions |
|---|---|---|
| Beginner | Why did the stock price decline | Was the reason really not factored into the stock price |
| Intermediate | What kind of news was released | Who bought and sold based on the news |
| Advanced | Who benefits | Will the flow of funds continue |
| Pro | Where did funds move from to where? | Can the movement be explained by indexes, interest rates, business results, or supply and demand? |
In investing, the more you rush to find an answer, the more mistakes you will make.
Especially when there is a sudden drop, it is tempting to jump to easy-to-understand explanations. Because it's scary.
However, the more scary the situation in the market, the better to break down the question.
What can be confirmed with public data
Even individual investors have material to check on supply and demand.
| Data | What to see |
|---|---|
| Trading volume/trading value | Are there more funds than usual? |
| Outstanding margin buying/outstanding margin selling | Future selling pressure/repurchase pressure |
| Short selling balance | Existence of short sellers and room for repurchase |
| Buying and selling status by investment sector | Flow of foreign investors, individuals, self-selling, etc. |
| Large holding report | Changes in holdings of major shareholders and funds |
| Financial results/timely disclosure | Performance, outlook, business risks |
Of course, looking at these doesn't necessarily mean you'll win.
Data is often released late. Short sale balances and credit balances alone do not provide a complete picture of price movements. The buying and selling status by investment sector is also a measure of trends in the market as a whole, and does not show all orders for individual stocks.
Still, it's much better than buying or selling based on the descriptions on social media without looking at anything.
Investment version “Slayer Horseman Dogoji”
If I were to translate it into an investment version, it would be like this.
ニュースは道旁の児であることがある。
だが、子供を無視すればいいわけではない。
そのニュースを誰が利用し、
どの資金が動き、
その売買がどれだけ続くのかを見る。What's really scary about the market isn't the news itself.
Which positions will be unwound, which funds will flee, and which investors will be forced to buy back in the wake of the news.
Stock prices do not move based on stories alone.
In the end, funds move.
Therefore, while reading the story, investors must also watch the flow of funds.
summary
The lesson in investing from ``Slayer Horseman Dogoji'' is not to jump to visible causes.
However, this does not mean that you should doubt the news or look for conspiracies.
More precisely, there are three:
- Don't be satisfied with just a superficial explanation
- Think about who benefits and who suffers
- Separately view news, performance, supply and demand, and fund flow
When stock prices plummet, the first reason that comes up is easy to understand. That's why it's dangerous.
“Did you really move based on that news alone?”
“Is the sale temporary?”
“Was someone forced to sell?”
Just asking this question will change the way you view the market.
What we should look at in market analysis is the structure, not the culprit.
Like Guo Ziyi, instead of getting absorbed in the explanation in front of you, think about the incentives and financial flows behind the scenes. This habit will develop your acumen as an investor.
source
- Japan Exchange Group "Margin Trading Balance"
- Japan Exchange Group “Buy and sell status by investment sector”
- Japan Exchange Group "Information on Short Selling Balance"
- Financial Services Agency "About short selling regulations"
- Related article: What is the modus operandi? Analysis method to see “who is buying and selling”
- Related article: What are margin purchases and margin sales? Basics of reading supply and demand from credit multiple
- Related article: What is no buy for Ayumu? Basics of supply and demand analysis from a backward-looking perspective