Retail investors are not the noise of the market, but the main theme of the market

Feb 02, 2026 15:02:41

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Written by: Theclues

I. The Fixed Cognitive Trap

For a long time, I had a deeply ingrained ranking of market difficulty in my mind: Commodities > A-shares > US stocks > Crypto. The logic behind this ranking seemed rigorous:

Commodities require deep industry research, macro judgment, and understanding of geopolitics.
A-shares are filled with policy games and information asymmetry.
US stocks are mature markets with high institutional pricing efficiency.
Crypto is the youngest, with transparent information, "the simplest."

But this logic has a fatal flaw: equating market complexity with investment profitability difficulty. The result is that we hesitate in "complex" markets and only skim the surface in "simple" markets.

II. Reflections at the End of 2025

Those who think the "simplest" markets are precisely the ones with the highest returns; those who believe the "most complex" markets require deep research are instead struggling.

I used to ask: "How much expertise does this market require?"

Now the question should be: "What determines the price in this market?"

III. Retail Investors Are Not Noise, They Are the Mainstream

The Misguidance of Traditional Financial Education

From the first day of engaging with investments, we have been indoctrinated with a narrative of "rational markets":

Prices reflect fundamentals.
The market will eventually correct errors.
Retail investors are noise traders who will be educated by the market.

This narrative may hold in institution-led markets, but it completely fails in markets dominated by retail investors.

The true operating logic of retail markets: In markets like Crypto, Meme coins, and thematic A-shares, where retail investors dominate, prices are not determined by fundamentals but by the collective emotions of retail investors.

This is not a "defect" of the market but an essential characteristic of it. When one million retail investors simultaneously believe a coin will rise to $1, their buying behavior itself will drive the price up, and the price increase will attract more retail investors—this is what Soros referred to as reflexivity.

Key Cognitive Shift:

Previously: The irrationality of retail investors is a mistake that needs correction.
Now: The collective behavior of retail investors is the strongest price driver.

In retail markets, emotions are not a disturbance to prices but a decisive variable.

IV. Reflexivity: The Core Mechanism of Retail Markets

What is reflexivity? Soros's theory of reflexivity simply states: cognition influences reality, and reality in turn reinforces cognition.

In retail markets, this cycle is amplified to the extreme: Price rises → Retail investors notice → FOMO enters → Price continues to rise → More people FOMO → Price accelerates upward.

This cycle does not stop due to "overvaluation" because retail markets lack stable valuation anchors.

Why is reflexivity weak in institutional markets?

In institution-led markets like US stocks:

Valuation models constrain prices (PE, DCF, industry benchmarks).
Quantitative strategies automatically arbitrage (price deviations are quickly corrected).
Fundamentals ultimately take effect (performance below expectations leads to crashes).

Reflexivity is suppressed by rational forces, limiting the extent of price fluctuations.

Why is reflexivity strong in retail markets?

In retail-dominated markets like Crypto and Meme coins:

There is no recognized valuation system (how much is a Meme coin worth? No one knows).
There is a lack of effective arbitrage mechanisms (retail investors won't sell due to "overvaluation").
Emotions can persist long after fundamentals (until emotions are exhausted).

Reflexivity can continue to absurd levels, with astonishing price fluctuations.

V. The Source of Predictability: Emotions Are More Regular Than Fundamentals

The unpredictability of fundamentals requires predicting:

Macro economic trends (What will the Fed do?).
Changes in industry supply and demand (When will new energy demand explode?).
Company operating conditions (Will next quarter's performance exceed expectations?).

These variables are filled with uncertainty, and even top institutions often make incorrect judgments.

The predictability of emotions: In retail markets, you only need to understand one thing: human nature. The emotional trajectory of retail investors is highly predictable:

Ignorance Phase: New things emerge, and most people do not pay attention.
Curiosity Phase: A few discussions, slight price increases.
Trial Phase: Early adopters enter, prices steadily rise.
FOMO Phase: Social media goes viral, prices skyrocket.
Frenzy Phase: Everyone participates, "financial freedom" topics go viral.
Panic Phase: Prices plummet, "I was scammed" wails.
Despair Phase: No one cares, rumors of zero.

This cycle repeats in every hot topic, differing only in duration and magnitude. The evolution of emotions is easier to track and predict than changes in fundamentals.

VI. Opportunities for Both Bulls and Bears: Volatility Itself Is Value

In traditional investment frameworks:

Find good companies → Hold long-term → Wait for value realization.
The core is "going long," while shorting is seen as speculation.

This is effective in long-term upward markets (like US stocks), but it is a huge waste of opportunity in highly volatile retail markets.

The bilateral opportunities in retail markets: In retail-dominated markets:

Certainty of rises: When emotions shift from negative to positive, reflexivity drives prices up.
Certainty of falls: After emotions reach their peak, a collapse is inevitable.

The certainty in both directions is equally high.

Key Insight: In retail markets, one should not only focus on "rises" but understand the pendulum of emotions—complete cycles from one extreme to another.

VII. Why Retail Markets?

The dilemmas of institutional markets: In institution-led markets (US stocks, commodities):

Information barriers: Retail investors cannot access deep industry chain information or first-hand research data.
Research depth: Institutions have professional teams, making it hard for retail investors to compete.
Pricing efficiency: Price deviations are quickly arbitraged, leaving little room for excess returns.

Retail investors are at a significant disadvantage here. The equality in retail markets: In retail-dominated markets (Crypto, Meme coins):

Information transparency: On-chain data is public, and social media sentiment can be tracked.
Emotion-driven: No need for deep research; understanding human nature is sufficient.
Huge volatility: Reflexivity creates significant opportunities for both bulls and bears.

Retail investors and institutions start on the same starting line, with retail investors often being more agile.

Essential Differences:

Institutional markets compete on information and research depth (I have no advantage).
Retail markets compete on understanding human nature (everyone has a chance).

VIII. The Essential Leap in Cognition

From "choosing markets" to "choosing demographics," which market's prices are determined by emotions? Which market is dominated by retail investors?

One should go to "predictable" markets, shifting from "researching targets" to "understanding emotions."
At what stage of the emotional cycle are retail investors now?
How long can reflexivity continue?

From "seeking value" to "following certainty":

Identify turning points in retail emotions and align with reflexivity.
Understand the operational rules of the market.

IX. Conclusion: A Redefinition of Investment Difficulty

The difficulty of investing does not lie in how complex the market is, but in whether the factors determining prices are predictable. In markets dominated by retail investors, emotional deviations are predictable, and there are opportunities for both bulls and bears.

This is not "dimensionality reduction" or "harvesting retail investors," but understanding the true operating mechanisms of the market: