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

Writing: Theclues

1. Fixed Cognitive Traps

For a long time, there has been a deeply ingrained hierarchy of market difficulty in my mind: Commodities > A-shares > US stocks > Crypto. The logic behind this ranking seems rigorous:

• Commodities require in-depth industry research, macro judgment, and geopolitical understanding
• 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, and the “simplest”

But this logic has a fatal flaw: equating market complexity with investment profitability difficulty. As a result, people shy away from “complex” markets and only dabble in “simple” ones.

2. Reflections at the End of 2025

Markets considered “simplest” are precisely those with the highest returns; those deemed “most complex” requiring deep research are often the most difficult to progress in.

I used to ask: “How much professional knowledge does this market require?”

Now, I should ask: “What determines the prices in this market?”

3. Retail Investors Are Not Noise, They Are the Main Theme

Misleading Traditional Financial Education

From the first day we start investing, we are fed a narrative of a “rational market”:

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

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

The real logic of retail markets: In Crypto, Meme coins, A-shares with retail dominance, prices are not determined by fundamentals but by collective retail sentiment.

This is not a “defect” of the market but its essential characteristic. When 1 million retail investors believe a coin will rise to 1 dollar, their collective buying behavior itself pushes the price up, which in turn attracts more retail investors—this is what Soros called reflexivity.

Key cognitive shift:

• Previously: Retail irrationality was a mistake to be corrected
• Now: The collective behavior of retail investors is the strongest driver of prices

In retail markets, emotions are not just noise but the decisive variable.

4. 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 FOMO → Price accelerates

This cycle does not stop because of “overvaluation,” as retail markets lack stable valuation anchors.

Why is reflexivity weaker in institutional markets?

• In markets like US stocks dominated by institutions:
  • Valuation models constrain prices (PE, DCF, industry benchmarks)
  • Quant strategies arbitrage automatically (price deviations are corrected immediately)
  • Fundamentals ultimately matter (poor performance leads to sharp declines)
  • Reflexivity is suppressed by rational forces, limiting fluctuations

Why is reflexivity stronger in retail markets?

• In markets like Crypto and Meme coins:
  • No universally accepted valuation system (How much is a Meme coin worth? No one knows)
  • Lack of effective arbitrage mechanisms (retailers won’t sell just because of “overvaluation”)
  • Emotions can persist far beyond fundamentals (until sentiment exhausts)
  • Reflexivity can reach absurd levels, with astonishing ups and downs

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

Fundamental unpredictability: Studying commodities or US stocks requires predicting:

• Macroeconomic trends (What will the Fed do?)
• Industry supply and demand changes (When will new energy demand explode?)
• Company performance (Will next quarter’s earnings beat expectations?)

These variables are full of uncertainty, even top institutions often err in judgment.

Emotional predictability: In retail markets, you only need to understand one thing: human nature. Retail investors’ emotional trajectories are highly predictable:

• Ignorance phase: New things appear, most people ignore them
• Curiosity phase: Few discuss, prices rise slightly
• Trial phase: Early adopters enter, prices steadily increase
• FOMO phase: Social media floods, prices skyrocket
• Frenzy phase: Everyone participates, “financial freedom” topics flood
• Panic phase: Prices plummet, cries of “I’ve been scammed”
• Despair phase: No one cares, rumors of zero

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

6. Opportunities in Both Bull and Bear Markets: Volatility 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 works well in steadily rising markets (like US stocks), but in highly volatile retail markets, it is a huge missed opportunity.

In retail-dominated markets, there are bilateral opportunities:

• Certainty of rise: When emotions turn positive, reflexivity drives prices up
• Certainty of fall: When emotions reach extremes, collapse is inevitable

Both directions have equally high certainty.

Key cognition: In retail markets, you should not only focus on “rising” but understand the emotional pendulum—a complete cycle from one extreme to another.

7. Why Is It a Retail Market?

Institutional market dilemma, in markets dominated by institutions (US stocks, commodities):

• Information barriers: Retail investors cannot access deep industry chain info or primary research data
• Research depth: Institutions have professional teams; retail investors cannot match
• Pricing efficiency: Deviations are quickly arbitraged, leaving little excess return

Retail investors are at a clear disadvantage here. The equality of retail markets, in markets dominated by retail investors (Crypto, Meme coins):

• Transparent information: On-chain data is public, social media sentiment is trackable
• Emotion-driven: No need for deep research, just understanding human nature
• Huge volatility: Reflexivity creates massive long and short opportunities
• Retail investors are on equal footing with institutions, even more flexible

Essential difference:

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

8. The Essential Leap in Cognition

From “Choosing markets” to “Choosing audiences,” which market’s prices are driven by emotions? Which markets are dominated by retail investors?

Focus on “predictable” markets, shifting from “researching targets” to “understanding emotions.”

What stage of the emotional cycle are retail investors in now?

How long can reflexivity last?

From “Seeking value” to “Following certainty”

Identify retail investor turning points, follow reflexivity

Understand the market’s operating laws

9. Conclusion: Redefining Investment Difficulty

The difficulty of investing is not about how complex the market is but whether the factors determining prices are predictable. Markets dominated by retail investors, where emotions deviate, are predictable, and both bulls and bears have opportunities.

This is not “dimensionality reduction” or “harvesting chives,” but understanding the true mechanism of market operation:

• In institutional markets, rationality is the dominant force
• In retail markets, emotions are the dominant force

The essence of investing is not finding the “right” market but the “right” logic.

By letting go of obsession with “professionalism” and “complexity,” and embracing “emotions” and “reflexivity,” one can understand what certainty truly is.