Unveiling the Logic Behind Stock Price Volatility

【Answer 1】 If a company’s operating performance is poor—and its future growth prospects appear limited—yet its stock price is already at a relatively low level, that low price has likely already priced in the negative expectations. In such cases, the stock price won’t fluctuate significantly. (e.g., some traditional, mature industries whose stocks have long languished near their lows.) 3. Rapid Earnings Growth & Low Stock Price: If investors anticipate, several years in advance, that a company’s earnings will grow steadily and rapidly—including even imagined growth—the stock price will rise. When more investors converge on this shared expectation, the stock price may surge aggressively. (e.g., popular growth stocks and theme-driven stocks.) 4. Rapid Earnings Growth & High Stock Price: Once the stock price has already surged substantially, but actual earnings fail to keep pace, the elevated price becomes inherently fragile—lacking solid support from fundamentals such as earnings, P/E ratio, or dividend yield. At that point, even minor triggers can spark sharp price swings. For example: the end of the ‘growth story’; a burst bubble of overhyped narratives; a short-term dip in sales; temporarily high dealer inventory; fluctuations in contract liabilities; unexpected black-swan events; or even remarks made by the CEO. Such seemingly minor developments may be interpreted by investors as signals of an ‘industry cycle turning point’, thereby triggering substantial price volatility. 5. Earnings Improvement & Low Stock Price: When a company previously expected to perform poorly sees actual earnings improve, market expectations often reverse accordingly. This shift manifests in the stock price as an upward move. (e.g., turnaround stocks.) Reflections: Growth Stocks and Theme-Driven Stocks: ・ Growth and theme-driven stocks represent hot sectors in the equity market. With collective enthusiasm and surging inflows of buying capital, prices tend to rise easily. ・ However, if investors miss the early stage of the rally, they risk entering too late: rapid gains are often followed by equally rapid losses, leading easily to being trapped. For theme-driven stocks lacking real earnings support, such entrapment may become permanent. ・ While we should maintain an open mindset toward emerging industries, investment must not rely solely on imagination. Betting purely on stories—without conducting one’s own assessment—is gambling. This is a key reason many retail investors incur losses. ・ We must resolutely avoid chasing theme-driven stocks without earnings support—even when their narratives sound exceptionally compelling.

Why Does the Stock Price Fall Despite a Significant Increase in Earnings?

【Answer 2】 In April, the company officially released an outstanding first-quarter report. On the day the financial results were announced, the stock price spiked to RMB 27 per share before quickly retreating—trading on massive volume but ultimately closing lower. Lao Qian immediately concluded: the positive news had been fully priced in, and major players were using the earnings release as cover to offload shares—a clear signal to exit. He decisively liquidated his entire position at RMB 25 per share, ultimately realizing RMB 345,000 with a profit of RMB 95,000—representing a 38% return. Same stock. Same initial capital of RMB 250,000. Lao Zheng: bought at RMB 25, sold at a loss at RMB 18—down 28%. Lao Qian: bought at RMB 18, sold at RMB 25—up 38%. The difference in returns amounted to 66 percentage points. This gap has never been about luck—it reflects a chasm in cognitive understanding. Why does buying based on earnings often lead to losses? Four Fundamental Truths: 1. Probability Reality: Stocks reporting large earnings increases tend, on average, to decline after announcement. A securities firm analyzed all A-share stocks (2020–2024) that issued earnings forecasts showing net profit growth exceeding 50%. Within 30 trading days following the official earnings announcement, the average stock return was –3.2%, underperforming the CSI 300 Index by approximately 5 percentage points. In other words, stocks with sharply rising earnings generally fall after the announcement—and the probability of making money is below 40%. Attempting to bottom-fish based on earnings announcements is, by nature, a low-probability strategy. 2. Cost Friction: Buying upon announcement often means buying at the peak of expectations. Before official earnings releases, sophisticated investors frequently anticipate results and complete a round of speculative trading. For many stocks, prices have already risen 50%–100% ahead of the announcement. When retail investors only enter after the report is published, they effectively buy into an already overheated position. After the positive news is fully priced in, the stock often corrects by 15%–20%. Waiting for the next earnings confirmation requires another three months—wasting considerable time and capital. Lao Zheng’s loss stemmed precisely from falling into the ‘good-news-exhausted’ trap. 3. Psychological Pitfall: Using earnings figures to bolster confidence often turns shallow losses into deep ones. Many retail investors buy stocks based on earnings reports—not because they conduct rigorous fundamental analysis, but simply to psychologically reassure themselves with impressive numbers. They subconsciously assume: “Earnings are so strong—I’m not worried about a drop; it’ll surely rebound.” Once trapped, they resist cutting losses, allowing shallow losses to deepen into severe, prolonged positions. More critically, sources of net profit growth vary widely: asset disposals, one-time subsidies, an unusually low base from the prior year, or accounting adjustments—all of which generate non-recurring income rather than genuine core-business growth. Ordinary investors struggle to distinguish ‘real growth’ from ‘fake growth’. Entering solely based on headline net profit figures is essentially lazy investing. As in the case above, net profit surged 150%, yet over half came from one-time asset sales; adjusted-for-non-recurring-items net profit grew only 30%. Lao Zheng overlooked the underlying quality of those earnings. 4. Market Structure: In the short term, the A-share market is a ‘funds-driven market’, not a pure ‘earnings-driven market’. Many confuse a key concept: ‘In the long run, fundamentals drive prices; in the short run, capital flows do.’ Short-term price movements hinge primarily on capital inflows and outflows—not directly on financial statements. Some companies post excellent earnings but attract no speculative capital, remaining range-bound for extended periods. Others show mediocre earnings yet see their stock prices double, propelled by large-scale institutional buying. In the A-share market, the typical timeframe for earnings logic to materialize is 3–5 years—whereas the duration of fund-driven speculation lasts only 1–3 months.

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