My stock portfolio has been bleeding for months. In March, I was up about 10% for the year; now I am down roughly 30%. At the worst point, the drawdown this year reached 40%. Since May, losses have arrived almost every trading day, with only rare rebounds. After June began, that pattern became even more obvious.
I went back through every holding. The businesses themselves do not look broken. Their earnings are fine, and in most cases they are improving noticeably. If the fundamentals have not deteriorated, why do the share prices keep falling?
The simplest explanation is that capital has become extremely concentrated in AI and a handful of technology names. Money is being drained from other sectors, and those sectors are falling as a result. My own holdings are mostly dividend-paying blue chips, exactly the kind of stocks that have been hit hardest in this wave of valuation compression.
Earnings Are Not Being Sold. Valuations Are.
The current style of the blue-chip market is clear: earnings are not being punished, valuations are. The more stable a company’s earnings are, the more severely its valuation gets cut, because stability leaves less room for imagination. Meanwhile, companies with a story but little real profit keep pushing their market capitalizations to new highs, because imagination has no visible ceiling.
Take one computing-card company as an example. Its market value has already exceeded 1 trillion yuan, while last year’s net profit was only 2.06 billion yuan. This year’s profit is estimated at around 5 to 6 billion yuan, and it is difficult to see net profit exceeding 10 billion yuan in 2027 or 2028.
Even if the current share price is already pricing in future expectations, it is still wildly inflated. Under the most optimistic assumption — 10 billion yuan of net profit in 2028 — the price-to-earnings ratio would still be around 100 times. For comparison, Nvidia, the global leader in AI computing cards, currently trades at only about 30 times earnings.
The reason this company has been granted such a high valuation is that many institutions keep emphasizing its profit growth rate. Some forecast that its net profit will exceed 50 billion yuan by 2030; others even suggest it could reach around 70 billion yuan. But this is plainly unrealistic.
If net profit were 50 billion yuan and the net margin were 30%, revenue would need to reach 166.7 billion yuan. If the company maintained a 12% market share, that would imply a total AI computing-card market of about 1.39 trillion yuan. That is obviously far above forecasts that put China’s 2030 computing-card market at roughly 310 billion yuan.
A more grounded set of assumptions looks like this: in 2025, the domestic AI computing-card market is about 53.6 billion yuan, and this company has around 12% market share. As AI infrastructure construction accelerates, projected domestic computing-card market capacity is 86.7 billion yuan in 2026, 129 billion yuan in 2027, 170 billion yuan in 2028, and about 200 billion yuan after 2029. The change in total market capacity is not actually that dramatic; much of the growth comes from rising domestic substitution. If the company’s market share and net margin remain unchanged — with net margin holding at 30% — the numbers still do not support today’s valuation. In reality, after the peak of AI hardware investment passes and capacity is released, price competition is likely, and margins may fall.
The frightening thing is not optimism. The frightening thing is mania.
How Mania Spreads
At first, market sentiment turns optimistic, and a sector becomes overvalued. Then the wealth effect created by that overvaluation attracts a large army of fund investors, pushing the sector even higher. Later, investors who had been holding blue chips can no longer bear the pressure of continuous declines, nor resist the temptation of the soaring high-valuation sector. They gradually abandon their positions and join the crowded trade. The logic becomes: if you cannot beat them, join them. That causes a stampede out of blue chips, sending them down even further.
This resembles a peasant uprising in ancient times. At the beginning, a small group rebels because of some accidental trigger. Then they attack nearby farmers and seize grain. Farmers who lose their grain, in order not to starve, are forced to follow the rebels and take grain from other places. The rebellion grows larger and larger until it sweeps across several prefectures. When it is finally suppressed, the result is a sharp population decline and a severe economic recession.
The stock market is similar now. If the manic sectors keep rising, other sectors will inevitably keep falling. Once that rise can no longer be sustained, the bubble will burst and those inflated stocks will plunge. But that plunge will trigger market panic. Fund investors will redeem. Institutions will sell other stocks that are not overvalued in order to reduce leverage. In the end, the entire market may fall in a stampede and shift into a broad bear market.
Why does the market enter a manic state instead of correcting itself? Does this prove that the market is irrational?
I have always considered myself a value investor. I used to believe the market was rational, and therefore share prices should reflect the value of the companies behind them. But this year’s market has taught me that the market is not always rational. When it becomes manic, it can be utterly irrational.
Graham said that in the short run the market is a voting machine, but in the long run it is a weighing machine. That sentence already makes clear that the market is not rational at every moment. In the short term, it can go mad. This is very close to Graham’s image of Mr. Market. I had read that line many times before, but I never truly understood that Mr. Market could become emotional to this extent. This year’s A-share market has given me a real lesson, and a much more concrete understanding of him.
Belief Determines Style
How one understands the market’s rationality or irrationality determines one’s investment style. If you believe the market is rational, you should choose value investing. If you believe the market is irrational, you should speculate.
My biggest character flaw is that I do not know how to speculate, and I have no respect for speculation. That makes it impossible for me to invest in story stocks with no earnings support and extremely stretched valuations.
Even though I remain rational and understand that the market will eventually correct itself, that knowledge does not make losses feel any better. On the contrary, the losses have been painful enough to affect my sleep. The reason I am rational yet suffering is that I worry I may fall just before dawn and never see the market return to reason.
This is why many older investors give up halfway. No one knows how long the darkness will last. Confidence is broken again and again, until surrender becomes the only option.
For a while I wondered whether I was simply too stupid. Those who caught the AI boom — would they keep catching the next hot theme too, compounding their gains without limit? A friend said that was impossible. If such people existed, the entire stock market would already belong to them.
I used to think this was a question of intelligence, that smart people were the ones able to step into every trend at the right time. But in the past two days I suddenly realized it is determined by temperament. People who believe the market is rational will not buy bubble stocks. Conversely, people who constantly chase hot themes will find it very hard to hold value stocks.
Because believing the market is rational and not believing the market is rational are mutually exclusive. You can choose one or the other. You cannot both believe the market is rational and believe the market is irrational.
Holding on to a belief is painful, because the market’s irrationality keeps provoking and tempting you to abandon it. It reminds me of people with faith, guarding that faith for a lifetime. It is truly not easy.
The Risk to the Whole Market
At the beginning of the year, I was optimistic. I believed China’s economy and comprehensive national strength were improving, and were clearly in better shape than those of Europe and Southeast Asia. Based on that view, I expected the main index to reach 4,800 to 5,000 points this year.
Now the year is already halfway over. The Shanghai Composite is still hovering around 4,100 points. Even as the index has edged up slightly, most individual stocks have continued to fall sharply. If the high-valuation bubble bursts in the second half of the year, the Shanghai Composite may be dragged down with it. A year-end close below 4,000 is entirely possible.
It could even end this bull market and push the market into another long period of adjustment, waiting until a new crop of retail investors grows back.
The most optimistic scenario is that the bubble sectors cool down gradually and release risk in a mild way, while the undervalued sectors that have been wrongly sold off begin to recover. Market style would rotate smoothly, and the broader market would continue moving upward.
But I now think that possibility is quite low. Mr. Market’s two hands are both acting wildly, and in the end he may cripple himself.