Wednesday, July 8, 2015

China anecdote of the week

From Monday's Wall Street Journal article on the travails of China's stock market, a little anecdote: 
Meanwhile, many investors don’t regret their bets on stocks even in the face of the latest drops. 
Li Ping was among those who sold homes to free up cash to invest in stocks, hoping for better returns. 
In April, 51-year-old Ms. Li sold her three-bedroom apartment in Beijing’s eastern Chaoyang district for 7 million yuan ($1.13 million). Since then, she has parked 4 million yuan in the stock market via a fund manager. 
“The fund that I have invested in is very mature and professional,” she said, adding that she thinks the market will stabilize and rise again. 
Ms. Li has a lot at stake. She now lives in a rented apartment with her husband near his workplace. Her older daughter is married but her younger daughter is going to high school in the U.S. Ms. Li, who works in the insurance industry, said she needs her stock investment to yield more than 20% a year to cover her daughter’s school fees and other expenses. “The yield I’m getting is definitely more than the rent I pay,” she said.
Well, just as long as you're not asking for very much from your fund manager...

(An interesting issue, China's stock market. Is China's stock market different?, i.e. it is reasonable to rely on 20% returns for more-or-less immediate financial needs? I don't think so, but so much about China is different than in the United States that it's probably worth asking the question. If someone relied on a mutual fund to grow 20% a year in the United States, I'd say they were nuts. (Of course, I'm a boring index fund investor, so I would say that, wouldn't I?))


  1. If you're wanting 20% a year, unless inflation is at 25%, you're either asking to be scammed (because you want more than you can reasonably expect to get), or you'd better be really smart and working hard. That, and the "Don't bet what you can't afford to lose" aphorism make me think that Ms. Li's investment strategy is a really bad idea. Maybe my expectations are wrongly set, though.

  2. It is never reasonable to rely on 20% returns for immediate financial needs. I suspect Ms. Li falls into the category of 'unsophisticated retail investor' that I mentioned in another post.
    By comparison, even in the US, until fairly recently it was considered relatively orthodox to discuss 10% market returns, whereas the actual rate is usually more like 5-6%.

    That said, the Chinese markets did have a huge run-up. The Shanghai Composite Index increased about 150% starting roughly in September 2014. The boom had run its course by mid-May. Expectations developed relative to the boom.

    My outsider's view on this is the general Chinese mindset vis. financial instruments is speculative. They are for the most part not Graham-style (or Buffett-style, if you prefer, though I think Buffett has changed the way he plays his game) value investors - at least not yet. The 'investment philosophy' is generally more akin to gambling, and is driven at least in part by wanting to keep up with (or better yet, surpass) the Zhangs. This tends to fuel speculative bubbles in a few areas (e.g. real estate - another sector that is going to cause real problems for the PRC).

    Where the Chinese market differs from that of the US is in the willingness of party officials to back-stop the market through a mix of instruments, including "institutionalizing" the individual retail investment that characterizes the Chinese markets today (prior to the boom, perhaps 85% of the market was owned by such investors - in comparison, the US markets are approx. 75% institution-owned), and also in the depth of financial resources available to the Party.

  3. It is reasonable to expect that kind of return on investment only based on inside information. By "investment" I meant buy and hold for 1 year or longer. A return of 20% on capital is possible in trading. It is a 24/7/365 job and one can expect associated medical bills.

  4. One of the few Chinese stock boards I used to follow. I stopped investing in Chinese companies a couple years ago. Too many frauds, and it's very difficult to detect. US auditors and CFOs have been implicit in at least some of the scams that have occurred.

    1. Ditto. After a few bouts of predictable experience I stopped investing or trading individual stocks. Large, commonly traded ETFs are much more difficult to con and offer just enough excitement.

    2. This Chinese company had an American CFO, Michael Toups, and American auditors. The company went dark after being exposed as having very little business activity after reporting numbers that stated otherwise. I used to say not all Chinese companies can be fraudulent. Now I'm in the camp that says probably all are fraudulent to some degree, even the company Buffet is invested in.


  5. Any speculation on the "technical glitches" that affected US Air, the New York Stock Exchange and the Wall Street Journal yesterday?

  6. $6 trillion later, and over half the Chinese markets are frozen, with some stocks not to trade again for six months. In addition, the real estate market has been tanking, and now has to contend with a surfeit of properties put on the market to cover stock market losses.

    I can't believe the IMF dismissed this as a minor issue in forecasting growth.