Equity Matters : The Monkey Trading Challenge In China
This post was written for www.hnworth.com, a site targeting high net worth individuals in Singapore.
Have fun reading !
When the Shanghai Composite broke their 6 year high last week, many an eyebrow, including mine, rose in disbelief. With margin debt at all time highs, economic data looking lacklustre and even doubtful, something is terribly wrong.
The index then proceeded to break new highs by the day this week, closing the week at another record high.
We know by now that many funds and industry pros have missed out on this massive move because 80-90% of the articles I have come across have been disparaging since late last year with the tone recently turning from dismissive to downright contemptuous.
These are examples of what has been circulating last week, before Friday’s record high.
1. New investor accounts dominated by a larger percentage of “uneducated” investors who are likely to be high school drop outs. http://www.bloomberg.com/news/articles/2015-03-31/china-s-big-stock-market-rally-is-being-fueled-by-high-school-dropouts
2. Speculative nature of investment decisions by Chinese investors who trade for the short term i.e. punting with their portfolios which implies less need for proper financial analysis of the companies they are investing in, possibly indulging in “rumour based” trading and other unorthodox methods by our standards, including numerology and such.
3. Margin debt soaring in China which explains the “madness” we are witnessing in their stock indices. Leverage leads to exacerbated moves on inflated volumes that are unsustainable, resulting in excessive volatility when the de-leveraging occurs.
So much for the stock investors, what about the companies and their owners or founders ?
I am not sure about recent statistics but back in 2011, we know that 15% of the world’s billionaires never had any formal tertiary education.