Riding Out the China Storm (Without Throwing Up)
January 19, 2016
The headline that dominated my feed this morning: “China economy grows at slowest pace in 25 years, latest GDP figures show.” I hadn’t even had my coffee, my stomach had already done a dozen flip flops and my heart had begun to palpitate. No, I’m not a high-stakes market trader. And no, I don’t want to check how my stocks are doing.
During the past few months of craziness, I developed a ritual. After having my fill of business (horror) stories for the day, I usually send a message to my favourite source for on-the-ground analysis — a mainland Chinese piano teacher who trades when she’s not teaching one of Bach’s piano concertos. She’d already made a bit of a fortune on both the Chinese and Hong Kong stock markets and she seemed to understand the CCP’s cues as well as, if not better than, the best financial analysts out there.
“Buy this stock,” she tells me one morning. I ask why. “The government said they want to support that industry,” she replies. Sounds fair. “Oh, and I heard a family member of one of the party leaders owns this company,” she quickly adds with a knowing smile, as if to say that was the explanation for her decision to buy that particular stock. It’s not scientific, but then again, isn’t the stock market dependent on feelings and herd mentality?
Like many other 30-somethings raised in an Asian financial capital like Hong Kong, I play the stock market. Not professionally, but on my own time. Many of those I grew up with started playing the markets the moment they were legally able to. Before the 2008 financial crisis, it was fairly common for my friends’ moods to change depending on how many thousands they gained or lost in the span of a few hours.
The first time I bought into the market was during the peak of the financial crisis. My thinking was: it’s so low, it can’t get any lower, and if it does I won’t lose much. Because the stakes were so low, I wasn’t worried about the outcome of this minuscule investment. But the circumstances have changed. Truth be told, I’m now worried for the simple reason that I don’t believe anybody has any idea what’s really happening in China, or at least the extent of this inevitable volatile market correction and economic shift.
As many have already written, the bulk of investors putting money in the Chinese stock markets are mom and pop investors — individuals who put their life savings into the system, hoping they could cash in before the next big fall. Anecdotally, there are several reasons why there are so many small investors. The Chinese generally have a flair for business and making money, investing is a family affair, and they have a high propensity to save because these will be the main sources of income for retirement. There’s no expectation that the government will be providing any sort of help, but perhaps it will slowly change as the pension fund, which was only introduced in Hong Kong in December 2000, becomes a bigger part of planning for the future.
So here I am wondering: what do I do with my small stock market investment that’s getting even smaller by the day? All I could do is read the papers and ask advice, mostly conflicting, from a variety of sources. I’m no certified financial planner, so read at your own risk.
Do nothing.
It’s human nature to want to sell when stock prices are going down i.e. cutting your losses, and buy when prices are going up i.e. jumping on the bandwagon. It sounds counterintuitive, but I’ve learned that the best small investors do the complete opposite. When prices are dropping, they don’t panic and sell. Easier said than done. My piano teacher friend has probably lost count of the number of times I asked why she isn’t selling, to which she always replies, “I don’t want to sell at a loss.” Another friend, who isn’t even interested in the stock market, also told me something to a similar effect, “You haven’t lost any money if you haven’t sold it yet.” So it seems, patience is your best friend these days.
The stock market always goes up.
I’ve come across several opinion/blog pieces online that essentially say the same thing, but I first heard it from a conversation I had with a well-known financial analyst several years ago. He had written about the unsustainable trajectory GM was on 5 years before it actually happened. Despite the numbers, some pundits dismissed his theories as preposterous because, as he put it, they claimed “the fall of GM would be the fall of America.” So, what this gentleman told me about the stock market is this: that over time, the overall market performance reflects the progress of that particular society. He said no society in the developed world would intentionally go backward and the assumption is, those in power would do their utmost to push the nation, at least the economic part of it, forward. During this tumultuous time, I will choose to believe this. Mainly because I don’t have much of a choice.
China’s not looking good, but we knew this would come.
Yes, it’s bad right now. But frankly, I don’t understand why the world is acting so surprised. When China was raking in above 7% growth year after year after year, you don’t need a fancy degree to understand that this upward trend is bound to end, just as any cycle does. Common sense would have told you that China can’t be a country of factories and cheap labour forever. To put it this way, if China kept on manufacturing non-stop, who would’ve bought all the goods? The economy was bound to change and adapt to new economic realities, just as the developed world did centuries ago.
So, news from China is grim, but for a small investor like myself, there’s nothing much I can do except ride out the storm, the roller coaster, without throwing up too much.
(Original post here.)
