Lessons that need to be learnt from the Chinese Stock Market Crash

General foolhardy market euphoria, Utter disregard for fundamentals, Retail Investors jumping in based on total speculation.

The above sounds all too familiar ya. Yes, the above is what I would use to describe what happened to the Chinese stock market over the last 1 year or so. Almost everyone in China who could invest, went into the stock marker with wild abandon. Chasing stock prices as they went higher. Buying stocks like it was a roulette game in a casino (red or black). Interestingly, this phenomenon was warned about in the book which I shared about in my previous post. And ex-post everytime this phenomenon occurred it was bound to end up being pretty ugly, which is what we are currently seeing in the Chinese stock market as we speak. It certainly was also a reminder of what we saw in 2008, where markets crashed discriminately and spectacularly.  

Over the last one week, around half of the stocks in the market were halted for trading by their own companies. We have seen certain stocks drop by levels that would have rendered most people bankrupt if they had marginalised their positions, something in which many Chinese investors did. Mutual funds were not spared as many of the Chinese A shares they invested in were similarly suspended. I did a quick study of some of these suspended stocks and some of the names just bewildered me (as there was a good mix of unfamiliar and relatively well known names). 

All the above just goes to show a few important points, which are closely correlated with behavioural finance. If you would like to invest and to do it well, understand the business you are buying into. Also, do not allow greed or emotions to drive your decision making. Never follow a trend based on hearsay or following your inner herd instinct. In the stock market a stock that everyone is chasing up is not necessarily a good investment idea. In fact, often times the stock price does revert to mean somewhat and you end up with a bruised position and sometimes ego. Put real effort and analysis into your investments and you will reap the harvest in the long run. Learn to look through the mess and stay focussed in finding quality businesses selling at reduced prices in the days to come.

In other words, Stay Calm and Invest On my friends.

Signing Off

Transitioning Stock Investor