Bloomberg has a good article on recent volatility of Chinese markets which is a good read at this point in the global economic/investment cycle: http://www.bloomberg.com/news/articles/2015-07-27/chinese-stock-index-futures-drop-before-industrial-profits
Deprival Super-Reaction Syndrome And Value Investing
Deprival Super-Reaction Syndrome And Investing. Part four of a short series on Charlie Munger’s Human Misjudgment Revisited. Charlie Munger On Avoiding Anchoring Bias Charlie Munger On The Power Of Prices The Munger Series - Learning . . . SORRY! This content is exclusively for paying members. SIGN UP HERE If you are subscribed and having an Read More
China as part of the emerging market asset class (EEM) peaked in early 2011 and then had a recent spike which represented highly speculative anticipation by Chinese investors of’ A Shares’ entrance into the larger MSCI index. I recommended all investors exit early 2011 and have not recommended a return. My last strong ‘Buy’ was late 2008-early 2009. I did recommend sale of this asset class in 2007 prior to the correction of 2008. Price moves due to market psychology are never sustained if the underlying economics are not there.
If your perspective is longer term and you are patient, you wait for your investment opportunities and do not let the market psychology of the moment force any investment decision. While Emerging Markets do offer opportunities at points in the economic/investment cycle, I do not see it as attractive at the moment and continue to recommend investors avoid them as I have since 2011. At some point, prices will fall enough to justify bringing this asset class back into portfolios. Now is not the time in my opinion.
Since Hedge Funds invest across all markets, whenever one market they hold falls they are forced to sell the most liquid equity asset. This is the SP500 ($SPY) . The phenomena of the SP500 falling every time we see turmoil in other markets is mostly due to Hedge Funds being margined and having to sell something liquid to meet daily margin limits. One could say that the illiquidity of all other markets is reflected in the SP500 by Hedge Fund activity. Markets are tightly connected by Hedge Fund speculation and use of leverage. Because many believe that markets ‘predict economic activity’, we are constantly hearing that the US is suffering due to China or some other market. The economic facts are actually opposite to these widely held perceptions. The underlying truth is missed by most professional and individual investors. If one sticks to economics and ignores the whims of market psychology, even for a couple of years at a time you will appear to be out of sync over the long term you generally come out ahead.