People are wondering if they should be worried about China’s most recent major stock market blunder. I’m sharing one of my favorite investing expert’s sage advice– this is Michael Zhuang’s letter to his own clients.
Michael is an advisor on Wealthramp.com
Investors Gone Crazy
By Michael Zhuang, MZ Capital Management
Here is the culprit of the global market selloff in the first week of 2016: The CSRC (China Securities Regulatory Commission) instituted a stock market circuit breaker in the new year: a 15 minute trading pause after a 5% drop in the main index, and the market closes for the day after a 7% drop.
The purpose of the circuit breaker was to temper the crazy volatility in the Chinese market. Talking about unintended consequence, it achieved the exact opposite effect. Retail investors there, fearful they couldn’t sell their shares fast enough, rushed for the exit, driving the main index down 7% (thereby triggering the circuit breaker) for 2 out of the first 4 trading days of the new year.
The CSRC did a quick about face and suspended the circuit breaker, basically telling investors now you could sell to your hearts’ content. You know what? The selling stopped, and the market came back about 2%.
This just shows how crazy and irrational Chinese investors can be. A circuit breaker should have no value impact on stocks whatsoever, and yet they brought their stocks down more than 17%.
The world market also tumbled across the board. All major US indexes went down more than 7% at the same time. This just shows US investors can be just as equally as crazy – how would a Chinese circuit breaker make US stocks 7% less valuable?
Somebody in the media explained it’s the slowing Chinese economy. Give me a break, that is old news.
The lesson we can learn here is: in the short run, investors can be crazy irrational. That’s why you should not try to predict the market. If somebody ask me what I see for the market in the near term, I would paraphrase my mentor Tom Warburton, who says: “I know the market will be open, whether it will go up or down I have no idea.”
Truth be told, I can’t even predict my wife, let alone what news will come out in the future and how crazy investors will react.
Over the long run though, the craziness (be it greed or fear) always dissipates and stocks will return to their fundamental values. If you ask me what do I see the market long term, I would say I expect about 10% return a year. That’s why I am in the stock market.
You can go crazy with the market, or you can stay put for the long-term return, it’s your choice.