Perhaps the last lesson I took away from my Shanghai experience: Maturity takes time. Just as kids grow from naïve adolescence to rowdy teenage years to eventual maturity, so will China and its market participants. While stocks have been a part of U.S. culture and wealth creation for several generations now, in China this is really the first generation where participants both have the money and the ability to invest in stocks.
Perhaps in another generation, after several years of painful lessons and surprising opportunities, it’ll look completely different.
- J.J. Zhang
Fred Schwed starts out his 1940 masterpiece Where Are The Customers’ Yachts? with this gem:
`Wall Street,’ reads the sinister old gag, `is a street with a river at one end and a graveyard at the other.’ This is striking but incomplete. It omits the kindergarten in the middle….”
75 years ago, Schwed turned his experiences in the wacky brokerage firms of the 1930’s into an epic book of tales, anecdotes and history lessons about money management, human psychology and market sentiment. Investing was far from the institutionalized business that it is today. It was a Wild West environment where old money and new money clashed and plungers came from all over the country to try to make their names. The world of Customers’ Yachts makes for an excellent analog to what we’re seeing in China right now, as the uneducated masses find themselves with excess savings and access to the stock market for the very first time.
In the US, individual investors only own 30% of the stock market and make up less than two percent of daily trading activity. In Mainland China, it’s the reverse – Chinese individual investors account for 85% of the market and just about all of the trading.
This is important because we need to remind ourselves that with Chinese stocks, irrationality will be the rule and not the exception, on a week to week basis. The brokerage accounts and margin debts that have accumulated over the last few months were largely taken on by inexperienced investors who are new to having money and understanding the basics of earning returns on it. And don’t even get me started on how long it takes for an investor to truly understand risk.