Only a fool would think China's efforts to cool its stockmarkets were a bad idea. The markets in Shanghai and Shenzhen have had a very strong run. Look at the five year chart! Doesn't this remind you of the dotcom days? It would be nothing short of preposterous to suggest they should continue on this path unchecked. After all, judging by reports those people who are jumping on the bandwagon now they aren't investing at all. They're just gambling. And as a value investor I see it as my duty to call this rally what it is: complete stupidity.
The Chinese authorities have now raised the tax on share transactions to 0.3%. This is already a tiny amount, but will hopefully curb some of the speculators. A Reuters report quoted in the Business Times this morning suggests that if this doesn't work, transaction taxes could be raised again, interest rates could be raised, approval for new mutual funds could be suspended, or a capital gains tax introduced.
I say: good on them!
The problem in China is investors have obviously not gone through the same rollercoaster ride investors in other markets have experienced over the last several years. Otherwise they would know the old phrase, that when taxi drivers and housewives start talking about the stockmarket it's time to get out. Or Alan Greenspan's comments about irrational exuberance during the dotcom days.
Who is listening to those words of wisdom now?
And what's the bet they will be quoted once again when the inevitable decline happens?!
The media have played their part in hyping the markets. They have dubbed a 44-year-old medical college graduate Lin Yuan as "China's Warren Buffett". He's quoted in The Standard as saying "my principles are simple: I nearly always invest every penny in the market. To win in the stock market, you must invest everything there for most of the time."
What complete nonsense!
Wealth managers will agree that leaving your money invested over time is important. Missing the 40 best trading days over the last ten years would have wiped out almost all gains. But that's not Buffett's investing philosophy at all. Buffett is a value investor. He invests where there is value. Frankly, given the lack of bargains in this market it's hard to see how anyone professing to practise Warren Buffett's investment methodology could be making comments like this.
Clearly, no investor who has bet their entire life savings on the rally in Shanghai's stockmarket wants to see the value of their money go down. But talk to stockbrokers in Singapore and they'll tell you how most people are bracing for a big fat bursting of this bubble. And that's not going to serve them well, either!
To my way of thinking, there would be nothing better than for the market to drop 10%-20% over the next month or so. A souffle-like deflation, rather than a balloon-like pop. It would let all those novice investors who thought the stockmarket was a sure-win casino down gently, and teach them the lessons they must learn. It would bring sensibility into a market that has gone completely crazy. And finally, it will open up opportunities to find value again in a market that has not only lost its bargains, but seemingly has also lost its mind.