Monday, July 19, 2010

Irrational behaviour getting common in Chinese stocks?

Anytime you buy or sell a stock, you should be buying and selling irrational behaviour.

You should buy shares when they are irrationally cheap and sell them when they are irrationally expensive. Those are subjective concepts but at the end they work. Certainly in hindsight it's obvious when things are absurdly cheap or absurdly expensive

People typically give too much weight to recent experience and extrapolate recent trends that are at odds with long-run averages and statistical odds. They tend to become more optimistic when the market goes up and more pessimistic when the market goes down.

“In summary, people trade for both cognitive and emotional reasons. They trade because they think they have information when they have nothing but noise (Orient Paper), and they trade because trading can bring the joy of pride. Trading brings pride when decisions turn out well, but it brings regret when decisions do not turn out well. Investors try to avoid the pain of regret by avoiding the realization of losses, employing investment advisors as scapegoats, and avoiding stocks of companies with low reputations."
Meir Statman ("Investor Psychology and Market Inefficiencies," Equity Markets and Valuation Methods, The Institute of Chartered Financial Analysts, 1988)

"Graham's conviction rested on certain assumptions. First, he believed that the market frequently mispriced stocks. This mispricing was most often caused by human emotions of fear (dilution, restatements and auditor issues) and greed. At the height of optimism, greed moved stocks beyond their intrinsic value, creating an overpriced market. At other times, fear moved prices below intrinsic value, creating an undervalued market."
Robert G. Hagstrom, The Warrent Buffet Way

For quite a period we can say U.S.-Chinese stocks are way undervalued and are traded at bankruptcy prices. Why, because in general misplaced fear. Short sellers like fear and will do anything to support it. So prices are slaughtered even more. Look for stocks that are likely to grow more than 20% the coming years, have almost no debt and are investor’s friendly.


  1. I agree that a lot of Chinese stocks are undervalued. Some day this undervaluation will disappear. The only thing you need is patience.

  2. The same phenomenon happens on a macro-economic level. When a few large shocks hit the global economy, everyone assumes the worst and March 2009 happens. If you step back and look at the facts, you get in and earn a decent return (75%plus). With China small-caps, a few very public frauds have been blown way out of proportion and are now used by the shorts to imply everyone in China is un-ethical and out to get the western investor. When the dust settles, fear will be replaced with greed and these under-priced Chinese small-caps will be trading at twice their true value and it will be time to sell. It is such a simple phenomenon that it surprises me that so many people willingly go along for the ride in this pattern of fear and greed. Can't complain though, makes investing that much easier.