中国股市泡沫

arnofren

China Stock Market Bubble similar to Tech Bubble?

On 23 May 2007, I was invited to speak on Capital Radio 95.8 FM. I shared with listeners that it is clear that China stock market is bubblish. The lesson we need to learn are:

All bubbles eventually burst.
the bigger the bubble, the bigger the impact when it burst.

Is there a bubble in China Stock Market?

Many people might not be aware that Shanghai stock index dropped to about 1,000 point in July 2005. It took 1 year and 4 months for the index to move from 1,000 point to 2,000 points in NOV 2006.

It took just 4 months for the Shanghai stock index to move from 2,000 points in Nov 2006 to 3,000 point in Mar 2007. If you think that is amazing, well it take just 2 months for the index to move up another 1,000 points to over 4,000 points by May 2007!

The Ascent is so steep that I’m not sure what you feel, I think it is SCARY! The Shanghai stock index is trading at Price Earning (PE) ratio of 50 times. What does PE ratio of 50 times mean? Well, it means that if you buy a stock today, it will take the company 50 years for the company to generate enough profits to pay you back your capital! Typically, stocks trade between PE ratio of 10 to 25 times. Even if we use the TOP end of 25 times to compare, PE of 50 times is way over-priced.

Would the China stock market bubble burst?

The answer is yes (all bubble eventually burst).

When will China stock market bubble burst?

I don’t think anybody knows. If I say I know I’m kidding you.


Will the China stock market continue going up?

Well, if we learn from past experience, yes, it is likely the market might go even “crazier” before the eventual burst.


What is happening is quite similar to what happened to NASDAQ index 7 years ago. NASDAQ index, bellweather index for Tech stocks moved from 2,500 point in May 1999 to over 5,000 point by Jan 2000. And many tech stocks were trading at PE of 100! Of course, the rest is history, NASDAQ plunged from 5,000 points all the way to 1,400 points when it crashed!

The problem is human beings have SHORT memory

Many people forgot the lessons to learn from past market crash. They forgot even though Technology bubble burst just 7 years ago!

What can investors do?

We should learn to “pyramid our money when investing”. Ie. you should be investing most of your money when markets are low, eg year 2003. As markets moved higher, you should take some profits and even if you re-invest, you should invest less money, rather than more money as stock markets moved higher.

However, most people do the reverse. A person with S$100,000 might only invest S$10,000 to “try”. When he made say S$2,000. He asked himself why didn’t he invest more money? So he put in S$50,000….and when market really moved very high, he plunged all his money S$100,000 plus the capital gains he made into the market…when market crashed, he ends up losing as much as 80% to 90% of his capital!

If you pyramid your money (invest less and less money as market moves higher), you would have “standby opportunity fund”. If you had opportunity fund, when market crash and everyone panicked, you’ll be so happy that you can pick up bargains, imagine you can buy a stock/property selling for S$1 (before crash) at S$0.20!! (or a Amazing 80% Discount!!!)

Do you get excited when shopping centres increase their prices?

Of course not. Why should you get excited when stock market’s prices are high? You get excited when you can get 70% bargain in “Singapore Sale”. Similarly, to move financially ahead, you need to learn to get excited (when everybody else is scared) when stock market is having 70% Sale!

Do you agree that a Crisis is an Opportunity?

Yeah, I know you say yes. Sorry, the answer is NO. A crisis is only an opportunity for those people who have CASH (Opportunity Fund) when a market crash happens.

Think about it.

Note: In my opinion, Singapore stock market and property market are NOT bubblish YET, prices are supported by strong fundamentals. However, China stock market is bubblish though.

Cheers!

Dennis Ng, http://www.HousingLoanSG.com