China’s stock market, the most high-flying in the world lately, is now mired in its inevitable crash. What rises too high shall fall again. In the long run, it will be okay. Unless you did something stupid.
In the past month, China’s stock market has lost about a quarter of its value—a bad loss. Even so, over the past year, the market is still up by more than 80%—a spectacular gain. So why is there so much panic about the market’s fall at the highest levels of the Chinese government? Who is really getting hurt here?
One clue: three months ago, “The China Household Finance Survey shows the average investor in the Shanghai equity rally didn’t graduate from high school.” And: “Individual investors own four-fifths of China’s stocks, a far higher proportion than in Western markets, where institutional investors predominate.” And: “A ninefold increase in so-called margin lending by brokerage firms over the past two years helped fuel the rally.”
The recent plunge in the Chinese stock market is of such great concern because the market’s rise was fueled by the very types of investors who can least afford to suffer a loss: individual people investing borrowed money. Borrowing money and investing it in a hot stock market is very similar to borrowing money to invest in a casino’s craps table because you’re on a hot streak. Sooner or later the hot streak will end, and you will lose, and—dang—now the people that lent you that money want you to pay it back. But you lose it.
Individuals slowly investing their own surplus saving in the stock market as part of a sensible long term plan: great.
Individuals investing borrowed money in a hot market trying to make a quick killing: that’s how you go bankrupt fast.
Enormous institutions investing borrowed money in a hot market trying to make a quick killing: that’s how you get another global economic crisis :)
Invest money you have but not money you don’t have.