Investor Mania

I recently read the following post from Bespoke Investment Group’s “Think B.I.G.” site, which puts forth the following train of thought:

  • A: Last week the Hang Seng index was very volatile (moving at least 1% every day) and ended the week at a gain.
  • B: In the past, when the index was very volatile and ended at a gain, it usually carried that gain into the next week and month.
  • The implicit conclusion C: it’s a good time to invest in the Hang Seng.

Now, I don’t purport to be an expert on investing, but I do know enough about logical reasoning to know that a lose correlation like the one between point A and point B does not warrant a rational investor’s attention. The myriad of causes that led to the index doing well for 3 weeks after seesawing intensely in December 1993, does nothing for me in 2007. I don’t even know why an article like that would be written.

The article caught my attention, because it reminds me of the faulty reasoning that is gripping Mainland Chinese investors these days. With the market soaring, Chinese investors continue to line up with little more than a gambling spirit backing their investment strategies. When evaluating how to take advantage of the enticing gains available in China, the following advice from the Everyday Finance Blog would be worth listening to:

Based on valuation and revenue growth, China is still considered to be THE value market of the BRIC four by many prominent investors and economists. However, before long, Vietnam, Columbia, and others could start to draw some of the speculative emerging market funds seeking 50%+ returns per year.

Given the massive runup in share prices in recent weeks, it would be prudent to take some money off the table. However, pulling out altogether could result in missing the investment opportunity of a lifetime. A good approach would be to continue to leave the speculative portion of your portfolio in SOLID Chinese stocks. This would include companies with some history, proven earnings, and you should be able to articulate what this company does.

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