New markets are volatile markets

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Shanghai Composite Index

Photo Credit: Bloomberg

The Chinese markets are certainly known for their volatility. In just a few months, 50% of the value behind China’s overall index was completely wiped. New markets should be known for their volatility, as their traders are very much new to the idea of investing. Look at the stock market in the United States in the 1920’s; US investors had never really known what a stock market crash was until it came in 1929.

Speculation runs rampant

New markets are notorious for speculation. Chinese residents and nonresidents alike get caught up in bubbles that eventually wipe billions in wealth out from underneath the markets. A bubble is difficult to see in progress, as the prices set reflect the current value – even though the strong growth rates may be far from sustainable. What investors need to remember is that inflated prices are the current price, though they are subject to the laws of gravity. Eventually the market will rise or fall to meet true value, as speculation wanes and investors look toward investing rather than get rich quick schemes.

The drop off of nearly 50% surely took speculators right out of the market. Highly leveraged investors experienced losses far greater than 50% and likely lost it all in an uncontrollable downfall. Now that the market has corrected to remove mal-investment, there is certainly the risk that it will happen all over again.

Long term outlook is very cheap

At this price, China looks very cheap. For a long term investment, there is no better market in the world than the uprising capitalist economy in China. The long term prospectus looks great, and even with another bubble, an investment here is likely closer towards the bottom than the top. Begin again to send more money into the Chinese market and at the sight of a bubble, exit until the market cools. China’s growth towards a more modernized economy creates a great position for investors.

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