This week a NY Times article: To see a stock market bubble bursting, look at Shanghai, reminded me of some familiar human themes. In the past 2 years, Asian stocks had gone through an incredible bubble.
Chinese share prices had climbed 500%, setting off a national stock buying frenzy. As the fever peaked last year, people were quitting regular jobs to day trade shares full time. Millions were lining up around the block to open broker trading accounts. “Everybody was talking about how much they had earned, how much more they would invest, and which stocks had jumped 20, or even 30 times.”
Then the bubble burst. Since market highs last October, the Shanghai composite index has plunged 45%. In India and Japan stock prices have plunged 31%, in Vietnam a whopping 53%. Now people are angry and distraught, crying and burning a security regulator effigy in the street. Families are straining under the financial stress and the regret of capital now evaporated. Many people were trading on borrowed money desperately levering themselves into the soaring markets.
The stories are all too familiar. I am reminded of other market bubbles around the world: the tech led stock market bubble of the late 90's, the housing and credit bubble of the past 5 years. Each replete with stories of regular people leaving regular jobs to become day traders. real estate flippers, brokers and mortgage specialists.
Easy gains encourage reckless behaviour and over-leverage. It also underlines the real damage of bubble markets. Most people are attracted to “play” markets late in each market cycle. The easy gains are made early when prices are still low. Those that get in early and get out anywhere near the peak, win and get to keep their profits. Those who get in late or who don't devise rules to get out get creamed.
For those who stay too late and lose in the market correction, the math of loss is savage. A loss of 45% requires a subsequent gain of more than 80% just to get back to even. Often it takes the next full market cycle of 4-5 years to regain prior market highs, sometimes it takes a full secular cycle of more than 17 years. Most people cannot or will not wait that long to recover their capital. Those who use leverage usually have no choice but to sell and accept defeat.
The social and economic costs of bubbles are enormous. This is why preserving and growing our capital requires the discipline to protect it from market peaks and their inevitable contraction. The buy and hold proponents focus on the upside, but few comprehend the risk involved until it is too late. The losses happen much faster than the gains. It took two years for the Shanghai market to go from 1,000 to 6,000 and only 2 months to fall from 6,000 to 3,500.
“These days my family quarrels a lot,” says a 55 year old [chinese hotel waitress], who with her husband had invested all their savings in the stock market. “My husband asked me to sell; I wanted to hold for a while. Now my husband comdemns me as so studpid that we lost our family's savings.”
Whether its North American, Europe or Asia, it seems that humans share familiar stories of greed, ignorance and loss.
Cory’s Chart Corner
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