I Beat China’s Stock Market

It’s been called a spectacle, a coal mine canary and a disaster, but somebody won out. What did it feel like to be a winner as the Chinese stock market suffered a flash-crash?

Greed is Good. Michael Douglas famously said so in Wall Street.

As the Chinese stock market experienced its most horrifying plunge ever, many investors lost years of savings within weeks.

They, and the media too, said investors were too greedy, especially those who bought on margin, which means they borrowed from brokers (and some from illegal sources) to buy. And the brokers were authorized to sell all their stocks if they dropped below the minimum margin requirement.

But, is it only greed that drove the bull market frenzy and collapsed it shortly afterwards?

I, too, wasn’t able to resist getting sucked into the bull market frenzy, and entered again last October, after two years. Fortunately, I shorted in early June, as the Shanghai Composite Index was driving up to my expected peak—5,000. At the time, almost everyone around me believed it would hit 6,000, 8,000 or even 10,000 this time.

And amidst the three weeks of the horror—with half of the stocks hitting the 10 percent bottom line every day and the other half ceasing to trade—I made profits of about 42 percent.

It was luck with caution. When the market started to downturn, I was able to claim profits simply because I sold almost everything beforehand and left in just enough to operate on the few stocks that still moved up and down daily.

“Hey, after all, we are in a communist country, if the communists want the market to go up, nobody can stop it,” said a friend’s 21-year-old cousin, a university student studying finance, back in May. That was after the market plunged 8 percent in three trading days in the first week.

“It’s the policy that drives the market up. Why should we waste the opportunity?”At the time, she had already made about 50 percent in profits since entering the market in March, and she didn’t care of the three-day plunge as “it always bounces back.”

I, too, was blinded by the frenzy until I got into the interview process of writing about stock market investors born after 1990s. Most of them, like this girl, know nothing about finance and invest in the most irrational way—they buy stocks that have been hitting the 10 percent roof every day for weeks with a price way beyond the companies’ profits in the next ten years.

“It is people’s expectations, more than anything else, that drive up and down the market,” my friend Philip, with more than 15 years of experience in the market, said so in 2008, when a six-year bear market started.

“Hey, after all, we are in a communist country, if the communists want the market to go up, nobody can stop it.”

He told me the story of tulips and how the price of the flower was boosted to hundreds of times its original due to frenzy, and finally collapsed. That was 16th century Holland. Everyone believed someone else would buy.

It is especially true in the Chinese stock market, with a distinctively high percentage of individual investors.

And that’s what rescued me this time. And Phillip Liu, an institutional investor operating a US$20 million fund—the so-called ‘big fish’—lost more than half of his super-rich clients before the market bounced back on July 8, when government—The National Team—adjusted their rescue plan from state-owned companies to smaller ones. Many of his peers in other institutions lost more.

“This is a market that pushes the professional ones to think and operate irrationally, and to lose sight of the big picture,” he concluded in our WeChat stock group.

A popular Chinese saying goes, when your domestic helper, those who wash your hair in the salon and those who wash your feet in the massage places, start talking about the stock market with you, it is time to go.

My mom’s domestic helper, who knows nothing about the market and just buys whatever she hears in the homes she works, made enough money to buy an apartment in Shanghai. My foot massage girl started asking me for stock suggestions. My WeChat stock group was growing from eight people, all with more than ten years of experience, soon to over 50, with a third of them barely ever invested in the stock market and half buying on margin.

All of these reminded me of the stock market in 1993, when there was no ten percent price limit, nor Internet software that helps you buy and sell in one click. A good friend of my dad was one of the big fishes, and I was lucky to pay him frequent visits in the bank’s VIP rooms for the super-rich. Individual investors—the so-called small fish and shrimps—crowded the bank and quarreled in the queue to get to the counter as soon as possible to buy.

“Our government is new to this market,” I still remembered what he said back then. “The way they do it is just to try it, to observe the responses from the people, and to adjust accordingly.”

And only months later, the index slid to 700—what everyone believed to be a political bottom line that the government would never allow under.

It went, all the way to below 400, when all the individual investors crowded the bank again, this time to sell. The uncle in the VIP room lost all his savings within weeks.

“Our government always rescues,” he told me on the day he cleared everything and walked out of the VIP room. “But sometimes, it is just too late and the market operates on its own.”