Jim Trippon: The pundits are out in full force on China. First they were yelling the sky was falling for the Chinese economy, but now that slowing growth in China appears to be both a more mixed picture and not the dire event first predicted, the China critics turn to Chinese stocks. The latest sounds are the insistence that not only couldn’t you have made money from Chinese stocks, but that you won’t be able to in the future. They’ve tied both the past performance of the Shanghai Composite to the slowing growth theme and come up with what is presented as a compelling investment theme, or what we might call a non-investment theme. But absent in much of the financial media is any analysis of this kind of theme. Is it true?
If you look at the performance of the Shanghai Composite or the MSCI China Index, the averages do illustrate nicely the bearish theme. A recent Reuters piece by Sujata Rao cited the MSCI China Index over the last 20 years as falling almost 10 percent, while during the same timeframe the S&P 500 would have garnered a 300 percent return. Samy Chaar, investment strategist at Lombard Odier in Zurich is quoted in the article as saying, “I don’t know who has made money in China in the last few years.” Show of hands, please?
Methods, Statistics And True
Someone once said of statistical arguments, “Just because it’s accurate doesn’t mean it’s true.” And before all the pure quants out there rise from their cubicles red-faced with rage to come at us, let’s look a bit at how these statistics are used and what they might mean. The problem with this analysis and similar analyses like it are multiple and profound. If you glance at a chart of the Shanghai Composite for even the last five years, for example, you’ll see that the week of October 8, 2007, it reached a closing price of 5,903. Recently, the Shanghai traded at 2,406. By that measure, had you bought Chinese shares that giddy week of October, 2007, and held on tightly until now, not only would you have underperformed the 20-year example cited by Reuters, but you would have been down nearly 60 percent. The ADRs for US investors weren’t as bad, but the Shanghai Index illustrates the worst case scenario.
Yet this is a question of method versus reality. What are the odds of buying in all your equity shares at the absolute top of a five year run, with an argument that presupposes you’ll hold onto all shares or funds until the absolute bottom? Now can this happen in reality? Possibly, though it’s highly unlikely.This is actually quite hard to do even if an investor were trying to do it. Think of the reverse and shorting this position. It requires calling a five year top and then the trough.
Think of the often repeated denouncing of buy and hold, which cites the S&P 500 for domestic stocks in the last ten years, calling it the lost decade. The argument goes, if you’d bought in ten years ago and held on for a decade, your returns would be zero. Again, possible but unlikely. No responsible money manager actually invests that way and few individual investors are that inept.
While even a John Bogle index fund disciple wouldn’t make one purchase of an index fund then sit and watch it tank, there’s a more realistic critique of this so-called method. Stock picking can drastically alter these results. Had you bought and held the S&P 500 back in ’07, yes, you’d be showing a slight loss today. (Remember, that presupposes that you wouldn’t buy more shares when the average was lower, or sell out before you reached a bottom.) If, however, you’d even bought shares of stodgy stocks such as Procter & Gamble (NYSE:PG) or Kraft Foods (NYSE:KFT), you’d have gains, and in the case of Kraft, a substantially higher performance than the average. This doesn’t even include dividends. Stock picking, with apologies to John Bogle, can dramatically increase your success.
PG, KFT vs. S&P 500, 5 Years
Source: Yahoo Finance
Does this work for equities in China? Absolutely. Take a look at China Mobile (NYSE:CHL), for example. While the Shanghai Composite was down roughly 40 percent in the last five years, China Mobile was up 20 percent. The one year-chart is similar: China Mobile up 20 percent, the Shanghai Composite down 20 percent. Need we point out what a huge performance difference that is? The takeaway is this: don’t give in to the alarm. Stick with real methods of investing that actually work, that investors actually do. Of further interest, at the end of the Reuters article, some experts are cited as putting money into Chinese equities because the bad news is already factored in. So there’s that, too.
China Mobile vs. Shanghai Composite Index 1 Year
Source: Yahoo Finance
Related: Vanguard Emerging Markets ETF (NYSEARCA:VWO), ProShares Ultra Short FTSE/Xinhua China 25 ETF (NYSEARCA:FXP), iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI), iShares MSCI Emerging Markets Indx (NYSEARCA:EEM).
Jim Trippon, founder of Trippon Financial Media, Inc., is a maverick that has dedicated his investment career to helping investors make smarter financial and stock selection decisions. Trippon, an internationally recognized expert on global and value investing, has a deep passion for finding hidden value in global equity markets. Trippon started his career as a financial statement examiner with Price Waterhouse which allows him to dissect a public company’s financial picture and better identify hidden gems. Trippon’s savvy approach to investing and personal finance makes him in high demand by major media who seek his unique perspective on stocks and global economics. He has been featured in top publications both in the US and abroad including Bloomberg, Investor’s Business Daily, The New York Times, The International Herald Tribune, Stock Futures and Options Magazine, The Bull and Bear Financial Report and he regularly appears on broadcast television including as an on air contributor to CNBC, CNN, Fox Business, and Fox News.
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