Beware of the present stock market frenzy
Updated: 2007-07-13 14:21
The author He Fan is a researcher with the Institute of World Economics and Politics under the Chinese Academy of Social Sciences
An official from the Japanese central bank once described to me how to judge whether there are bubbles in a stock market or a property market.
When economists and analysts of institutional investors hold numerous meetings to discuss if a certain market has bubbles, and when most of them deny it, then you can be sure that market is loaded with bubbles, he said.
Another practical way for judging bubbles comes from Peter Lynch, manager of the Magellan Fund and a legendary icon on Wall Street.
At cocktail parties, after a mutual fund manager introduces himself, and if everybody just nods and resumes discussions on the weather or soccer game or should one of them seek the dentist to talk about plaque. Then the stock market is sound.
If someone should approach the fund manager and engage him conversation for about two minutes, and then turn to the dentist, there must be a bull market.
If the stock market keeps rising, almost every guest at the cocktail party, including the dentist, will surround the manager eagerly seeking his opinion on stock investments.
The fund manager must be vigilant against bubbles if everyone recommends to him stocks that are worth investing, even the dentist has an opinion.
With the above two examples, it is not difficult to see why the Chinese stock market has seen plenty of bubbles.
The current disagreement about market bubbles among experts here originates from the fact that they draw conclusions of the Chinese stock market using different factors.
The optimists say the stock market is fine at present because they think China has a unique economy different from others. The pessimists say China might have to pay a high price should the market fall, as has happened in other countries.
Being a pessimist myself, I believe people tend to make similar mistakes without realizing it.
Admittedly, the soaring stock price is propped up by economic fundamentals. The reform of liquidizing untradable shares in State-owned enterprises has helped shareholders and investors.
Listed companies are no longer used as a tool to funnel money from the stock market. Managerial and controlling shareholders are strongly motivated to improve the company and boost its market value.
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