Prejudice is sooo comforting. It removes the need for hard thinking, something I observe most of the world’s population seem to rarely engage in, and also it makes life easier if you just know you’re right about so much. Am I right, or am I right? Right?
For investors though (and I’m as guilty as the next) prejudice is a sure performance killer and to be vigourously guarded against. I’m talking about the kind of broad brush summaries we all resort to like ‘No, I met the company last year and they were a mess, no point in turning that one over again’; often wrong. Or how about ‘That whole sector is a nest of bandits and I’m sure XYZ is just the same, I don’t have time to waste on another meeting with that type of company’; sound somewhat familiar?
With that preamble let me come on to this week’s paper which addresses some prejudices held by many about China’s A-share markets. We all know A-share markets are a casino run by insiders right? Grown-up analysis is useless when you’re at the mercy of a tribe of rumor mongering retail day traders, right? Moreover, notwithstanding the recent fireworks, the market’s been a dog for the long term investor, right?
ALL VERY, VERY WRONG.
In the paper I’m highlighting this week from The National Bureau of Econonic Research in the US the authors Ms. Jennifer N. Carpenter (NYU Stern School of Business), Mr. Fang Zhou Lu (MIT Sloan) and Mr. Robert F. Whitelaw (NYU Stern School of Business) do a grand job of debunking those widely held beliefs.
In their own words ‘..China’s stock market has become as effective as the US stock market at aggregating and impounding information about future profits into prices, and exhibits a cross-sectional return pattern surprisingly similar to those in developed markets,..’ Really? Indeed. Investors in the China domestic markets get paid just as reliably as investors in the more ‘grown up’ markets for size, value, illiquidity and right skewed payoffs. The authors also note ‘.. because of its low correlation with other stock markets and high average returns, China’s stock market offers high alpha to diversified global investors who can access it.’ Which is also very well worth knowing.
Finally on performance; between 1995~2012 an American investor, adjusting for currency, would have received a CAGR of 16.97%. If they were still in today that number would be considerably higher.
So, not an opaque crap-shoot that outsiders are doomed to fail in. A developing market for sure but one where techniques reliably employed elsewhere are shown to lead to superior results. Comforting for those possibly about to be forced to participate by friends at MSCI.
Happy Sunday.
[The paper in full can be accessed by the following link The Real Value of China’s Stock Market]