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July 14, 2015

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Home » Business » Biz Commentary

Stock rout instills harsh lesson for investors

I am just an ordinary Chinese stock investor, one of the millions of small punters who have experienced the roller-coaster ride of the last month.

It’s not that I don’t appreciate ups and downs in a market. In my 10 years of buying stocks, I have seen crashes and rallies.

But the recent crash — when most shares fell between 10 percent and 70 percent in just 10 days, then rebounded 18 percent in the three days to yesterday — have reminded us with a vengeance about the quixotic nature of stock trading.

No wonder The Economist magazine calls the Chinese market a “crazy casino.”

The government rushed in with a raft of measures to prop up the market on its down slide, including an interest-rate cut, a halt in initial public offerings, a relaxation of margin lending and collateral rules, and a directive for brokerages to buy stocks, backed by cash from the central bank. About half of China’s total shares have been suspended from trading.

My share portfolio includes Sichuan Changhong Electronics, Zhangjiang High-Tech Park Development Co and Shanghai International Port (Group) Co. Even after buying shares at the bottom line on Wednesday, the value of my shares has declined 15 percent from the middle of June, just before the market volatility erupted.

As a technology reporter, I was interested to look at how the information age has played a part in this drama.

Certainly social media were active. Rumors flew. Was Xiao Gang, chairman of the China Securities Regulatory Commission, really going to resign?

Then, too, the popular use of smartphones meant that small investors were hooked up in real time to every twist and turn in the market and to prevailing mass sentiment.

Leverage, of course, took the lion’s share of the blame for the stock rout. Word about how you could make money by borrowing money and investing it in stocks made the rounds. Online lending sites, which aren’t regulated the way brokerages are when it comes to margin trading, offered cheap loans. Other relative new trading tools, like short-selling, also became common talk on social media.

I spent one or two hours a day trying to learn the basic mechanisms of these esoteric new market tools, but I found them hard to fully comprehend because they require math and professional finance skills.

With these leverage tools, many investors, including me, entered the “casino” and paid the price of ignorance and over-confidence. We were perhaps seduced by all the talk of easy money on social media sites.

“Social media amplified panic and the negative mood of the past few days,” Wu Bin, vice president of Shanghai Media Group, told an industry conference on Friday.

On my iPhone, I was receiving stock-related messages every five minutes during the trading day. That made it difficult to stay calm and make intelligent investment decisions.

The pop-up notification messages on my iPhone included government pronouncements, announcements of trading suspensions, share price movements and running news commentaries.

I received this barrage of information via mobile applications from finance tools like Xueqiu and Wind, from news applications like Thepaper.cn, Jiemian and Shanghai Daily and from my broker Guosen Securities.

I also received several hundred messages a day from investor groups on WeChat, 10 times more than a month ago.

Mobile applications and social media no doubt offer convenience and efficiency, but they can just as easily whip up a sense of nervousness and then panic.

Online rumors such as claims that foreign enemies were out to destroy China’s finance system and unverified stories about people committing suicide because of heavy stock losses widely circulated among netizens.

I have no data to prove it, but I suspect all this online frenzy exacerbated panic selling.

Experience is a great teacher. The rout has forced many investors to think twice about risk before they commit savings or borrow money for share trading.

“It’s a finance and investment lesson to make investors more mature,” said Ye Daqing, chief executive of Rong360, an online platform for loans and other finance products.

For my part, I plan to avoid market tools that I don’t fully understand. I will continue to seek opportunities when trading returns to normal, but I won’t get carried away by mass hype.

And as a journalist, I will be more cautious in interpreting information posted online and make my own reports as objective as possible.




 

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