Investing in China: The Long Term View

After gaining a measly 1.45% in July, the Shanghai market continued its downward trend in August. It lost another 13.6% and closed the month at 2397, which is a 60.8% decline from its October 2007 high of 6126.

As the market continues to fall, it is getting closer to the bottom, although no one has any idea how much further it will fall. It is difficult for anyone to call the bottom of this market.

Everyone knows emerging markets are known to be volatile. As investors, one must look beyond the short term volatility. Instead, one must look at the market with a LONGER time frame, 10-15 years away. The following chart is collected from yesterday's Yang Cheng Evening News:

If one analyzes the above figures one will quickly conclude:

1. China's market, like any emerging market, is highly volatile in a 1 year to 5 year period. One can see the 1 year return varies from -54% to 167%, with the 5 year return varying from -44% to 273%. However, the 10 year return rate varies from 74% to 1,525%!
2. Like investors in any emerging market, one must have a LONG TERM (10+ year) view. This will even out the short term volatility.
3. One can also see how investing in emerging markets can be very profitable. A $10,000 investment in 1990 would bring you $177,862 by now.

Remember the Hong Kong Hang Seng Index was at 152 at one time in 1972. Today, the Hang Seng Index closed at 21,042. A similar story will repeat itself in China as the country develops.

Investors who have the utmost patience will be rewarded.

Comments

[investor88:]

The key word here is utmost patience. The average investor is short of this quality.

2008 Sep 03 08:14 AM

[20smoney:]

I'm long China as seen here:20smoney.com/2008/08/2.../

2008 Sep 03 09:34 AM

[Urbane Gori...:]

15 years? I could be dead in 15 years! On the positive side, I wouldn't have to be concerned about my portfolio if I were... jegan

2008 Sep 03 10:36 AM

[longshort:]

If you count on Shanghai composite index to calculate the return, do you know how it is compiled. Actually it is mis-designed. Even every stays same but with one big new IPO, it will get boosted. Although new issues usually gain more than 100%, your return would not get any improvement unless you could win this lottery.

2008 Sep 03 02:06 PM

[Steevo:]

Frankly, 5 years is a bit much for me. This is the only market I know of where some companies could sustain tremendous profit and their stock triple in worth, and hardly anyone... believes.

2008 Sep 04 02:57 AM

[Steevo:]

Frankly, 5 years is a bit much for me. This is the only country I know of where some business' can reap tremendous profits and the worth of their stock potentially triple in the coming years, and hardly anyone... believes.

2008 Sep 04 03:01 AM

[kkin365:]

I didn't know that Yang Cheng Evening News can do such sophisticated research. What is its source? YCEN, if I remember correctly, is a paper published in Quanzhou.

2008 Sep 04 09:39 AM

[notsosmart:]

has anyone ever figured out the current value of all the defaults of russia since ww1? i dont have the courage to invest in these dictatorships that change the goalposts at any time.just a reminder-china is still a communist dictatorship.

2008 Sep 04 02:01 PM