Yesterday the Dow dropped 367 points. It could have been worse, frankly, because Friday marked the 20th year anniversary of the Dow’s 22% drop on Black Monday. According to this CNN article, Black Monday ranks near the top of worst one day performances any way you dice it. Let’s look at some of the worst days:
It wasn’t a shock to see the Dow Jones take a pounding yesterday, not because traders are nostalgic, but because Wachovia was the latest to confess its sub-prime sins.
Incidentally, on the 20th anniversary of Black Monday, Motley Fool urges investors to get out of China:
As you’ve probably heard by now, today marks the 20th anniversary of the stock market crash of 1987, which yanked down the Dow Jones Industrial Average by 22% in a single day. I can hardly think of a better way to commemorate one of the most famous stories of irrational expectations that ended in calamity than to discuss the world’s frothiest, most overheated, and biggest waiting-for-trouble market: China.
The financial world is no stranger to bubbles. As we’ve seen with the stock market crash of 1929, the Nifty 50 in the early 1970s, Taiwan and Japan in the 1980s, the Nasdaq dot-com hoopla in 2000, and the real estate mania over the past seven years, there’s rarely a shortage of stupidity somewhere in the markets.
One belief that tends to characterize these bubbles is that “it’s different this time.” People justified the incredible surge in the Japanese Nikkei average because they knew electronics would change the way our world functioned. They justified the Nasdaq boom by saying the Internet would forever change the way people do business. In both cases, those people were right about the effects on our lives — but that didn’t justify the massive speculation that dominated the market.
Sure, the Chinese economy has a lot going for it right now. For the first time since economic restructuring began in the 1970s, growth is being fueled by the citizens — not the Communist government. Combine that with low interest rates, an increase in property values, growing corporate profits, and a sky-high personal savings rate … and, heck, maybe it is different this time, right?
I think it’s great that there are more cautious voices urging people to be careful… that, in itself, almost makes me think that this time could be different. But, the truth is, that with China, they’re due for a correction - much like Nasdaq rose very quickly to 5,000, then crashed to 1,200 and is now after a few years of torrid growth and momentum is back only to the half-way mark at 2,500… the same will invariably happen to China.
I sold my main holding exposed to China, SINA, strictly because I was sitting on a 100% gain and despite the fact that WatchMojo.com generates revenue and all, I have historically sold off holdings in my stock portfolio to finance the growth of the company… I realize that is oh-so not conservative and conventional… but playing the stock market is pretty much like gambling at a casino, but starting a company isn’t. Sure, there are externalities, you don’t control all of the variables, but you are far more in control of your own destiny… which is reassuring, especially when you consider this:
Big-timers like Li Ka-shing — whom some regard as the Warren Buffett of Asia — along with Chinese central bank governor Zhou Xiaochuan and Alan Greenspan all share a strong sense of pessimism about the Chinese market. Unlike the U.S. stock market, which is dominated by hedge funds and mutual funds (whose managers, in theory, should know what they’re doing), 70% of Chinese market activity comes from regular people. One-sixth of all Chinese individual brokerage accounts have been opened in the past year; the fact that the indices have more than doubled in value during the same period should come as no surprise.
Yikes! I don’t think the web market is going to go anywhere and I see a lot more upside… but the stock market is tricky because the fact remains that not everyone has access to the same information… and ultimately, you’re risking your net worth on a bunch of managers that you could not pick out of a lineup… but, as an entrepreneur, you’re in control of your own destiny.
I love the stock market and remain in it, but I just think that exerting some caution is always the smarter path to take… ultimately, a financial manager should allocate his or her capital to the highest growth opportunities given a certain level of risk, with China, I see a lot of potential upside. With SINA in particular, I think that it’s a good bet, but at some point, once you have earned a decent return - and 100% is pretty much it for a stock - I think it’s good to avoid becoming greedy and, well, stupid.
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