Discipline When Investing in China: Buying and Selling… With a Plan

In a previous article, we have explained that Chinese assets can get quite volatile, with the pros as well as cons associated with said volatility, anything from pros such as the trading opportunities potentially brought about by wild price swings to cons such as the fact that over-leveraged positions are much more easily wiped out than with assets more on the safe haven side. Before continuing with this post, we would strongly recommend reading the article in question by clicking HERE.

As a bit of a “cliff notes” version of the previously mentioned article, let’s just say that volatility is not inherently good or bad. It is merely a “tool” for lack of a better metaphor and just like any other tool, it all depends on how you use it. Needless to say, a more than meaningful understanding of the asset(s) you are investing in or especially trading is required so as to leverage (sic) volatility properly.

Aside from that, however, there is another elephant in the room: discipline.

Time and time again, investors and traders with high expectations embrace Chinese assets, thinking that generation-defining riches are just around the corner. To put it differently, they embrace this asset class with a “get rich quick” attitude and are treating the entire endeavor as a sprint rather than a marathon. Unfortunately for them, their “I came, I saw, I conquered” approach quickly turns into “I came, I entered an over-leveraged position thinking I’d get rich, I got liquidated” and the individuals in question end up abandoning this asset class with an emptier bank account and an a more than bitter aftertaste.

Furthermore, most of them do not even treat the entire experience as a learning opportunity, an opportunity to understand themselves better and avoid the mistakes they’ve made in the future… what mistakes? In their view, they made the right choices but ended up losing their money because the entire space is manipulated, because the Chinese authorities are quick to over-regulate and the list of reasons could go on and on… reasons which, needless to say, usually don’t involve looking in the mirror.

The (painful) truth is oftentimes different: they lost and gave up because they lacked discipline.

Let us make ourselves perfectly clear: if you greedily up the leverage, you lack discipline. If you lost money on a trade and quickly initiate another one so as to “break even” then, once again, you lack discipline and are closer to a gambler than an investor/trader. If you “double up” not because you have rational reasons to do so but because you “feel” it’s the right thing to do, you are yet again in gambling territory rather than that of discipline.

Time and time again, whether we are referring to investors and traders or pretty much any other profession, perhaps the most easily identifiable common denominator among those who do well in the long run is represented by discipline. Of course, the manifestations of discipline vary on a case by case basis and as such, it all depends on what your activity is.

In our view, discipline when investing in China and Chinese assets revolves around:

1. Being thorough and not shying away from reading everything related to China that you can get your hands on. There is a reason why we have turned the “New Here” section of our website into an actual encyclopedia by covering anything from economics-oriented topics to culture-related ones such as Confucianism, Daoism, Buddhism and so on. It’s not because we enjoy reading our work (although we do) or hearing ourselves speak (we might) but rather because… well there is no other way and a superficial understanding of “all things China” will yield mediocre long-term results at best and lead to ruin at worst
2. Embracing patience or, in other words, understanding that even if you are “right” when it comes to your baseline hypothesis, it oftentimes takes frustratingly long until the market catches up with you. Yet again, a reason to keep leverage to a minimum and allow for ample wiggle room, especially for Chinese assets and let’s say generally speaking, other assets that can get volatile
3. Humility or, in other words, understanding that, as painful as it may be, your baseline hypothesis was wrong. While waiting for the market to catch up with you within reason makes sense, it’s equally important not to get married to a position once you have valid reasons to believe that your hypothesis has been invalidated. As such, always have a clear invalidation scenario in mind and should it occur, don’t hesitate to pull the proverbial plug, cut your losses and re-assess
4. Having a long-term plan and including even your shorter-term trades in a framework that revolves around the long-term plan in question. Internalizing why you are here, what your long-term goals are with respect to Chinese assets and how short-term actions can help you get closer to them in a “step by step” manner is a must and needless to say, most strategies are unfortunately severely lacking in the consistency department
5. Implementing strict and clear risk as well as money management strategies. Time and time again, the difference between traders who do well and traders who do not is represented not necessarily by how frequently they “got it right” but rather by how disciplined they were when it came to booking profits, re-sizing positions and generally speaking, sticking with their risk and money management strategies

As can be seen, discipline comes a lot closer to involving simple common sense than to being in the realm of rocket science, yet very few investors/traders meaningfully internalize the concept and actually put it to good use. Whether we are referring to Chinese assets or anything else, there is a world of difference between “kind of, sort of” understanding why discipline is paramount and actually making it a core pillar of your long-term strategy. Here at ChinaFund.com, we are more than happy to help readers and especially clients with the latter.