Apr
This much is certain: let’s call them “Chinese assets” to use a very broad term represent an asset class about which people tend to have very strong feelings, one way or another. When using the term Chinese assets, we are referring to assets that stand to do well if China itself does well economically, anything from stocks to complex derivatives.
When analyzing not the asset class itself or individual assets but rather market participants, we inevitably identify two extremes… two very vocal extremes, we might add:
- The “it’s all a scam and/or unsustainable” camp or perma-bear camp, market participants who wouldn’t touch Chinese assets with a ten-foot pole due to considering them questionable in one way or another or at the very least unsustainable. If anything, the only involvement of these market participants when it comes to Chinese assets will be initiating short positions, with there even being a quasi-famous Netflix documentary about just that, which should make it clear that yes, at least some “critical mass” element is there
- The “new paradigm” camp or perma-bull camp, situated on the opposite end of the spectrum and which consists of individuals who think anyone who dares believe that Chinese assets are anything but the next frontier or a surefire to generational wealth are just spreading FUD (Fear, Uncertainty, Doubt). Needless to say, individuals situated on this end of the ideological spectrum consider short-selling anything from foolish to morally reprehensible
This article focuses on whether or not being in the latter “camp” represents a wise choice. Time and time again, new readers (especially those who are new to our website and therefore not accustomed to our work) make the mistake of assuming that just because we specialize in Chinese assets and/or have chosen “ChinaFund.com” as our business name, this automatically means we are in the perma-bull camp and believe it’s wise to just close your eyes and buy anything related to China without thinking twice.
This couldn’t be more wrong.
You need to understand that we are in the business of putting our expertise (over a decade of hands-on experience when it comes to all things China, including the brick and mortar dimension) at the disposal of clients who pay us for our time. As such, just like we aren’t in the business of spreading FUD, we are not in the business of cheerleading either.
We have one purpose and one purpose only: ensuring that our clients make money so as to nurture long-term relationships with them.
As such, we do our best to eliminate emotion and bias from the equation to as significant of a degree as possible. While we are long-term bullish on “most things China” as opposed to all things China, we also understand that without proper guidance, our clients will be financially wiped out due to bad decisions by the time the next roaring Chinese asset bull market manifests itself.
And “doubling down” for emotional reasons usually leads to just that: being wiped out by the time you are “right” with respect to your baseline scenario.
You cannot will a bull market into existence if you have a more or less over-leveraged long position, nor can you hope and dream your way to a bear market if you are short. By doubling down and aggressively adding to a losing position, you are essentially letting emotions take over and for a trader as well as longer-term investor, this is nothing short of a death sentence.
Time and time again, market participants (whether they dabble in Chinese assets or anything else) lose money not necessarily because they were “wrong” or, if you will, because they weren’t “right” about the bigger picture. On the contrary, many of those who correctly “predicted” what happens next ended up losing everything by the time the market actually got there due to… drum roll, please… bad money management!
And yes, doubling down compulsively as opposed to knowing when to cut your losses represents a textbook example of horrendous money management. Words cannot begin to describe how important it is to know how and especially WHEN to lose as an investor or trader. To have even a remote chance at any kind of longevity in this field, strict money management is paramount.
Are there instances in which emotionally doubling down proves to be profitable?
Of course.
As an extreme example, there may very well be at least once example of a person who spent his entire monthly wage on lottery tickets and actually won, becoming remarkably rich. Does this mean spending your entire monthly wage on lottery tickets is a wise idea? Of course not.
One of the trickiest aspects pertaining to investing and trading is represented by the fact that yes, you can even make money if your strategy was unwise. The real threat here is not understanding that your strategy was unwise and actually believing the contrary, with it only being a matter of time until the market teaches you a lesson in this respect. As a bit of a word of advice: analyze your strategy after winning just as rigorously as you analyze a strategy which resulted in you losing money, as counter-intuitive as it may sound.
A fairly straightforward conclusion to this article would be that while generation-defining wealth can most definitely be accumulated by investing in Chinese assets, it is equally true that fortunes can and actually have been lost by those who let emotions get the best of them. Eliminate emotions from the equation to as meaningful of a degree as possible, don’t fall in love with the asset class you’re investing in or with a certain position and understand that knowing how/when to lose is equally important as winning, if not more. Should you be in need of assistance with putting together a long-term strategy that enables you to gain exposure to Chinese assets properly, the ChinaFund.com team is only a message away.