Anyone who has read Benjamin Graham’s book, the Intelligent Investor will be familiar with the concept of Mr Market. In the book Graham explains how irrational the stock market can be through the analogy of Mr Market offering to buy shares in companies for either way more or way less than they are really worth.
Well Mr Market appears to have been going particularly crazy in China. The Market has recently dropped about 30% in a month. This has come after it had gained around 150% in the past year so the sudden drop was most likely a the market adjusting to the overpriced stocks. However, Mr Market has since started to rally and now appears to be heading back up again.
I am not going to pretend I understand the Chinese market as it has many complications. However, it does show a great example of Graham’s point about choosing stocks based on their true value rather than what Mr Market wants to pay. There are a lot of private investors in China and it seems that when some saw the market dropping they sold leading the market down further. A heard like mentality then caused others to panic sell as they looked at the recent trend at assumed it would continue.
If the investor remembered Graham’s principles for valuing a stock then they would have not needed to panic sell and this crash would not have been so severe. The key is to buy bargain stocks and to sell them when they are starting to become overvalued. Given the dramatic 150% rise over the last year it, I am guessing many stocks were already well overpriced.