Hold on to your stocks

I trust you have made money by following my blog.

I meant to post this a week ago for two reasons. First, I have told this to everyone I met since the last post in the last September, including a few conferences in which I was a speaker. These include the funny period of people dumping stocks after Obama is elected, and the overly concern about fiscal cliff. Many do not understand the Obama’s election means this recovery will not be derailed. Fiscal cliff will be a little bump in the road anyway.

Second, I see risks popping up, but markets still should have runs, which means the returns from this point will be bumpy. Then after some more time, we will see some dive again (the sure thing, which is not a risk, is China’s economic dive). What are the current risks? Although European crisis has abated, including some positive steps to further forgive debt in Ireland, the austerity stance has not eased and will lead to further economic contractions. China will start to put some brakes on housing price increases, and likely will start to slow down further by the end of the year (I had some friends calling me that the Chinese housing markets will be wonderful again but I told them that the central government will not allow that, which will set up the fall after all the speculators start to depart). A few Fed sillies who argue for early ending of QE will only set up for more QE later, after economy fail again, but I do not think they can change the course of the QE this year. The market seems to focus on this last event in the last couple of days, which is a good time to buy.

Hong Kong, International Financial Center or China’s International Financial Center in the next decade or two

A couple of months ago, I was sitting at a conference after I spoke and the panel was discussing whether Hong Kong could become an international financial center on par of NYC and London. Afterwards, some email me what I think of this question. I responded the following:

The only thing the panel really discusses is how Hong Kong could serve China. China is a big fish, so just China is a lot to feed. But with this mentality, it hard to see HK become a real international financial center like NYC and London. HK's financiers and government officials generally do not have a grand view. British was making the decision for them. Now, other than doing as little as they can, they are also largely influenced by Beijing. So it is not surprising that HK cannot have the longer term view that Singapore (SG) government might have. So if China slows down in the future (and US recovers), HK will have a hard time. For SG, the bigger picture is much better if they know how to play it. They are part of the China story, but they are also part of India, and Southeast Asian stories, which probably will be the next stories to unfold, except that no one knows the timing and catalyst.

For either to become an international financial center rivaling NYC and London, another battle they need to fight decisively is with Western countries and firms. For now, most financial functions in Asia involve channeling money to North America and Europe, instead of having the money to be managed in Asia. So they are just satellite centers serving NYC and London. As long as this situation lasts, there is no hope for them to become real international financial center. But I do not see this happening any time soon. Even Asians or their governments are not helping. If you do not believe it, look at all the capital flight from Mainland China and the reason leading to that.

Can China not slow down?

I have told my students all the time that there is one thing on China’s side because Japan is already at the tech frontier, whereas China can still bring up per capita GDP even if working age population or total population shrinks. That could still bring China’s overall GDP to positive growth even with population shrinks, even if the huge gravity of shrinking working age population. But that also requires China to release its human capital to allow and facilitate its citizens to gain access to information and pursue their own ambitions. Currently a large part of this system is not there and the system is actually getting worse. So it is possible for China to get stuck at mid income as well. Lower income never means higher growth; it means potential for higher growth ;=).

I am not a democrat, I am not a republican, I am eclectic; if you are a value investor, you are suffering from behavior bias

I have no political affiliation or bias. I only try to predict the markets and the world.  But in today’s world, e.g., Democrats in the U.S. have much better economic policies than Republicans.  If you still do not see what the right economic policies are for the US to recover, you should look at the data and facts. If you still do not believe it, you must be close minded or mind deaf. The fundamental problem of today’s world is lack of demand. That is something you have to understand before you can predict market. The policies that Republicans only know are to cure lack of supply. I will not be pretentious and appear balanced but will pick up Republican for their wrong-headed policies. However, if one day, Republicans have much better economic policies, I will support their policies instead of those of Democrats.

In essence, this debate is the same hopeless as I had when I was trying to persuade people before the crisis came that crisis was coming and before the severe quant underperformance that quants will severely underperform. People insist on their prior and cannot be eclectic about the world, or investment.

Take another example, if you self claim to be a value investor, you suffer from a severe syndrome of behavior bias. Investing is like fighting. The goal is to win, not about which style you use. Bruce Lee will never care about which style he uses; he uses all the styles. If you stick to one style, you are predictable and you have known weakness, and you will surely fail one day.

If you understand one big issue against successful investing is behavior bias, then you should have an open mind and open heart to look at facts and evidence instead of insisting on your style or political views. Investing is about getting rid of all these crap.