China’s economic growth has been unheard of over the past few decades, but it has yet to translate into stock market gains. Here’s a nice chart from Alliance Bernstein comparing the GDP growth and stock market gains between China and Mexico since the early 1990s:

This doesn’t mean there haven’t been booms and busts in that time though. From 2005 to 2007 the Shanghai Composite Stock Index was up more than 400% before crashing and losing the majority of that gain. Since then stocks in China have basically gone nowhere.

That’s changed this year as the Chinese stock market is on fire in 2014. The local shares in China are up nearly 50% on the year. You can see since this summer the Shanghai Stock Index has achieved liftoff status, up 20% last month alone:

The Economist wrote a piece last week detailing possible signs of irrational exuberance building up. They talked to one Chinese investor at a brokerage in Shanghai and here are his thoughts and experiences with the stock market in China:

One middle-aged man, Mr Xu, had come to meet a manager to inquire about how to subscribe to initial public offerings; their average first-day gain has been about 40% this year. He said he had taken the afternoon off work for the meeting and could hardly conceal his glee. “I’ve been trading since 1992 (just two years after the Shanghai Stock Exchange was established) and I guarantee you this bull market will last,” he said. He confessed to getting badly bruised by the last big one – his portfolio of 500,000 yuan had swollen to 3 million yuan by 2007 at the peak of the market, before falling back to its original level.

Sometimes I feel bad for the people they get soundbites from for these types of articles. It makes you wince because you know it’s not like that with everyone and they pick the most sensationalized quotes they can find. But still, this guy’s portfolio was up 500% before he then lost over 80% to get back to break even during the last boom-bust cycle in 2007, yet he guarantees this bull market will last. Maybe he’s right. Maybe not.

China will have to get its stock exchange in order and I think they will eventually. There’s simply too many people in a growing middle class of consumers. The government will make it favorable for the citizens to buy stocks at some point. It’s only a matter of time.

The potential of the Chinese stock market is interesting, but it’s also amazing to me how quickly some investors can forget about their historical track record. While certain investors are scarred for life after losing money, others are completely oblivious to their past failings. Both of these attitudes can lead to future problems.

Some of the smartest, most seasoned investors I know have told me the more they learn about themselves and the markets, the more they realize how much they still have to learn. Taking this type of humble approach to the markets is a good way to keep certainty and overconfidence out of your decisions.

It’s unfortunate that there have to be investors that fail to allow others to succeed. Those that don’t learn their lessons from past mistakes or from the mistakes of others are doomed to repeat them over and over again.

Sources:

Super-bull on the rampage (The Economist)

GDP leaves false trail in emerging markets (Alliance Bernstein)

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