6 ms·

Quants Think Like Amateurs in China’s Wild Stock Market

110 points by jbredeche 7y ago

ilamont 7y ago
If developing profitable trading approaches based on message board and social media sentiment, will it work outside of China in those markets where small investors and day traders dominate - penny stocks, certain cryptocurrencies, etc.?
- synaesthesisx 7y ago
  Yes - in fact many people do this regularly...for instance, identifying and shorting pump and dumps (usually popular penny stocks).
lawrenceyan 7y ago
Also because the Chinese government has direct control over the stock market, and can make arbitrary changes at any time. Makes things pretty difficult when the entire market is literally just a giant chop shop. It amazes me that any Chinese investor would willingly invest in the market to be honest, but I suppose that’s why alternative investments like housing/cryptocurrencies are so popular.
- devoply 7y ago
  The question for a real investor in a stock market is, is it going up or down over a 10 year period or if it's a company the same thing applies in a period of 10 years is it going up or down. Outside of that in any stock market you are gambling.
  - vpribish 7y ago
    pretty arrogant statement there, buddy - decreeing what a real investor is permitted to do. There are many things happening on the stock market on many timescales and the participants would definitely not consider themselves gamblers.
    - foldingmoney 7y ago
      You're not wrong, but holding for shorter time scales is typically called 'trading', whereas 'investing' is holding for several years or more.
  - themodelplumber 7y ago
    There are lots of other Q's too: - Am I just being prospective and intentionally introducing some contained risk to my financial plan (fine) - Am I doing this for entertainment (fine) - Is this for learning purposes (fine) - Did I just get a tip which is near-insider or insider-quality (well...party politics can lead to this) So, some gambling can be bad in some sense sure, but not necessarily if informed by various conditions or analyses. A big part of HN psychology skews toward low financial risk + low tolerance for nuanced financial thinking so I thought I'd mention that.
  - lawrenceyan 7y ago
    Even if you take the long view, I’m not sure how much faith you can really put into the Chinese market. Authoritarian governments as shown by past history, don’t have a great track record for long term stability unfortunately. Who knows though, maybe the Chinese government will manage to make a smooth transition towards a more democratic system without the violent revolutions that previous incarnations have had to deal with respectively. Now is probably a critical moment in determining whether such a future scenario is realistic, considering the slowing economic growth of China and the need to transition towards a service oriented rather than manufacturing based economy. Economic recession is usually one of the first steps towards civilian revolt in authoritarian regimes.
    - outlace 7y ago
      Most governments in history were authoritarian and many were stable for hundreds of years. With modern technology, I don’t see why authoritarian governments are necessarily more vulnerable than democratic ones.
      - lawrenceyan 7y ago
        That’s sort of a bad argument though isn’t it? There’s a reason why those governments no longer exist. FYI, a fall towards authoritarianism being a key factor to an ultimate collapse. Being authoritarian from the beginning just makes you start that much closer to edge.
        chii 7y ago
        or authoritarian gov't but with competent bureaucrats and significant drop in corruption and bribery could in fact, be more stable than a democratic society.
        lawrenceyan 7y ago
        The problem with that “strongman” autocrat ruler kind of thinking is that, while in the short term it can bring benefits, it’s ultimately unsustainable precisely because people don’t live forever and you can’t guarantee that your successors will be as competent or intelligent. The bugs with authoritarianism reveal themselves at this point, as the wide powers given to the aforementioned incompetent people in power results in extremely bad decisions being made, ultimately leading to a degradation in society and either collapse or a coup. Such a cycle is extremely unstable, and it only takes a brief glance at history to see the results for yourself. There’s a reason why in today’s world, empires and monarchies have been replaced by republics with systems of checks and balances that are put in place specifically to avoid these effects.
  - YjSe2GMQ 7y ago
    Well, ASHR's price has changed by about 0% between Nov 2013 and Feb 2019, and by about 10% to this day. It was also +125% at some point. So even in the long run investing in diversified top-of-the-country-stock-market ETFs may be "just a gamble".
- angel_j 7y ago
  That makes their market more like a casino, with a house in control. Unlike a casino, the house is not precisely fixing numbers, but doing it dynamically, with elements of chaos and predictability—what will the gov't do next? I imagine that would make the Chinese market a lot of fun for gamblers.
  - kiran-rao 7y ago
    I can't say that's too different from Trump tweets acting directly on the US markets. Though to a lesser extent.
- walshemj 7y ago
  And still a lot of funds will invest on the HK market as its much more trusted that the main market.
- opportune 7y ago
  Even if the prices of the assets themselves are manipulated, if you have a buy-and-hold mentality and invest in companies with strong earnings, I think it's still rational to invest. If you think the price of an asset is maybe 100% higher than it should be, but it has a current P/E ratio of 20, it's theoretically better than making no investment at all if you hold it for 10 years (not accounting for tax or how the earnings are distributed, and assuming constant real earnings). If all the stocks available to you are like that, and your only other non-shady investment options are an already terribly inflated housing market, I think it's still rational. There's also no guarantee that the bubble will even pop in 10 years. The best case scenario for overvalued equities is that they deflate at a rate somewhat lower than real growth - in that case, you see yoy growth in the traded price of the asset while the asset prices move towards more reasonable prices.
  - gruez 7y ago
    >If all the stocks available to you are like that, and your only other non-shady investment options or an already terribly inflated housing market They don't have access to developed market (ex china) ETFs?
    - seanmcdirmid 7y ago
      Not when they are spending RMB. Since the RMB isn’t fully convertible, this is a hard barrier for many.
    - opportune 7y ago
      China has some sort of capital control system (meaning, it is hard to move money out of China legally), someone can probably explain it much better than me. I am guessing it is enforced by the fact that the Chinese and non-Chinese banking systems are not very well linked, so anybody trying to move large amounts of CNY out of the country will show up on someone's radar. I know a lot of Chinese people use casinos as a way to make their money "go dark" so they can move cash out / exchange their cash for things they don't want their government to know about
      - 7y ago
- atomical 7y ago
  Berkshire Hathaway invested heavily in BYD because there aren't enough opportunities in the US.
  - seanmcdirmid 7y ago
    BH invests in a lot of companies worldwide, investing in just US companies would be stupid from a diversification point of view.
    - atomical 7y ago
      They don't do it to diversify.
- foldingmoney 7y ago
  The dirty little secret is that trading on insider information is absolutely rife in the Chinese market among anyone who's above the bottom few rungs of society.
  - oarabbus_ 7y ago
    Is it really different in the US stock market? Sure, it may not be quite as corrupt. But insider trading is the standard for those non-peons out there trading with big bucks.
    - seanmcdirmid 7y ago
      Parent didn’t mention anything about the aspect being binary. You can inside trade in the USA, and unless you are a member of Congress, the SEC will likely go after you (eventually). So people don’t do it with anywhere near as much impunity as it is done in China.
    - bassman9000 7y ago
      Sure, it may not be quite as corrupt. You answered yourself. It's a matter of how widespread it is.
    - foldingmoney 7y ago
      You can just look at the average returns of the non-peons to see that they're unlikely to be using insider trading. When I was at university, a meaningful percentage of my Chinese classmates' parents had paid for their expensive overseas tuition by making 'informed' investments in the stock market, and thought nothing of it. Bribery and insider trading (stock tips are effectively one form of bribery) are absolutely the standard in China.
- gingabriska 7y ago
  Here is a hypothesis: Top investors are hands in hand with the government and it's a way to transfer money from the who are farther away or in opposition to the government to those closer to government and this enables them to have a control over the market forces and keep control in the center whereas small time investors are just gambling based on hopes and speculations. Sometime they make money while other times they are wipped off.
deleted 7y ago
[deleted]
0898 7y ago
My favourite part of this article: "He became interested in the challenge in part because of some quirky moves in Chinese stocks in the wake of the 2016 U.S. presidential election." "When the result became clear, a listed Chinese company whose name sounds like “Trump Wins Big’’ in Mandarin surged, while a firm that sounds like “Aunt Hillary’’ slumped."
- sabujp 7y ago
  i had to read that a couple of times to understand the implications, are people really that dumb?
  - curiousgal 7y ago
    I remember reading about a company's shares rising by like 400% after it added "blockchain" to its name. Rational agents are going to do rational things all over the world /s.
    - AznHisoka 7y ago
      It's completely rational to buy a stock if you think other ppl are going to be irrational and make the price surge.
      - whatshisface 7y ago
        I have an image of highly rational traders sitting in high pressure meetings coming up with stupid ideas so that they can front-run stupid people.
      - 6gvONxR4sf7o 7y ago
        Sounds like a keynesian stupid contest.
        icebraining 7y ago
        For people who don't know the reference: https://en.wikipedia.org/wiki/Keynesian_beauty_contest https://en.wikipedia.org/wiki/Keynesian_beauty_contest
nemoniac 7y ago
To use the title of Dan Ariely's book: Predictably Irrational
AFascistWorld 7y ago
https://finance.yahoo.com/quote/300431.SZ/ https://finance.yahoo.com/quote/300431.SZ/ A third tier media player software company with an antique main product when listed, reached a high of 327 rmb in three months, then the company started it's VR glasses business. https://finance.yahoo.com/quote/300104.SZ/ https://finance.yahoo.com/quote/300104.SZ/ LeEco, founder absconded to the US, about to sink his FaradayFuture too. https://www.bloomberg.com/news/articles/2019-04-30/kangmei-slumps-after-revising-2017-cash-holdings-by-4-4-billion https://www.bloomberg.com/news/articles/2019-04-30/kangmei-s... Oops, 30 billion rmb profit in cash accounting error boys. https://www.google.com/search?q=600485.sh https://www.google.com/search?q=600485.sh Yes that guy who trumpeted to actually dig The Nicaraguan Canal. Trading suspended ever since December 2016, when a news report accuses its main business, telecom in Cambodia which rocked a 80%+ net profit margin, is a fraud. It seems no one dares to mess with this company right now, rumored to have deep military connections.

110 points by jbredeche 7y ago

If developing profitable trading approaches based on message board and social media sentiment, will it work outside of China in those markets where small investors and day traders dominate - penny stocks, certain cryptocurrencies, etc.?

synaesthesisx 7y ago
Yes - in fact many people do this regularly...for instance, identifying and shorting pump and dumps (usually popular penny stocks).

lawrenceyan 7y ago

Also because the Chinese government has direct control over the stock market, and can make arbitrary changes at any time. Makes things pretty difficult when the entire market is literally just a giant chop shop. It amazes me that any Chinese investor would willingly invest in the market to be honest, but I suppose that’s why alternative investments like housing/cryptocurrencies are so popular.

devoply 7y ago
The question for a real investor in a stock market is, is it going up or down over a 10 year period or if it's a company the same thing applies in a period of 10 years is it going up or down. Outside of that in any stock market you are gambling.
- vpribish 7y ago
  pretty arrogant statement there, buddy - decreeing what a real investor is permitted to do. There are many things happening on the stock market on many timescales and the participants would definitely not consider themselves gamblers.
  - foldingmoney 7y ago
    You're not wrong, but holding for shorter time scales is typically called 'trading', whereas 'investing' is holding for several years or more.
- themodelplumber 7y ago
  There are lots of other Q's too: - Am I just being prospective and intentionally introducing some contained risk to my financial plan (fine) - Am I doing this for entertainment (fine) - Is this for learning purposes (fine) - Did I just get a tip which is near-insider or insider-quality (well...party politics can lead to this) So, some gambling can be bad in some sense sure, but not necessarily if informed by various conditions or analyses. A big part of HN psychology skews toward low financial risk + low tolerance for nuanced financial thinking so I thought I'd mention that.
- lawrenceyan 7y ago
  Even if you take the long view, I’m not sure how much faith you can really put into the Chinese market. Authoritarian governments as shown by past history, don’t have a great track record for long term stability unfortunately. Who knows though, maybe the Chinese government will manage to make a smooth transition towards a more democratic system without the violent revolutions that previous incarnations have had to deal with respectively. Now is probably a critical moment in determining whether such a future scenario is realistic, considering the slowing economic growth of China and the need to transition towards a service oriented rather than manufacturing based economy. Economic recession is usually one of the first steps towards civilian revolt in authoritarian regimes.
  - outlace 7y ago
    Most governments in history were authoritarian and many were stable for hundreds of years. With modern technology, I don’t see why authoritarian governments are necessarily more vulnerable than democratic ones.
    - lawrenceyan 7y ago
      That’s sort of a bad argument though isn’t it? There’s a reason why those governments no longer exist. FYI, a fall towards authoritarianism being a key factor to an ultimate collapse. Being authoritarian from the beginning just makes you start that much closer to edge.
      - chii 7y ago
        or authoritarian gov't but with competent bureaucrats and significant drop in corruption and bribery could in fact, be more stable than a democratic society.
        lawrenceyan 7y ago
        The problem with that “strongman” autocrat ruler kind of thinking is that, while in the short term it can bring benefits, it’s ultimately unsustainable precisely because people don’t live forever and you can’t guarantee that your successors will be as competent or intelligent. The bugs with authoritarianism reveal themselves at this point, as the wide powers given to the aforementioned incompetent people in power results in extremely bad decisions being made, ultimately leading to a degradation in society and either collapse or a coup. Such a cycle is extremely unstable, and it only takes a brief glance at history to see the results for yourself. There’s a reason why in today’s world, empires and monarchies have been replaced by republics with systems of checks and balances that are put in place specifically to avoid these effects.
- YjSe2GMQ 7y ago
  Well, ASHR's price has changed by about 0% between Nov 2013 and Feb 2019, and by about 10% to this day. It was also +125% at some point. So even in the long run investing in diversified top-of-the-country-stock-market ETFs may be "just a gamble".
angel_j 7y ago
That makes their market more like a casino, with a house in control. Unlike a casino, the house is not precisely fixing numbers, but doing it dynamically, with elements of chaos and predictability—what will the gov't do next? I imagine that would make the Chinese market a lot of fun for gamblers.
- kiran-rao 7y ago
  I can't say that's too different from Trump tweets acting directly on the US markets. Though to a lesser extent.
walshemj 7y ago
And still a lot of funds will invest on the HK market as its much more trusted that the main market.
opportune 7y ago
Even if the prices of the assets themselves are manipulated, if you have a buy-and-hold mentality and invest in companies with strong earnings, I think it's still rational to invest. If you think the price of an asset is maybe 100% higher than it should be, but it has a current P/E ratio of 20, it's theoretically better than making no investment at all if you hold it for 10 years (not accounting for tax or how the earnings are distributed, and assuming constant real earnings). If all the stocks available to you are like that, and your only other non-shady investment options are an already terribly inflated housing market, I think it's still rational. There's also no guarantee that the bubble will even pop in 10 years. The best case scenario for overvalued equities is that they deflate at a rate somewhat lower than real growth - in that case, you see yoy growth in the traded price of the asset while the asset prices move towards more reasonable prices.
- gruez 7y ago
  >If all the stocks available to you are like that, and your only other non-shady investment options or an already terribly inflated housing market They don't have access to developed market (ex china) ETFs?
  - seanmcdirmid 7y ago
    Not when they are spending RMB. Since the RMB isn’t fully convertible, this is a hard barrier for many.
  - opportune 7y ago
    China has some sort of capital control system (meaning, it is hard to move money out of China legally), someone can probably explain it much better than me. I am guessing it is enforced by the fact that the Chinese and non-Chinese banking systems are not very well linked, so anybody trying to move large amounts of CNY out of the country will show up on someone's radar. I know a lot of Chinese people use casinos as a way to make their money "go dark" so they can move cash out / exchange their cash for things they don't want their government to know about
    - 7y ago
atomical 7y ago
Berkshire Hathaway invested heavily in BYD because there aren't enough opportunities in the US.
- seanmcdirmid 7y ago
  BH invests in a lot of companies worldwide, investing in just US companies would be stupid from a diversification point of view.
  - atomical 7y ago
    They don't do it to diversify.
foldingmoney 7y ago
The dirty little secret is that trading on insider information is absolutely rife in the Chinese market among anyone who's above the bottom few rungs of society.
- oarabbus_ 7y ago
  Is it really different in the US stock market? Sure, it may not be quite as corrupt. But insider trading is the standard for those non-peons out there trading with big bucks.
  - seanmcdirmid 7y ago
    Parent didn’t mention anything about the aspect being binary. You can inside trade in the USA, and unless you are a member of Congress, the SEC will likely go after you (eventually). So people don’t do it with anywhere near as much impunity as it is done in China.
  - bassman9000 7y ago
    Sure, it may not be quite as corrupt. You answered yourself. It's a matter of how widespread it is.
  - foldingmoney 7y ago
    You can just look at the average returns of the non-peons to see that they're unlikely to be using insider trading. When I was at university, a meaningful percentage of my Chinese classmates' parents had paid for their expensive overseas tuition by making 'informed' investments in the stock market, and thought nothing of it. Bribery and insider trading (stock tips are effectively one form of bribery) are absolutely the standard in China.
gingabriska 7y ago
Here is a hypothesis: Top investors are hands in hand with the government and it's a way to transfer money from the who are farther away or in opposition to the government to those closer to government and this enables them to have a control over the market forces and keep control in the center whereas small time investors are just gambling based on hopes and speculations. Sometime they make money while other times they are wipped off.

deleted 7y ago

[deleted]

0898 7y ago

My favourite part of this article: "He became interested in the challenge in part because of some quirky moves in Chinese stocks in the wake of the 2016 U.S. presidential election." "When the result became clear, a listed Chinese company whose name sounds like “Trump Wins Big’’ in Mandarin surged, while a firm that sounds like “Aunt Hillary’’ slumped."

sabujp 7y ago
i had to read that a couple of times to understand the implications, are people really that dumb?
- curiousgal 7y ago
  I remember reading about a company's shares rising by like 400% after it added "blockchain" to its name. Rational agents are going to do rational things all over the world /s.
  - AznHisoka 7y ago
    It's completely rational to buy a stock if you think other ppl are going to be irrational and make the price surge.
    - whatshisface 7y ago
      I have an image of highly rational traders sitting in high pressure meetings coming up with stupid ideas so that they can front-run stupid people.
    - 6gvONxR4sf7o 7y ago
      Sounds like a keynesian stupid contest.
      - icebraining 7y ago
        For people who don't know the reference: https://en.wikipedia.org/wiki/Keynesian_beauty_contest https://en.wikipedia.org/wiki/Keynesian_beauty_contest

nemoniac 7y ago

To use the title of Dan Ariely's book: Predictably Irrational

AFascistWorld 7y ago

https://finance.yahoo.com/quote/300431.SZ/ https://finance.yahoo.com/quote/300431.SZ/ A third tier media player software company with an antique main product when listed, reached a high of 327 rmb in three months, then the company started it's VR glasses business. https://finance.yahoo.com/quote/300104.SZ/ https://finance.yahoo.com/quote/300104.SZ/ LeEco, founder absconded to the US, about to sink his FaradayFuture too. https://www.bloomberg.com/news/articles/2019-04-30/kangmei-slumps-after-revising-2017-cash-holdings-by-4-4-billion https://www.bloomberg.com/news/articles/2019-04-30/kangmei-s... Oops, 30 billion rmb profit in cash accounting error boys. https://www.google.com/search?q=600485.sh https://www.google.com/search?q=600485.sh Yes that guy who trumpeted to actually dig The Nicaraguan Canal. Trading suspended ever since December 2016, when a news report accuses its main business, telecom in Cambodia which rocked a 80%+ net profit margin, is a fraud. It seems no one dares to mess with this company right now, rumored to have deep military connections.