Discerning a stock market bubble

January 25th, 2007

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In our previous article, Speculative fervour in the Chinese stock market, we mentioned that we were ?dismayed to see the amount of speculative fervour and volatility in the Chinese stock market? and that there were ?stories after stories of stock market ?success? and how ?investors? achieved wealth through share ?investment.??

Yesterday, from someone we know in Shanghai, we learnt that the Chinese stock market mania seems to be getting worse.

Retirees are lining up in long queues all over Shanghai?s banks. What can they be queuing up for? We learnt that many of them are withdrawing a significant part of their savings to ?invest? in managed funds, which is the latest investment fad. Many of these retirees do not even know what a managed fund is. When asked which managed fund they want to invest in, they replied, ?I don?t know. I want to invest in whichever is good.? With rampaging inflation, many of these retirees want to preserve the purchasing power of their savings. Upon seeing that scores of people are making easy money in the stock market, they want to join in the party too.

This is a classic sign of a stock market bubble. When you see people who are usually very financially conservative (and have a good reason to be) being overcome by greed, it?s time to exit the market.

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