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A bear in Shanghai should be commended, not condemned

A man looks at an electronic board at a brokerage house in Beijing, China, January 4, 2016.
Kim Kyung-Hoon | Reuters
A man looks at an electronic board at a brokerage house in Beijing, China, January 4, 2016.

The investigation [of Xiao Jinhua] is said to be focused on manipulation that contributed to panic selling during the 2015 market rout. - SCMP, February 2

The law punishes whoever originates or circulates rumours calculated to affect adversely the credit or business of individuals or corporations...

But how is the public protected against the danger of buying stocks above their real value? Who punishes the distributor of unjustified bullish news items? Nobody; and yet, the public loses more money buying stocks on anonymous inside advice when they are too high than it does selling out stocks below their value as a consequence of bearish advice during so called "raids".

So reads "Reminiscences of a Stock Operator", by Edwin Lefevre, Books of Wall Street, 1980, on page 297.

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Lefevre was actually Jesse Livermore, the "Great Bear of Wall Street" in the early twentieth century and his Reminiscences is a stock market classic, a hugely readable account of the career of a professional speculator.

Just to put that career into perspective, however, Livermore died penniless, a suicide who shot himself in a New York hotel washroom after having scrawled the words, "My life has been a failure" on the washroom mirror.

I tell you this to make the point that no speculator, however clever, is consistently cleverer than the market. To win consistently you either have to fool government into giving you a special advantage or have the good fortune to be in the right place at the right time for a 50-fold jump across the board in share prices, such as the Hang Seng Index staged from the mid-1970's to mid-1990s.

Livermore never enjoyed either of these, unlike some of our developers who just bet double or nothing for those 20 years and won every time.

But he knew whereof he spoke and he was prescient. He saw 100 years into the future and described the Shanghai market perfectly.

Stock markets serve corporations by allowing them to raise capital and they serve investors by allowing them to participate directly in the growth of their economy.

In the mainland, however, the authorities will have only the first of these two.

Markets exist to raise money from the public, end of story. The interests of the millions of investors are generally scorned.

I cite the evidence of the chart.

The blue line represents nominal gross domestic product on an index basis of January 2000 = 100. The red line represents the performance of the Shanghai Composite Index on the same basis.

Ordinarily speaking, a stock should reflect the performance of the economy on which it is based. It is never a precise match in any country but in the mainland the two bear no relation at all.

The stock market stands at barely a quarter of where you would expect it to be on the comparison and has even maintained this level only with vigorous government support.

It strongly suggests that a majority of the stocks have been peddled on spurious bull stories to ordinary people who have been forgotten the moment their money has been taken from them.

And I think Livermore was right about this. Pushing the market this way exacts a far greater toll on the public's savings than a market in which prices are dropping because some big players have come to the view that the next major move is down.

It may not feel that way to you at first but surprisingly often it later becomes evident that the market was indeed overbought. Better out earlier than later and more painfully in that case.

Mr Xiao's alleged crime is said to be market manipulation that contributed to panic selling during the 2015 market rout, according to South China Morning Post's reporting.

But arguably a simpler interpretation might be he was acting more like the bear of Shanghai two years ago - and if that's true, he may just have done investors a service, and should be commended, not condemned.

Commentary by Jake Van Der Kamp of the South China Morning Post.

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