One lesson from Warren Buffett has served me particularly well over the years:
“Never invest in a business you cannot understand.”
Of course, this can be extended across much of the financial world. As a general rule I adhere to “never invest in something you cannot understand”. I bring this up as the Chinese stock market collapses. Their stock market has cratered 40%+ in just a matter of weeks. It’s a truly breathtaking collapse. And it reminds me of my own personal experience in Chinese stocks during the 2007 bubble.
In my book I go into some detail about the story, but the short version is that I shorted the Chinese stock market bubble without fully understanding what was going on in the market. At the time there was a discrepancy between mainland China shares and Hang Seng traded shares and the markets traded differently due to a government induced arbitrage that was occurring between the two. I had literally timed the Shanghai peak to the day, but the Hang Seng market continued to trade higher. And so I was caught short in a vicious bubble during which I rode a 20% rally higher which eventually unwound entirely and left me relatively unscathed, but emotionally scarred. (more…)