China crazy!

Need further proof that people are going nuts over China? Simply adding “China” to a company’s name has led to beating the market by 31% (for 18 listed companies so far in 2010). This is the finding of Professor Wei Wang of Queen’s School of Business and reported by Jason Zweig in the Wall Street Journal this week.

The last time this happened was between 2004 and 2007, when adding the words “oil” or “petroleum” led to an 8% boost in stock performance.

Before that, it was the technology bubble from 1998 to 1999, when adding “.com” to a company’s name led to 53% out-performance of other technology stocks.

In the late 1960’s, a company’s stock would soar if it added “-tronics” or “-dyne” to its name.

I’m sure if we went back to the 1800’s, we’d find the same thing for “canal” and “railroad” companies.

It’s a story as old as markets. People fall for the hype only to find they’ve invested in little more than smoke and mirrors.

I don’t mean to say that no company is China is worth its salt. Nor am I saying that all oil, .com, or –tronics companies are pure puffery.

But, when simply changing the name of your company to reflect the latest craze leads to serious out-performance, you know there’s a bubble afoot.


China, too, may not live up to the hype.

Is China a huge and growing market? Yes, indeed. Will China’s economy have a huge and growing impact on the world economy? Unequivocally, yes.

But, that doesn’t mean every investment in China will do well. In fact, it might be a good idea to pull back on the China hype and consider other less bubbly alternatives.

Perhaps a case history can be instructive, here. The last time people went country-crazy was the mid to late 1980’s. Then, it was Japan, Inc. Do you remember how Japan was buying up real estate in New York, Hawaii and California, and how almost everyone was convinced the Japanese way of doing everything was better?

Fast forward to 2010, and Japan has been in a 20 year off-again, on-again recession. Their stock market peaked at almost 39,000 in late 1989 only to fall below 8,000 twice in the last 20 years (down over 80%). Even now, their market is around 11,000, down over 70% from it’s peak of over 20 years ago!

Can you imagine if the Dow Jones Industrial Average were at 4,250 19 years from now!? That was the Japanese hype experience.

China’s story may not look much better 10 or 20 years from now, either.

Before jumping into the hype machine, remember the lessons of history. Extreme hype is almost always a bad sign.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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