Here’s pretty good reasoning, I’d say, characterizing asset bubbles in general and the China stock market in particular. Remember, the general public always gets it wrong by either exiting to early (fear of loss when hope of further profits is called for) or staying in too long (hope for a turnaround when fear of deeper losses is called for). This, from a book published in 1923 that I just quoted the other day:
The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you you hope that every day will be the last day—and you lose more than you should had you not listened to hope—to the same ally that is so potent a success bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out—too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.
The above of course refers to short-term trading or speculation, not to "buy & mold" like many today do in their IRAs and 401Ks. Still, there were many who moved to cash in 1997 or ’98, fearing a wipeout and more still who rode their tech shares all the way to the bottom in 2002, where today, five years later, the NASDAQ has only recovered to about 50% of its 2000 high.
China could be a very interesting development. You know, back in 1990 while living in France, The Wall had recently come down and I half toyed with outlining the plot to a novel where Russia with its rich natural resources and revolutionary tremblings — that once had led the world into some of its darkest moments — leads it to its greatest freedom ever.
I think that was naive (for real; but might have made a good story in 1990), but I note today that China has no capital gains taxes for stocks traded on its exchange, either for foreigners or nationals. Foreign companies pay half the tax rates (15%) that national companies do and there is serious talk of eliminating it altogether.
I seriously doubt this is leading anywhere near a libertarian paradise or anything like it, but it’s certainly worth paying attention to. Sources in a position to know such things claim that even now there are moves to cut taxes all over the world over fear of China attracting all the capital.
Call me crazy, but I think that for better or worse, China is at least smart enough to understand what they have to do to attract capital and keep it coming in. 1.3 billion people with an almost instinctual propensity to cooperatively produce like bees: It’s a sobering thought and I’m not so sure an altogether scary one. We’ll see.