Stupidity & leverage caused China Financial crash


Stupidity & leverage caused China Financial crash

After the housing market had tanked, investors were looking for a quick way to make a buck. What better way to try to lock in some big gains than trying one’s hand in the stock market.  This would be fine if the investors were educated and making calculated bets.  Turns out that over 67% of those who opened new accounts did not even graduate from High school. Now a high education does not guarantee success in the stock market. Otherwise, everyone with Ph.D. would be a millionaire, but that is not the case. Higher education does help one to evaluate the investing landscape and have a better grasp of what one is doing.  At least, individuals would not borrow large sums of money to invest in the markets; this is the equivalent of trying to put out a fire with gasoline.

China's stock market crash 2015 caused by greed and stupidity

Not only was a lack of education the problem, but the insane amount of debt the average investor took on in the hopes of making a quick buck indicated that the opposite would come true.  In 2007, Chinese regulators banned the use of leverage, but as an effort to boost interest in the financial markets, they reduced these restrictions, and the floodgates of hell opened.  In Dec 2014, the value of margin positions skyrocketed to 800 billion Yuan, double what is was in July of 2014.  In mass psychology, this phenomenon is called a feeding frenzy and when this occurs a crash is usually not too far in the makings.

Sadly most investors are not familiar with the most fundamental of concepts of mass psychology; had they known this they would have not only walked away unscathed but would have managed to walk away with large profits.  Be wary when the masses are euphoric and Euphoric when the masses are wary is the most basic law of mass psychology.  Using this law would have had you bail out in around May or earlier and saved you a fortune.  This is exactly what we told our subscribers to do, and we managed to close our positions and walk away with a profit almost at the top.   Never invest when the masses are Jubilant.

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