The Olympics Are Over

By Roger Nusbaum | August 25, 2008 | 12:31 PM | 0 Comments

Now what?

For the last I don't know how many months a consensus seems to have built that once the Olympics ended the markets in China would drop. The logic being that after all the build up, the event is now over, the anticipation has ended and there would be an obvious let down.

I heard this repeated many times. One small problem with the argument is that the Shanghai market had already dropped by about 60% by the time the Olympics started.

Markets cutting in half is not a common occurrence. They don't often fall much more than 50% (here I would define much more as 75% from the peak). Before you cite the Nasdaq, the Nasdaq at its peak was 80% technology and so I submit that it was a sector proxy as opposed to a broad measure of the US capital market.

If you believe the notion that stock markets are a forward looking indicator then you have to believe that China (or any other market) down 50% has discounted an awful lot of bad news already.

Looking forward anything can happen but this is about probabilities and a market that has cut in half realistically doesn't have much more to go. This will occur in the future with different markets as well (happening now with Iceland).

Buying a market that has cut in half is not easy emotionally and 50% is certainly not a guarantee of a bottom but anyone able to have a time horizon that allows them not to worry about the first 10-15% from their entry point will likely do very well within a couple of years.

The way to manage the risk of being wrong is with moderate exposure. I disclosed going back in to China a couple of weeks ago. The exposure I put on targeted about 2% of the portfolio. The drag if I am wrong would not be financially ruinous for clients but if the stock doubles in a year or two it would add 200 basis points of return which could be meaningful if the US market continues to languish.