Abaci's Common Sense Investing

Last month I was in an accounting standard update seminar and the speaker, who might have lost a lot of money and thus turned a complete cynic, kept making lame jokes every few minutes about mini-bonds, Citic Pacific, HSBC, and other names I've forgotten. But he repeated more than once, in a serious tone, of his gloomy prediction of HSI falling by 90% and reaching 3,200. His reason was two-fold: (1) this crisis is most severe since the great depression of 1920s, since there's no HK stock market at that time, he could only surmise the HSI fall will be at least as bad as in the 1973 bear market; (2) one of his manufacturing client in Foshan made the exact same gloomy estimate when they discussed the market condition.

Reason (1) is actually not his origination but a popular bear belief in the market, and I don't understand why reason (2) can be considered a reason at all, maybe his client is the unknown 'Foshan Buffett'.

Then I read from Tony Messar's daily column last week and he mentioned something about the 1973 bear market, when the index fell from 1,775 in Mar 1973 to 150 in Dec 1974.

"The 150 on the Hang Seng Index during 1974 was extraordinarily elusive. On that day it had fallen for less than 10 minutes, and 600 points was about its real bottom, and that was hardly attainable for more than a day or two."

This certainly sounded encouraging, but I wasn't satisfied. So I started my own research on the great 1973 bear market, and found out unfortunately Tony's memory was a bit too rosy, although I don't blame him especially given his age now why shouldn't he be keeping only pleasant memories.

There wasn't much on the internet about the crash, mostly anecdotes about how people went mad and then crazy (or the other way around) in the great bull/bear cycle in 1973/74. I have little confidence in the accuracy nor representativeness of those stories, given the tendency of the media to spice up things for attraction.

I did manage to find some data about the index. 1st, the real bottom wasn't 150 but much lower, but it's an intra-day low and probably happened in what Tony referred to as the 10-minute selling. But he's wrong in saying 600 was the real bottom. In fact, the index did fall by 90% in Dec 1974 and stayed there for quite a while before rising again, to 209 on Jan 27 1975, and then to 279 on Mar 27 1975.

Another useful bit of information was found about the super bull market before the crash, on Nov 13 1972, the index was 673, 3 months later on Feb 9 1973, it was 1,450, 1 month later on Mar 9 1973, it was 1,775. I don't really have a starting point for the bull run because of poor data collection. But if I use 673 as a base, then it was up 263% in only 4 months. It was indeed quite a gold rush! [Update: From less reliable source I got that HSI was 113 at beginning of 1969, so in 4 years and 3 months (until Mar 1973), it's risen by 15.7 times! The Economic Journal wasn't even published until sometime in late 1973 in the middle of the crash.]

Next I tried to compare this to the last bull run we had, I used 32,000 as the finish line and calculated backward, arriving at 12,167 in order to give the same 263% increase. It was a time around Aug 2003. The total time was 4 years and 4 months.

So it was 4 years+ vs 4 months!

You should realize the intensity of these two bull runs wasn't quite the same. If you believe that the extent of a bear market fall has some thing to do with the previous bull market run, then you should perhaps give some more thought before casually linking the two bear markets.

[Update: A quick summary

From 1/1969 to 3/1973 (51 months), HSI was up 1,570%
From 8/2003 to 11/2007 (52 months), HSI was up 263%

From 3/1973 to 12/1974 (20 months), HSI was down 92%
From 11/2007 to 10/2008 (12 months), HSI was down 66% (using 11,000 on 10/27 as floor)

For additional info, the bottom of 150 in 1974 was still 33% higher than the starting point of 113 in 1969, while the 11,000 bottom last month was 10% lower than the starting point of 12,167 in 2003.]

Anything can happen for the 1st time, the HSI may fall by 99.9%, or it may rise by 100 times. History is not a reliable predictor of the future, for you will continue to witness 'new' piece of history. (idea of Black Swan author Taleb)

p.s. one should also bear in mind the composition of HSI is very different now with the addition of Chinese companies. therefore to assume a HSI of 3,200 is similar to making an end-day prediction of the China economy. well, if that day does come then that accountant probably has a lot of other things to worry about than the HSI.