Going against the crowd can be difficult, especially in this environment with steep interest rate hikes in the US, the Russia-Ukraine conflict, weakness in the Chinese property sector and rolling Covid lockdowns. We are not macro investors, nor can we predict how such events will play out. But while every crisis is different, the ingredients are often the same — they all relate to human nature.
In my career over the past 20-plus years, there have been two major lessons investing in Chinese companies. The first is to focus on bottom-up analysis and hold on to quality companies. Sentiment could turn extremely positive or negative, which I experienced first-hand during the Asian Financial Crisis in the late 1990s, the bursting of the tech bubble in the early 2000s, and the Global Financial Crisis (GFC) in 2008. But the key driver of share prices over the long term is the ability of companies to generate value, by growing their earnings or net asset value.
The second lesson is to remain disciplined and not be carried away by greed or fear. I have seen the same market trade at 60x P/E and 5x P/E. This means when the market is fearful, we need to be more courageous, and when the market is irrationally bullish, we should tread carefully.
