China’s Tennis Communism

Today the biggest emerging market of all — China’s economy, will release its official PMI data , which is likely to show the manufacturing sector continued to slow down in January. But it’s a quiet period at the moment in China as everyone is off to celebrate the Year of the Horse.

In Australia, we’re celebrating the year of the house…again. That maddening show, The Block, is back on TV, a painful reminder of our collective stupidity in thinking that we can speculate and renovate our way to wealth.

But 2014 just might throw a few surprises in the way of those celebrating the year of the house. That’s because there are ominous clouds now on China’s horizon. We won’t go into detail here, as we’re just finishing up a report on developments in China, with the opportunities and the threats that it will bring, for our Sound Money. Sound Investments subscribers.

Instead, we’ll tell you a brief story that is some sort of metaphor for China’s woes. It’s about Li Na, the Chinese tennis player who won the women’s Australian Open last week, at the age of 31.

She first turned professional in 1999, at 16 years of age. But it wasn’t until 2008, when she quit the national team and the state run sports system to go it alone, that success started to come her way. This gave her the freedom to pick her own coaching staff, but she would also be responsible for costs like travel and training.

It also meant she only had to give 8–12% of her winnings to the Chinese Tennis Association, instead of 65% under the state-based system she was under previously.

This decision to go it alone transformed her career. In 2010, she reached her first grand slam semi-final. In 2011 she won the French Open at the relatively old age of 29, becoming the first Asian to win a Grand Slam singles title. She’s now ranked number 3 in the world, with total prize money of over US$15 million.

There you have it. When you reward risk taking and hard work with a wealth redistribution scheme, you don’t get hard work. You get plodders, prepared to do the minimum because anything more is wasted effort. It’s better to speculate and try for easy gains — or be corrupt — than work towards long lasting wealth creation.

It shouldn’t come as a surprise then that the biggest economic and credit boom in China’s history has done nothing for the Chinese stock market. It’s still down more than 60% from the peak, reached way back in 2007.

Companies might look like they’re growing, but it’s profitability, not profits, that count for stock market performance. Companies that use capital efficiently reap the rewards. Those that abuse it are ignored. Clearly, there’s a lot of inefficient capital within China’s economy right now.

The one good thing that will come out of a China slowdown and economic rebalancing is that capital efficiency will (or should) increase. And that will eventually prove beneficial for China’s stock market.

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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