"In 1993 – when I was 22 years old – China was making me rich," I told the audience of 200 in a private meeting at the New York Stock Exchange two weeks ago.
"By early 1994, it all came crashing down. My income fell by 90%."
What happened?
I experienced my first China boom... and bust. That's what happened.
Nothing could have prepared me for the ups and downs that are possible in China. And I've seen it happen many times since that first rollercoaster ride in the early '90s.
Today, I'll share a bit of my experience and the lessons I've learned along the way.
It's important, because China is in the middle of another boom right now. And you need to understand the potential risks – and rewards – if you plan to take advantage of it.
Let me explain...
The 1993 China stock boom – and subsequent bust – was my first "real life" boom-and-bust experience.
It was a dreadful experience to go through...
When it started, I was a broker specializing in international stocks and bonds. I didn't know it, but I was really in the right place at the right time. Our phones were ringing like crazy... mostly with people wanting to buy Hong Kong-listed China plays.
I was paid on commission. So I was accidentally making more money than I ever thought I would make in my life – and I was 22 years old.
Longtime readers know all this... But what you might not know is that around this time, my father entrusted me with about $100,000 of his retirement money – a large sum for a Navy man and his schoolteacher wife.
I was humbled that he trusted me with it. China plays were soaring nearly every day in December 1993, and I was proud that Dad's account was going up.
Then, the bottom fell out...
These China plays crashed in January and February. The feeling was just the opposite of how I felt in December... Each subsequent day felt worse than the previous one. I felt terrible for my clients – and for my father.
"Markets will go higher than you think, and fall lower than you can possibly imagine," investing legend Jim Rogers said in the late 1980s book Market Wizards. When I first read that, it went in one ear and out the other.
But in early 1994, I learned what it meant, firsthand. In the depths of the 1994 bust, I decided right there I never wanted to go through that experience again.
I drew two conclusions from the 1993-1994 boom and bust in China plays:
- I knew I would never invest for the long term in China plays, ever again.
- I needed to find a way to cut my losses... I needed a way to never experience a catastrophic loss again.
I didn't give up on China forever. I was just determined to be smarter the next time around.
By 1996, I'd traveled around China, visiting with companies and touring the stock exchanges in Shanghai and Shenzhen. Honestly, while I was impressed with the companies I visited, I was not impressed with the stock markets...
In 1996, China's stock markets were more like casinos for short-term speculation as opposed to a place for long-term investors.
I tell you this so you know that I have not always been a China cheerleader.
Here's the thing though... Those stories are from 23 years ago.
A lot has happened in 23 years. A lot has changed.
Today, I'm incredibly bullish on China. Prices are rising. And trillions of dollars are set to flow into Chinese stocks in the coming years.
That's because of three big stories we've been covering here in DailyWealth...
- China must invest a huge portion of its pension assets into the stock market to support its aging population.
- Stocks trading locally in China could see inflows of up to $2 trillion over the next 10 years as index provider MSCI continues to add them to its benchmarks.
- China is launching a Nasdaq-like stock exchange this year, which could kick off the biggest bubble we've seen in 30 years.
After 23 years, this is the setup I've been waiting to see... And I believe this time, the gains could be even bigger than what I experienced during my first China boom.
But if you're going to invest in China, you've got to be smart. You've got to learn from my mistakes.
That means you need to avoid catastrophic losses. You need to have a plan and stick with it.
I suggest using trailing stops on your investments. That's how you stay in for the upside – and protect yourself on the downside. And it's the right way to benefit from the China boom that's happening right now.
No market stays in bad shape forever... least of all China. I've seen what the Chinese markets can do, firsthand. And you really want to invest in this incredible boom.
So make a plan... and take advantage of it!
Good investing,
Steve
P.S. I traveled to Wall Street this month for another reason... to premiere my first-ever documentary film in the NYSE's auditorium.
It's called New Money: The Greatest Wealth Creation Event in History. I made this movie to show investors what's really happening on the ground in China right now. (And if the reaction to our screening is any indication, it's a must-see!)
You'll dig in to China's hottest new companies... discover "the Silicon Valley of the East"... hear what top investors and entrepreneurs in the country are saying today... and much more.
I hope you'll check it out. Rent it once for $4.99, and then you can watch it whenever you want... no subscription needed. Get the details here.
Further Reading
"What are you waiting around for?" Steve asks. "If you've stayed on the sidelines, you might think it's too late now... But no, you didn't miss it." History points to more upside ahead in China... Learn more right here.
"It's tough to do," Brett Eversole writes. "But you really want to follow the trend when investing... You really want to buy things after they've gone up." Get his take on the potential for more upside in Chinese stocks here: The China Boom Isn't Over Yet.
It's important to avoid taking catastrophic losses in investing. And this principle is another key idea every investor needs to know...
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