China’s Investment Landscape: A Risk Worth Ignoring or Embracing?

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Travis discussed China’s Investment Landscape: A Risk Worth Ignoring or Embracing?. Here’s an excerpt from the episode:

Jake: -it’s reasonably priced. [Tobias laughs] If rates stay this low and returns on equity stay this high, then the market is fairly priced.

Tobias: Right. You find his returns on equity the most mean reverting series in finance?

Jake: Are they?

Tobias: Yeah. It seems not maybe. Maybe not.

Jake: I don’t know. They were. [laughs]

Tobias: It’s been amazing. It’s been quite an extraordinary period.

Jake Taylor Yeah, it really has.

Tim: It has. Just like the tech bubble was. They’re not the same or anything like that, but, yeah, it’s always surprising how long stuff can go on. It’s been weird. You had 2020, which was just such a bizarre year. You had the huge euphoria with the AMC and all that stuff. You’ve had a lot. You had the pseudo banking crisis last year, and now you have the geopolitics and an election year. We’ve never had an election like this is going to be after the last one. At least in the modern era, it’s going to be different. I’m not someone that dwells too much on the macro. I don’t let it dictate my decision making, but I think you can expect a wild ride.

Jake: What do you think that–? Let’s put the history. We opened up the history book in 2050. What does it say about the markets of today?

Tim: That’s such a good question. People thought earnings were going to keep growing at the same rate. It would be that type of thing where you have high valuations, you don’t have mean reversion, which you should expect mean reversion. That’s one of the things that Toby does a great job talking about in his books is that you should expect some type of mean reversion.

Tobias: That’s been wrong.

Tim: Yeah.

Jake: We’ve identified the problem. [laughs]

Tim: Yeah. Maybe we’ll be idiots for not jumping on China. Who knows? I hope that is the case. I hope that is the case instead of like, “Well, people didn’t jump on it because that situation got a lot worse.”

Tobias: There’s a lot of that investment where you get right one times in a row. We’ve acknowledged that there’s some serious risk with China, but someone could set up a fund, just plow everything into China, have it come true. They’re a genius because they’ve ignored the one risk that everybody else was ignoring or it doesn’t work out in the other way around, they get a big short on or something like that. I think that’s the same thing that Paulson had that– He had that trade on where he was long all the CFDs or whatever, long all the CFDs, insurance.

Tim: CDFs. Yeah.

Tobias: It didn’t eventually blow up. There’d been other people who’d had that trade on for a long-time and–

Jake: Yeah. It went bust before it could pay off.

Tobias: Yeah.

Tim: Well, there’s people that will have–

Jake: So much will have dependency on this stuff a lot of times that–

Tim: Yeah. There’s people that will have multiple funds too, and then it’s like one– This is bigger in some like the manage future space and stuff like that, where they have all these different strategies and then they only really market the one that hits a home run, you know?

Jake: Yeah.

Tobias: You run three times long in one and three times short in the other. And the one that works, you change the name to your flagship fund. And the one that doesn’t work you just-

Tim: Yeah. Exactly.

Tobias: -remember you hold that one.

Tim: Yeah.

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