The general note of surprise in most of the commentary on how strong the Hong Kong market has been suggests that it's time to repeat a cardinal rule of investment. It's in the price if it's in the press. It should be obvious really. When you buy stock on a market you're not taking a bet on what prices have done. Your interest lies in what they will do. It's a reasonable assumption, then, that other investors are not ignorant of news which has driven prices in the recent past. It's not news any longer. When the headlines say the latest figures show economic growth in negative territory and retail sales plummeting, most big investors - the ones who really drive markets - will have seen it on their dealing-room screens the night before and already put through their sell orders if they want to sell on these announcements. If you then see it only with your newspaper draped over your second cup of post-breakfast coffee, you can be sure that the market will be down at the open before any sell order you give your broker is transacted. You have history in front of you. You'll know why prices have moved, not where they will move. What counts is information at the margin. What likely developments in the future has the market not yet taken into account? The best source of information on these is, of course, inside information; but you probably suffer from the same difficulty that almost everyone faces here. You would love to hear good inside information, however much the authorities fulminate against it, but you just don't seem to get any. So it's back to crystal ball gazing. Start with the proven observation that markets move in cycles and the game is to pick the bottom of the cycle. It never advertises itself. In fact, common wisdom at the bottom of the cycle is that the market will move down forever; witness the number of brokers who proclaimed in mid-August that the Hang Seng Index would fall a further 2,000 points and there was no end in sight. Here is another investment rule of thumb for you. Sentiment is never more bearish than at the bottom of the market and never more bullish than at the top. What the bears were doing in August was reading history as usual and they are still doing it now. They place a great deal of weight, for instance, on the fact that the financial secretary announced that economic growth in the third quarter was minus 7 per cent. But he doesn't really know. He doesn't have the final component figures yet. Even then, gross domestic product figures in Hong Kong are woefully inexact. An economy that cannot even track its balance of payments is not in a good position to measure growth to the first decimal place in its all-important service export industries. More important, however, is that he was talking about the third quarter and we are now only weeks away from the first quarter of the New Year. In market terms that third quarter is not just history, it's ancient history. Much the same goes for high unemployment numbers. They reflect the fact that a slow economy earlier this year forced employers later, in many cases months later, to freeze hiring and lay off staff. Unemployment is a lagging, not leading, indicator. If it governs your investment decisions you'll buy at the top and sell at the bottom. Become a historian then, not an investor. Meanwhile, interest rates have dropped, the property market is reviving and bars and restaurants are beginning to fill up again. These things are usually good indicators and, while they may not guarantee you the future, they are at least happening now, not months ago. What buyers on the market are now doing is taking the view that the negative indicators still being reported will prove to have defined the bottom and that they will be much more positive a year from now. And if this improvement is what drives the historians to invest then there is probably still some way to go as they all come back. It's completely reasonable thinking.
