The ViewMy big bet – Chinese stocks are near the bottom

Bill Miller of Legg Mason went from investing rock star to has-been during the global financial crisis when he was caught with too many financial stocks. One bad patch doesn’t impact a highly successful 30-year career, but as a friend of his said, “when things are going well, you are a genius. When they are going badly, you are a dope”.

Fund managers share a characteristic with football managers and politicians: “their careers always end in failure”. Top investment managers, the ones who make the news, have always had an aura of super intelligence, while dressed in a cloak of luck. Which can run out.

This not to say that good investors don’t work hard, are not smart, or don’t piece the evidence together like a detective – but to outperform, you occasionally have to make conviction bets. Your money needs to be positioned just right to benefit from your insight. The bigger the bet, the bigger the risk to your overall portfolio, so it is usually those playing with their own money that can wager with the most conviction.

The big call that made George Soros famous was to bet against the pound in 1992. At the height of the trade, he was shorting the currency by some US$10 billion (mostly borrowed money) knowing that the UK only had US$15 billion to defend it. He became the first man to make US$2 billion on a trade by not only carefully thinking it through, but also by deciding to put all of his chips and more on it.

Much more common however are the stories of the “Masters of the Universe” who bet on their big call - and plummeted to earth like Icarus. LTCM failed in 1998 with two Nobel Prize winners in support. Many hedge fund managers have found that a changing market environment (say bull market to bear) just doesn’t suit them anymore so they shut up shop.

And if you have made a fortune on your previous bets sufficient for you and your children and your children’s children, why not retire “to spend more time with the family”?

So now is the time to make our big conviction call: that the Chinese domestic stock markets are nearing the bottom. Does that mean buying? Well perhaps not just yet; but the bias should be to reach for the buy, rather than the sell tickets.