If you follow markets at all, you probably have noticed the pretty major sell-off of Chinese equities in the past few months. Below is the KWEB index fund, which does a good job of showing the selloff. I don't buy index funds, but it does the best job showing you how poorly Chinese equities have done this year.
Now, the whole point of this post isn't to sway you in one direction or another. I'll just be going over a variety of psychological misjudgments that have caused people to panic sell these stocks. I am a supporter of Chinese stocks, and I continue to be, so there may be a little bias in here. I'm only going to cover a few, I'm sure you could sprinkle a few more in here, but we'll just concentrate on the most obvious ones.
Disliking Tendency
If you read the comments on pretty much any article in Western news/journalism, you will notice largely anti-Chinese rhetoric (to put it nicely). The fact that many people, especially Americans simply do not like China weighs heavy on this sell-off and is the reason that many great Chinese companies constantly are evaluated at a large discount to their American peers (see Amazon vs. Alibaba).
Investors see this news and allow it to stoke the fires of their dislike for China. The constant negativity only makes things worse and feeds into their growing confirmation bias. They are forced to see the trees instead of the forest and focus on the noise, rather than the big picture. Short sellers are beginning to aggregate into Chinese stocks as well.
Doubt-Avoidance Tendency
There is primarily first-order thinking in most areas, but I see a lot of it going on with the new regulatory frameworks coming forward. Instead of investors digging into what these regulations are truly about they conclude: Regulation > Bad > so we sell because it's bad. They are going with the herd instead of actively thinking about what these regulations are for and how they will impact these companies long-term.
It's simpler to doubt something and believe what someone is doing is true rather than digging in and finding the truth. China won't be destroying the companies that continue to feed GDP growth. China wants to massively increase per capita GDP growth. Do you think they will actively handicap their citizens from spending money using platforms that Tencent and Alibaba own? It's completely at odds with each other and makes literally no sense to think that way.
Add some second-order thinking into your thought process and things become a little more clearer.
Influence From Mere Association Tendency
If you look at the new video game bans that Xi discussed you can see how the market overreacts to "negative" news. Tencent's market cap went down around 20 billion dollars because of a ban that effect ~3% of its users on 1 segment of their business. Complete overkill.
The average scared investor was influenced to sell their position because they associated the ban with a downward movement in share price. Instead of keeping a cool head and looking at how the top line would be affected, they reacted with alarmism and poor decision-making.
Deprivation Super-Reaction Tendency
This one is visible in pretty much any sell-off. A large percentage of sellers sell their shares because they fear losing money. They are short-sighted instead of looking at the long-term. They fear losing money in the next few days and will take a loss rather than keeping the stock and understanding it well enough to see it has a decent probability of doing well in the next 5-10 years.
As markets constantly show us, people are incapable of doing this. There are a multitude of reasons, but all that matters here is that people sold their shares of BABA and TCEHY because they thought the share price would go down, not because the underlying fundamentals of what makes these companies so good was broken.
Social-Proof Tendency
We can look at the exit of institutional players here. Alt Perspective wrote an interesting piece on China here:
"The holdings by institutional investors of BABA's American depositary shares (ADSs) accounted for 24.3 percent of its total shares at the end of June, shrinking 8.6 percentage points from a quarter earlier. The reduction nearly doubled the decline of 4.6 percentage points at the end of March as fund managers were concerned about an exacerbation in the regulatory crackdown in China."
Most fund managers "follow the herd" and will take losses like their colleagues because "if everyone else loses money like I do, then it's ok." This is part of the institutional imperative that Buffett is always touting. Following the herd will lose you money.
You should never succumb to social-proof in your investments. Doing what other do will prevent you from being a long-term investor as the vast majority of hedge funds are simply index funds that trade in and out of stocks (unsuccessfully I might add). I'd say the majority of retail investors aren't much different, with trading and speculative buys making up a large chunk of "investing" in this demographic. You should understand your holdings well enough to hold a contrarian view when it seems like the world is ending for a company you hold.
Contrast-Misreaction Tendency
We contrast things in relation to things we have experienced in relative terms rather than absolutes. We are all used to some sort of regulation in our lives, it happens all the time. In the west, these regulations take time. So even though we know they happen, they're gradual, we hear about them in the news for years before they actually come to fruition.
In China, things don't work that way. If they want a new regulation, the CCP get's the paperwork done today and bam. It's law. The fact we are unable to deal with understanding how different regulation in China occurs verses how we are used to it makes us misjudge the event.
Anti-monopoly laws, unions, sharing of private data, algorithm regulations are all at the forefront of these new regulations in China. But show me how this isn't happening in the West? Look at how often Google, Facebook, and Amazon are in trouble with regulators. Regulation of tech is happening everywhere, it's just expedited in China.
I think companies like Alibaba will simply find other avenues to make up the small dings it receives from these regulations, but I don't see how these regulations have destroyed their moat. Their moat is wide and deep and hard to cross from competitors. Sure more competitors can enter the fray, but they will find it difficult to compete with the totality of what Alibaba offers it's customers.
So there you have it. A list of a few large misjudgment on the China sell-off. A year from now, institutions will probably all be back in buying high after selling low (man they're good at that aren't they?). I'll continue to be on the sidelines watching my companies grow and attempting to reduce my misjudgment as best as I can!