China

The Hang Seng Tech index in Hong Kong has declined 40% in the past six months. This is greater than the S&P 500 drawdown of 32% in March 2020, when fear of a worldwide pandemic caused unprecedented panic and uncertainty.

The main reason given for the decline is increased Chinese government regulation. An entire sector, private tutoring, has effectively been wiped out overnight by government fiat. Tech companies are facing tougher regulation, and investors are viewing such “controversial” new rules like “paying food delivery drivers minimum wage” and forbidding the practice of “tricking users to click on [a company’s] own offerings over competitors’” as an unmitigated sign that the end of private enterprise in China is nigh.

China may have some real problems, but most of these measures seem eminently reasonable, especially if you read the official proclamations instead of the exaggerated secondhand commentary. Whether or not you agree with Beijing’s heavy-handed methods, questions about how to handle user data and privacy, and challenges over how best to regulate anti-competitive behavior by monopolistic tech companies, are issues that all countries are facing, even Western democracies. If anything, increased regulation in other parts of the world (i.e. GDPR) has only strengthened larger incumbents as the regulatory burden has become untenable for smaller companies.


I’m an avid surfer, and one of the realities of surfing is that you share the water with large sharks. Fortunately, encounters are rare. Among regular surfers, the general feeling is that “sharks are always out there, but most of the time you just don’t see them.” One corollary to this is that just because you see a shark one day doesn’t mean your risk of being eaten alive, over the long-term, has materially increased. An even stronger (although perhaps fatally faulty) conclusion might be that your risk has actually decreased, because if a shark really wanted to eat you, you probably wouldn’t see it coming in the first place.

I’m no expert on China, but there are some parallels. The risks of regulation have “always been out there” - just because this danger periodically surfaces doesn’t necessarily mean that the risks for a long-term investor have materially changed. And if you believe that increased regulation makes Chinese tech companies uninvestable, how do you handicap that risk with Western tech companies, which likely face the same threats, but with arguably more uncertainty?


It is trivial to repeat Warren Buffett’s advice to be “fearful when others are greedy, and greedy when others are fearful,” but much more difficult, psychologically, to act on it. The valuations of many quality Chinese companies are in bargain territory. There are some real risks, but many of these risks have always been there. Some “unknown unknowns” remain, but that is the entire reason for having a “margin of safety.” The challenge seems not one of quantitative analysis but psychological temperament.