Complete Investment Makes Money in Two Ways

One approach is to profit from value growth.

The other is to profit from price deviations caused by how people manage their expectations.

Most investors in China's stock market are mostly trading on these price differentials. A differential means that the company's fundamentals haven't changed—its revenue this quarter is roughly the same as last quarter, and we don't expect any significant shifts next year either—yet the stock price can swing dramatically.

Why?

Because policy changes have shifted investor expectations, which in turn changed the flow of capital into the stock. This process is what we call a change in valuation.

What people are really profiting from is the change in valuation generated while others are being shaped by expected management.

In China, what you can play with is exactly this: the shift in valuation as expectations change. Essentially, you buy at a low price from someone when fundamentals haven't changed, and then sell at a high price to the next buyer, also with no change in fundamentals.