Legendary investor Warren Buffett has warned about the dangers of booming developing markets, which he said can be like ‘casinos’. The Oracle of Omaha offered advice to a Chinese investor while speaking at the Berkshire Hathaway annual shareholders meeting in Omaha, Nebraska.
“Markets have a casino characteristic that has a lot of appeal to people, particularly when they see people getting rich around them,” was Buffett’s response to a question about volatile Chinese stocks. “Early on in the development of markets there’s probably some tendency for them I think to be more speculative than markets that have been around for a couple hundred years,” Buffett said. “And those who haven’t been through cycles before are more prone to speculate than people who have experienced the outcome of wild speculation,” he added. “If the market gets hot and people on leverage are doing well, a lot of people will be attracted not only to what I call speculation but what I call gambling,” Buffett said, adding that this mentality can be true in the U.S. markets too.
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Chinese economy, world’s second-largest, has been in recent years struggling, failing to manage the fallout of a slowdown. The Chinese stock market turbulence began with the popping of the stock market bubble in June 2015. A third of the value of A-shares on the Shanghai Stock Exchange was lost within one month. By 9 July 2015, the Shanghai stock market had fallen 30 percent over three weeks as 1,400 companies, or more than half listed, filed for a trading halt in an attempt to prevent further losses.
Values of Chinese stock markets continued to drop despite efforts by the government to reduce the fall. Chinese authorities have tried to correct the situation by imposing capital controls and by tightly managing the exchange rate of its currency, the yuan. In the last several weeks, Chinese authorities have further tightened regulations on financial markets, bringing stocks under even more pressure. The Shanghai composite is now flat on the year.