Interview with Emerging Markets Expert Paul Goodwin
The Great Divide: Active vs. Passive Investing
A Chinese Stock with Big Growth Possibilities
To celebrate the tenth anniversary of Cabot China and Emerging Markets Report, I sat down with chief analyst Paul Goodwin to pick his brain about how he learned about investing and emerging markets, his advice for new investors, and his favorite stock right now.
Tim: You come out of an academic background, so how did you learn about investing?
Paul: One of the things academics fear most about the outside world is that you can lose your job for no reason at all. I found out that was true. And it was during one of my periods of being “between jobs” that the wife of a one-time co-worker called me and asked if I could write about finance.
I said that I could write about anything as long as it was in English, and she hired me to write quarterly reports for a big Boston investment house. After a couple of years of increasingly intense freelancing, I signed on as a full-time employee.
Much of what I know about finance I learned from osmosis. If you hang out with people who know investing, you learn it almost without trying. But I’ve always been curious about everything, so I did a ton of research and asked questions on my own. Essentially, I duplicated the arc of a new investor at an accelerated rate.
So by the time I got to Cabot, I knew investing very well. At Cabot, I’ve continued to hone my skills—no one ever stops learning—on the aggressive growth side, especially in emerging markets, with a real focus on China.
Tim: What do you think is the greatest divide among investors?
Paul: I used to think the big divide was between growth investors and value investors. Then I figured out that what I was really looking at was risk tolerance.
Growth investors are comfortable with higher levels of risk (and some actively crave it). Successful growth investors are active, buying stocks in upswings, riding them higher and looking to jump off at the right time with their profits intact.
Value investors want to find compelling stories that the market has mistakenly undervalued. They want to buy and hold, and hold, and hold, until the stock reaches a pre-determined price, at which point they sell out and book the profit.
But right now, I think the biggest divide is between active investors who want to make their own investing decisions and the people who are happy with passive allocations.
This difference also extends to what people invest in, with active investors favoring individual stocks, ETFs and options, and passive investors choosing from a menu of index funds. There are so many advantages to the active side that I don’t even know where to start. But, then, I write about it all the time, so just stay tuned.
Tim: How does a guy with a graduate degree in Speech Communication become a China expert?
Paul: Personally, I made a well-considered decision to join the Army in 1966 in hopes of attending the Defense Language Institute in Monterey, California. I got my wish, but not the language I was hoping for (Arabic). Instead, I wound up studying Chinese (Cantonese) for six hours a day, five days a week, for 47 weeks. I came out of language school knowing much more about China than the average GI.
Then, when it became apparent that the Army actually didn’t have much work for Cantonese linguists, I cobbled together a working knowledge of Mandarin, which has proven to be a much more useful skill.
When I was first getting to know China, it was in the throes of the Great Proletarian Cultural Revolution (the Cul Rev), which proved to be Mao’s last big experiment in reshaping Chinese society. And it has been fascinating to see the ancient traditions of Chinese society reasserting themselves, allowing the country to benefit from its time-tested combination of hard work, learning and devotion to family.
Tim: What’s the most important lesson new investors should learn?
Paul: It’s a toss up for me, since new investors aren’t all the same. For a really brand-new investor, the best thing that can happen is for them to figure out what their investing personality is.
Someone who has a high risk tolerance and enjoys the action of buying and selling is likely to prefer growth investing. Anyone who appreciates a calmer approach and longer holding periods is probably better suited for value investing. And people who are looking for an income stream and aren’t too concerned about price appreciation will tend toward income investing.
The sooner you figure out what you’re comfortable with, the better off you’re going to be. You will know where to look for stock ideas and advice that will make sense to you. And you will have an easier time learning and following the rules of the particular investing style you have chosen. The most important lesson for new investors who happen to be growth investors (like me) is to keep your losses small. I’ve written about that a thousand times, so I won’t go over it again here.
Tim: If you had to buy one stock right now, what would it be?
Paul: Nice question. You know how much I hate that question. But here goes. Right now, markets are in a swivet, with growth stocks tanking and sectors like energy, commodities and other cyclicals finding buyers while the market leaders from the last year or 18 months take a pounding.
So I’m not looking for one of the high-flying growth stocks that would ordinarily be in my sights. I need a company with big growth possibilities that represents a good value right now.
Thus, here’s Sina.com (SINA), a big Chinese Web portal company that offers a ton of online services for free (much like Yahoo in the U.S.) and gets its money from advertising, mobile value added services and games. The company has had four years of double-digit revenue growth and 2013 earnings were $1.13 per share, after a disappointing 15 cents per share in 2012.
The big wild card in the Sina.com story is the company’s Weibo microblogging service that has half a billion (with a b) users in China.
Sina.com has announced that it intends to spin off Weibo, a move that would realize a monster pile of money for the parent company.
Add to that the recent decline in SINA from 90 in January to just over 50, and you have an attractive setup. SINA still has a P/E of 51, so it’s not exactly a value stock. But this steep correction makes it a very attractive target once 1) the stock finds support and puts in a sound bottom, 2) the underlying broad emerging markets universe gets back on its feet and 3) the stock’s chart shows evidence of investors coming back in.
I know that’s a lot of qualification for a “favorite stock,” but that’s how I’m thinking these days.
To learn about additional stocks on Paul’s watch list, consider a risk-free trial subscription to Cabot China & Emerging Markets Report.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory