Don’t look now, but Chinese stocks are showing signs of life. More on that in a bit. But first, a little advice about growth investing.
Taking Charge of Your Growth Stocks
My wife and I handle our own finances (although not our own taxes, for Pete’s sake!). We make decisions on major purchases (like a replacement for my Ford pickup, which has 232,000 miles on it), charitable giving and rudimentary budget goals together. This is how our parents handled their money and (I think) how most people still do.
(The one time I talked to a financial advisor I felt as though I’d been interrogated by a team that included everyone from a priest to a proctologist. And frankly, I didn’t have answers to many of the most important questions he asked.)
Before I came to work at Cabot, the only real decisions I made about retirement savings were for TIAA-CREF (what percentage to equities and what percentage to bonds) and choices among different stock funds for my 401(k).
One thing Cabot has taught me is that investors can be a heck of a lot more aggressive with their retirement accounts than they think. Anyone who is willing to spend the time to monitor their stocks’ performance and stick to a disciplined loss-limit program can take on more risk than is usually advocated by investment professionals. The key is the ability to move into and out of individual stocks and asset classes (emerging markets stocks among them) quickly as conditions improve or deteriorate.
I don't know what a financial professional would regard as a reasonable allocation to growth stocks. Personally, I think every portfolio should have at least 10% exposure to emerging markets. But whether this should be via ETFs, mutual funds or individual stocks is the kind of question that causes raised voices when investment advisors go to bars.
I’ve read lots of the literature about how individual investors go wrong when they buy and sell individual stocks. The pattern is incredibly consistent. Here’s how it goes.
1) Stocks (either individual stocks or the entire market) correct and hit bottom, and institutional investors, who are largely value investors, buy them because they’re cheap.
2) Stocks rise as more investors begin to appreciate both their value and the new appreciation reflected in their charts.
3) Stocks rally strongly and institutional investors begin to sell into the rally. This is the stage when individual investors start piling in.
4) Stocks go ballistic as more and more individuals (probably the same ones who sold just before the institutions did their buying) jump on the bandwagon.
5) Stocks top out and seasoned growth investors begin taking profits as the price begins to decline.
6) The investors who bought during step 4, unwilling to book a loss, ride the stock all the way to the bottom.
7) Back to step 1, as the last of the herd-followers finally gives up and sells in disgust, swearing that they will never buy another stock.
That’s what the research has to say about why individual stock investors lose their shirts over and over again and year after year.
Here’s what I would like to say to these people: “Hey, stupid! Did you really think that you could just jump into this poker game with highly paid, experienced players who have enormous resources and just walk off with the pot? Have you done any research on this at all? Or did you just take it as gospel when your brother-in-law told you that it’s different this time and that you couldn’t miss with this stock?”
Fortunately, I’m a much more sympathetic and understanding person than that. Usually.
Chinese Stocks On the Rebound
Right now, I think there are some very convincing signs that Chinese stocks, which have been about as popular as used gym socks for a number of years, are about to turn around in a massive way.
You should have been feeling this too, because when just about everyone agrees that an asset class (like emerging markets stocks) is total dog meat, and that only an idiot would put money there, that’s when savvy investors begin sidling in. As Baron Rothschild said in the 18th century, “the time to buy is when there is blood in the streets.” And the streets leading to China have been fairly sticky with red stuff lately.
Investors have been watching as China struggles with a slowing economy, a botched attempt to jump-start a market economy using money generated by a stock market bubble, a huge volume of non-performing loans on the books at Chinese banks and on and on.
Waves of optimism and discouragement have kept Chinese ADRs (the Chinese stocks that trade on U.S. exchanges) trading up and down, with lots of movement but very little progress. Here’s a chart of PowerShares Golden Dragon Halter USX China ETF (PGJ) showing the years of range-bound trading since October 2013.
I’ve been Chief Analyst of Cabot Emerging Markets Investor for over 10 years, and I’ve found plenty of stocks to buy during the uptrends shown in this chart. And I’ve saved plenty of money for my subscribers by getting them out of the market and into cash when the downtrends start.
When China works, it really works. And that means that over those years, I’ve been both the editor of the hottest investing advisory in the whole United States and the captain of the Titanic. It all depends on how Chinese stocks are doing.
And I’m saying that right now, you should be keeping an eye on China. And you should be preparing to take the initiative with your own retirement portfolio, allocating at least 10% of it to emerging markets stocks.
I’m ready to be your guide to the enormous opportunities to be found in countries that are rapidly industrializing. And most especially, I’ll tell you how to run with the big dogs in Chinese stocks.
Every month, Tim Lutts, Chief Analyst of Cabot Stock of the Month, picks a stock from among all the stocks featured in Cabot’s various advisories. And this month, his pick is a Chinese stock! (I can’t tell you what it is, but subscribers to my Cabot Emerging Markets Investor have known about it since last Thursday.
A Hot Chinese Social Media Company
My stock pick today is Weibo (WB), a Chinese company that’s called “the Twitter of China.” Weibo was spun off from Sina.com, a popular Chinese Web portal that still holds a majority of its stock. (Alibaba also owns an 18% stake.)
Weibo is like Twitter in being a social medium for sharing news, messages, gossip and links to everything else.
But it’s unlike Twitter because 120 Chinese characters can communicate a ton more information than 120 Western characters.
Weibo has always been popular, but what has investors taking notice is the successful monetization of its huge user base of 222 million monthly active users. When Weibo reported Q4 earnings on March 2, earnings were up 275% and revenue up 42% and the company’s after-tax profit margin was a record 22.1%.
WB is trading around 18, which is essentially right where the stock came public back in 2014. WB has traded as high as 26 in its short life, and as low as 9, during the August 2015 free-fall, and 12 just last month.
WB remains on the list of past holdings for Cabot Emerging Markets Investor, as we got shaken out during the February retreat. We’re always ready to get out of positions when the market (and a stock’s chart) turns against us. That’s part of how we can take on the risk inherent in emerging markets.
But we still love the story and appreciate the stock’s rebound from its February low.
If you’d like to know when to get back into WB, a click on this link will bring you a no-risk trial subscription to my Cabot Emerging Markets Investor, and the full story on how emerging markets in general (and Chinese stocks in particular) are performing. And when WB is ready, I’ll tell you.
Chief Analyst of Cabot Emerging Markets Investor
and Editor of Cabot Wealth Advisory