It's an easy trap to fall into.
In looking for a place to park your investments, you scan the headlines, looking for good news... when you should really be looking for bad news.
Let me explain.
Apple Chooses A New Partner You may have heard that Apple is dropping the reigning internet search engine giant as their search-engine and maps provider.
What you may have not heard is that they've already chosen a successor.
This news hasn't made mainstream media yet, so the company is still trading at only $24 - a full 19 times cheaper.
This could spell big gains for anyone who acts on it right now.
To get all the details,
go here.
While encouraging economic news can help move a market forward, money flows move for a wide variety of reasons. In addition, markets look ahead, and if you wait for rosy headlines, you'll be very late to the game.
A much better and more conservative approach is to focus on countries where news is dismal and the markets are beaten down...
But you need the right strategy.
Even a 'Skeptic' Can't Resist Right now China is a classic case. In less than a year, it has gone from the financial media's darling to its punching bag.
Now, just so you know where I'm coming from, I wrote a 45-page report early this year called
The China Skeptic: Seven Troubling Trends. The main theme is that the model that has delivered such stunning growth and progress is no longer working, and China's political system makes adjusting to a consumer-led growth path very difficult.
The numbers coming out of China, such as manufacturing, new investment, new export orders and electricity generation (the best growth indicator since it can't be manipulated), are all slowing, in some cases quite dramatically. Manufacturing wages were up around 20% last year, and continue a sharp upward trajectory, while smaller companies are starved for capital.
The political situation is equally troubling. In about a month, China's mandarins will officially meet to announce a once-in-a-decade top leadership change. But the political infighting amongst the factions is both fierce and murky. The expected next president disappeared for two weeks with no explanation and a series of high-profile corruption cases have highlighted that there are really two Chinas - one for the party establishment and their friends, and one for the rest of the country.
We seem close, if not at, the point that John Templeton referred to as "maximum pessimism."
As you can see from the chart below, China's Shanghai stock market is down sharply over the past two years, and lagging many markets by a sizable margin. China's market is very much a momentum market, with about 75% of trading done by individual investors. Turnover was down 20% in 2011, and stock prices have been driven down to make China the second-cheapest market in the world, after Russia.
I can't predict when China's economy or stock market will turn, but I do sense an opportunity. How should you approach investing in China right now? Let me lay out five principles you should follow:
- Start slow and, even better, wait for a turn to begin in the market to avoid the "dead money" trap.
- Stick with the highest-quality companies that have good earnings momentum, since these companies will attract the first wave of capital.
- Target Hong Kong-listed companies whose shares are equally cheap but offer better transparency and higher reporting standards.
- More conservative investors might consider a Chinese exchange-traded fund (ETF) for more diversification and lower risk.
- Always use a 15% trailing stop loss in case you're too early, or to lock in hard-earned gains.
China's stock market will turn at some point, and will usually lead economic turnarounds. Even a skeptic like me thinks it's worth a small bet.
Good Investing,
Carl
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