Four Rules for Measuring Expertise

Should You Listen to that Expert?

Four Rules for Measuring Expertise

A Chinese Stock That’s on a Roll

The online brokerage I use to do my personal stock trading just added a new feature. It’s called “Social Signals,” and it offers me (via Twitter) a way to “tap into an extra source of ideas about stocks.”

I’m hardly technophobic. I’m on Twitter and Facebook and I spend much of my day trolling the Web for information about stocks and market.

But I can’t say that it would occur to me to solicit the opinions of random strangers on Twitter to get ideas about stocks, much less actually pay any attention to them. And I’ll tell you why.

I believe in expertise. I think people who have lots of knowledge and experience are likely to be more helpful to me in finding reliable information and solving problems.

Yes, I know that many experts are pumped-up idiots who have outlived their usefulness and are just cruising on their reputations. And others are just mouthpieces for companies that want to sell me something.

And yes, I know that experts frequently disagree with one another.

I get that. Not all experts are what they’re cracked up to be. And certainly not what they themselves say (or think) they are.

But I believe I can (usually) tell the difference between someone who genuinely knows what they’re talking about and those who are trying to spoof me into thinking that they do. Sometimes it’s in what they say, sometimes in how they say it. And other times it’s just the name of the website where they say it.

What I don’t understand is why people who distrust experts are so willing (eager, even) to trust complete strangers. Personally, I prefer to follow a simple set of rules in deciding whether to pay attention to someone else’s opinions or advice. I developed these during my college teaching days to give my students guidelines for judging expertise. I hope you find them useful.

1) Does the expert have any expertise? Any idiot can take to the Internet, radio, television or an orange crate in the park and give opinions … and many idiots do. But I want to know that my expert has some experience—either academic or practical—to bring to the table. Just having an opinion isn’t enough; you need to have a record of training and performance. That’s why your doctor’s diplomas are on the wall. Ditto for your mechanic’s training certificates.

2) Is the expert wearing a corporate leash and collar? Specifically, is the expert being paid by a commercial interest to sell a product? The days of the boiler room stock pumpers may be over, but I still get lots of stock “tips” from fly-by-night stock touts telling me about a penny stock that’s ready to explode higher. And we hear plenty of horror stories about brokers who get kickbacks for recommending certain investments.

3) Does the expert ever admit to being wrong? Anyone who claims to have a perfect record in their predictions, whether it’s about stocks or sports events or elections or what that crease in your palm means, is probably guilty of painting over a few inconvenient facts.

These guidelines for evaluating expertise can be used on all kinds of experts, from real estate and insurance agents to doctors and automobile mechanics. Doing a quick check of history, objectivity and honesty is never a bad idea.

The one source of information I’m always willing to trust implicitly is the chart of a stock or a sector or an index. The chart represents all the opinions of all the competing players and their various motivations. The market sums them all up and the chart goes either up or down or sideways.

And finally, because I want to be completely honest, I have to admit that my academic checklist for evaluating experts had a fourth item. With a few updates, here it is.

4) Does the expert have an ax to grind? If a so-called expert has an ideological line to conform to, I’m immediately going to discount what they say at about five cents on the dollar. I would no more trust a spokesman for either the Republican or Democratic Party to comment on politics than I would trust Fox News or MSNBC. A constant diet of pre-digested opinions that hew to a particular point of view is useless, and deadens your mind to either nuance or contrary positions. An expert being paid by Ford will never tell you to buy a Chevy. Beware.

And similarly, right in my own bailiwick, a growth stock expert will very seldom tell you to start buying value stocks. But I promise I’ll try to be more neutral in the future.

But I’m not ready to throw in the towel on growth stocks quite yet. My recommendation today is a Chinese stock (Surprise!) that’s been on a roll since the middle of March. It’s NetEase (NTES) and here’s what Cabot’s analysts had to say about it in the May 4 issue of Cabot Top Ten Trader.

Why the Strength

The major Chinese Internet portals—like NetEase, Sina.com and Sohu.com—all provide a wide range of services that include news, weather, sports, email, shopping, messaging, search and entertainment. But each portal also has a specialty that sets it apart from its competitors. So, while NetEase is the largest e-mail provider in China (over 740 million registered users) and has one of the most popular portals, including mobile offerings, its differentiating specialty is games. NetEase is the top developer of in-house-designed games in China, with popular titles like Fantasy Westward Journey II, Ghost II, Tianxia III and Heroes of Tang Dynasty Zero. The company is also the sole Chinese affiliate of Blizzard Entertainment, and has offered World of Warcraft and other Blizzard titles, since September 2009. By keeping content fresh, NetEase can make money from subscriptions and sales of in-game items. After a couple of years with just 15% growth, revenue accelerated to 26% in 2014. And estimates of earnings growth are for 14% in 2015 and 19% in 2016. NetEase, which pays a higher-than-usual dividend for a growth stock (forward yield is 1.3%), will be revealing its Q1 results on Wednesday, May 13, after the market closes. From the recent strength of its stock, investors appear to be expecting good news.

Technical Analysis

NTES has been in an uptrend since late 2012, but several large pullbacks—the latest was a dip from 118 in February to 94 in March—have made it tough to stick with it. The rally that kicked off in the middle of March has lifted NTES from 94 to nearly 130. Despite that rally to new price highs, NTES is trading at a reasonable trailing P/E of just 22. We think NTES is buyable on any pullback of a couple of points, although you should keep any buying small this close to earnings. A stop a bit below the rising 25-day moving average, now at 117, will provide protection.

Suggested Buy Range: 124-128

Suggested Loss Limit: 114-116

Note that the rising 25-day moving average is now around 121.5, and adjust the buy range and stops accordingly.

Sincerely,

Paul Goodwin
Chief Analyst, Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory

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