The Enormous Potential of Chinese Stocks

Capital Investments

What You Need to Do to Get Ahead

The Enormous Potential of Chinese Stocks

Years ago, when my wife and I were still living a life of genteel poverty as academics, we just about despaired of ever owning a house. Despite our luck in finding very cheap apartments, our university income, even augmented by extra classes and small speaking engagements, wouldn’t support both our contributions to TIAA-CREF and saving for a down payment, much less what seemed like a back-breaking house payment.

Suddenly—in one of those changes of fortune that seems quick in retrospect but played out like the death of a thousand cuts as we were living through it—we found ourselves out of academia and living like ordinary civilians. After a fairly rough period of adjustment (if you know what I mean), we were in better shape financially and we bought the house that we still live in today.

But the experience I want to write about happened before the big change in our lives, while we were still doing the extensive research that characterizes most academics’ approach to any big decision.

We went to a seminar put on by a local post-and-beam housing builder who had a plan for owning your dream house. Their system, boiled down to its essence, was to buy the cheapest lot in a new subdivision, build a house (post-and-beam, naturally), live in it for a year or two while the neighborhood filled in and became more desirable, then sell out and roll the profit into another new home, but a bigger one this time.

According to these people, if you did this four or five times—choosing your properties well and working on the interior finishing and landscaping that increases salability—you would have made enough to buy your dream house for cash and own it free and clear.

It was an interesting idea, and probably worked for the people who jumped on it. Housing prices began to ramp up in the early 1990s, and they continued to ramp up for a long time.

But what really fascinated me was the evangelical zeal of the sales people, and the strong brand of capitalism they were preaching. People make money, they said, not by saving, but by making capital investments.

Over the years, I’ve come to appreciate what they were saying. Capitalism is about putting money to work and making it grow. If you have some capital and you’re willing to take the risk, you can grow it like crazy. You can also go broke, but that’s implicit in the idea of risk.

I think about this idea when I see stories bemoaning the pathetic savings rates of Americans. Experts (especially those who run savings banks) advise people to save at least 10% of their income … but only 28% of Americans do that.

Tsk, tsk. Shame on you, Americans.

On the other hand, people who think that saving money is the key to a secure future are fooling themselves, at least if they’re putting that money into a savings account.

The stock market makes a habit of punishing optimistic people who get in without proper preparation and don’t exercise caution. But saving generally keeps you crawling ahead while inflation nibbles relentlessly at your net worth.

Saving is what you do to stay where you are. Investing—buying capital goods like stocks—is what you do to get ahead. And what we do at Cabot is to give advice that helps people buy stocks without getting fleeced by the vagaries of the market. Capitalists—even small-time capitalists—need good advice, and we’re here to provide it.

My stock pick today is an exchange traded fund (ETF) that will give you exposure to the collective performance of all the Chinese stocks that trade on U.S. exchanges. It’s called PowerShares Golden Dragon Halter USX China Portfolio (symbol: PGJ), which is a colorful name. What it means is that PowerShares (a family of ETFs run by Invesco) offers one called Golden Dragon (to indicate that it targets Chinese issues) that tracks the performance of the USX China Index run by Halter.
Or, to simplify things, just think of PGJ as a way to get exposure to China without having to buy Chinese stocks or worry about currency risk.

I don’t often recommend ETFs, preferring to research individual companies where I can get an edge by analyzing the story, number and chart on my own.
But a look at the chart for PGJ should show you why I’m feeling pretty good about it right now.

Worries about the economic health of China caused many investors to run away from China as if it were a burning building. PGJ plummeted from above 8,400 in June to below 5,700 in August and again in late September.
But the market is constantly discounting old news and looking at where things might be in six months or a year. And investors are clearly willing to bet that China will be in good shape in the future.

PGJ has rebounded to around 7,255 and is back on top of its long-term 200-day moving average. You can see the shift in investors’ thinking that began in late September and gathered strength during the entire months of October.

If you are interested in the enormous potential of stocks from China (and every other emerging market in the world), you should consider a subscription to Cabot Global Stocks Explorer. You can learn more about it here.

But if all you want to do is dip a toe into that exotic world, PGJ will give you some exposure to China with less volatility. PGJ is thinly traded, but a small investment will give you a taste of Chinese stocks.


Paul Goodwin
Chief Analyst of Cabot Global Stocks Explorer
and Editor of Cabot Wealth Advisory

Timothy Lutts

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