How to Become an Instant Expert

Instant Expertise


A Chinese Stock for Your Watch List

For the last 18 years, I’ve been leading film discussions at The Music Hall, a wonderful old theater in the heart of downtown Portsmouth, New Hampshire.

Once or twice a month, I do some research on a movie that’s showing there and talk it over with a small group of film enthusiasts after the film has screened. I give a little background on the film–who directed, who wrote it, how it got made, etc.–and we talk it over. The Music Hall supplies the coffee and popcorn.

I realized the other day that the process of familiarizing myself with a movie in preparation for a discussion is a lot like doing research on a stock before buying it.

Like a movie, each stock has a story. Companies are founded to provide particular goods or services, and their business strategies can be all over the map, from modest niche businesses to grandiose, world-changing enterprises. And it’s often the story that first attracts investors to a stock. There’s nothing like a “can’t miss” business proposition to fire the imagination.

In the same way that we describe a movie as a comedy, drama, action or horror flick, stock stories fall into larger categories like growth stocks, value stocks, income stocks or penny stocks.

I don’t want to belabor the metaphor, but what’s important is that the more you research a movie, the more you appreciate it … up to a point. (I don’t have a lot of patience for the kind of film buffs who obsess about the minutiae of cast lists and other trivia.)

And the more research you do on a stock, the better your results will be … up to a point.

The kind of research I’m talking about is the kind that makes you an instant expert. That’s someone who can take in lots of information, make sense of it, make a decision about it and then mentally throw it into the shredder.

Once you have done the research on a stock–which will probably include revenue and earnings history, the chart (price and volume tendencies, resistance and support levels, patterns, trends, gaps and splits), and the competitive landscape–you will make a decision to buy or not buy based on what you find. Plus you’ll take into account the general health of the market.

But once your decision is made and you’ve bought the stock, you can probably toss much of that instant expertise into your mental recycling bin. It won’t do you any good.

A stock that you own should be managed by looking at its chart, with occasional glances at any new headlines or earnings results that pop up.

A stock’s chart will tell you all you need to know because it’s a record of every buying and selling decision made by every investor in the market. If price and trading volume are rising, the sun is out and everything’s fine. If price is going up and volume is dropping, you need to be paying special attention, and maybe considering a little profit taking.

I answer a lot of questions from investors who want to know why a stock is going up or down. Sometimes I can even tell them why, especially if there’s an earnings report or an analyst’s rating change involved.

But in a more fundamental sense, you don’t really need to know why a stock is going up or down. If the direction is down, it probably means that all of your instant expertise won’t pay off, at least in the short run.

The bottom line here is that you should try to avoid falling in love with your own research. Your instant expertise about a company can bring you to a buying decision that represents favorable odds.

But if the stock’s chart doesn’t confirm your bet, it makes no difference that your research showed that the price should be going up. Stocks love to laugh at our expertise; it’s one of those things that keep us humble. Don’t fight the chart.

I recently ran across an article that was written by Charley Reese, a columnist for the Orlando Sentinel. It’s known on the Web as “545 People,” meaning the president, all the members of both houses of Congress and all of the justices on the Supreme Court.

Reese wrote the column first in the 1980s, and it’s a nice rant, blaming the 545 people who lead the government for everything that’s wrong with America. The original 1985 column asserts that these 545 people ” … are directly, legally, morally and individually responsible for the domestic problems that plague this country.”

That’s a big claim.

Well, actually that’s not quite fair. What he says in his 1995 version of the column is that “Anything involving government that is wrong is 100% their fault.”

That’s a bit more reasonable, but it still chaps me more than a little.

As far as I know, not one of those 545 people elected or appointed themselves.

Our Constitution has a preamble that begins “We the People,” not “We the government” or “We the politicians.”

And while I bow to no one in my impatience, dissatisfaction and disgust with the ideological cat fight that led to the debt ceiling crisis, I think it’s a mistake to blame it all on the politicians.

We are a representative government, and right now our government represents quite accurately the polarization and radicalization of the American people. Part of this can be attributed to the economic morass that is keeping unemployment high and home sales low.

But some of it is a direct result of our increasing intolerance of opposing views and our gullible acceptance of the idea that our political system is the right place to handle questions of morality or political philosophy.

We have been manipulated by cynical political strategists into being a heck of a lot more radical than I can ever remember. And when we let politicians play to our worst instincts and exploit our least reasonable impulses, we get the kind of bitter political impasse that has darkened headlines for the past months.

I don’t have a handy solution except the one that our Constitution recommends, and that’s the ballot box.

I’d like to see more politicians smoked out of their foxholes on the extremes of the political battlefield and forced toward the center.

If I can find a good moderate of any political stripe, he (or she) will have my vote.

I am so tired of extremists on both sides I could just spit.

I will accept responsibility for seeking out leaders who understand tolerance and compromise (which have been turned into dirty words despite their appeal to our Founding Fathers).

Together, we can rebuild the middle of the American political landscape. I invite you to join me. All you need is a voting booth.

My stock pick today is a recommendation for your watch list.

I included (SINA) in the portfolio of the Cabot China & Emerging Markets Report on October 1, 2010. SINA was trading at 51 then, and I was attracted by the company’s consistent revenue and earnings growth and by the beautiful 10-month base the stock etched beginning in November 2009. There was a lot of value stored up in SINA, and when it broke out above its old resistance, I recommended buying it.

After taking profits twice, we finally sold our SINA holdings in early June, as the stock was correcting sharply on high volume.

I never really lost faith with, but letting a correction eat your profit (especially when the Cabot China-Timer was flashing an emphatic warning signal) is a great way to turn a gain into a loss.

Since that sell in mid-June, SINA has bounced back well, and looks to be entering a new consolidation phase.

The big story for is, of course, its Sina Weibo microblog service. Sina Weibo is the first really successful microblog service to be tolerated by the Chinese government. The Chinese authorities have been severe in banning the most successful U.S. services like Twitter, Facebook and YouTube because they fear that they have been used to coordinate protests and create unrest.

Sina Weibo is approved because is a know quantity, a company that knows what content will and won’t be tolerated and enforces the rules enthusiastically.

My feeling is that SINA is in the process of building potential value, and what I’m hoping for is a calm consolidation that tightens into a range between 105 and 115. If that happens, a break above recent resistance at 125 will be a proper buy signal.

Keep your eyes on this one. I will too.

And if you want continuing advice on and other top Chinese or emerging markets stock that trades on U.S. exchanges, check out the Cabot China & Emerging Markets Report.  Hulbert Financial Digest recently named it the #2 investment newsletter for five-year performance! With an annualized return of 17.2% for the five years ending June 30, Cabot China & Emerging Markets Report is stomping versus the Wilshire 5000’s paltry 3.4% gain during that period. Click here to learn more.


Paul Goodwin
Editor of Cabot China & Emerging Markets Report


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