You Can’t Predict the Market

You Can’t Predict the Market
The Real Rules of Stock Investing
The App Store of China?

The universe has a couple of laws that it’s really fond of. They apply to everything and they never get broken. The Law of Gravity is one. But my favorite is the Law of Unintended Consequences. It applies to almost everything, and its power of enforcement is unrivalled.

This is the law that says that you can’t anticipate what will happen when you mess with a complex system.

If you’ve been reading anything at all about the global economy in the past 10 years, you know that the story about China preparing to knock the U.S. from its pedestal as Big Dog of the Entire World has had real legs.

There’s an almost infinite number of ways to spin the story, most of which just point out the ideological predilections of the writer.

Patriots rail against the decline of the U.S. and demand action to keep America in the lead.

Historians seek parallels in the declines of the great empires of the past.

Economists either calmly confirm the trend, or point to more-or-less probable factors (lack of oil, scarcity of water, political unrest, real-estate bubbles, corruption, natural disasters) that might interrupt Chinese progress.

As growth investors, my fellow Cabot growth writers and I will always fall back on the Law of Unintended Consequences to explain why we don’t indulge in predictions.

But instead of calling it that, we will often refer to Thomas W. Phelps, the author of 100 to 1 in the Stock Market, a 1972 book that detailed his method of picking stocks and holding patiently.

Phelps believed (and so do we) that if you buy good stocks, you put yourself in a position to benefit from “the unforeseeable and incalculable” events that could send stocks soaring.

Personally, I believe in painting a broad-strokes picture of China and the emerging markets. The more detailed you get, the more complex the picture becomes and the less certainty there is in the validity of any predictions. More data = less certainty, not more.

Understanding that the future of China, the U.S. and the world is too complicated to predict actually frees you up from worry.

Just pick good stocks, watch the headlines and take comfort in being able to sell out your entire holding in an hour if you need to.

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I remember a (bad) old joke that was a favorite tool of speech teachers. A man in the Old West accepts a ride on a wagon pulled by a mule. The driver is bragging that the mule will do anything he’s told. But after several unsuccessful attempts to get the mule moving, the driver gets off the wagon and hits the mule between the eyes with a big stick.

When the driver resumes his seat and says, “Giddap, mule,” the animal starts walking.  

The passenger, appalled, says, “I thought you said he’d do anything he was told.”

The driver says, “He will. But first I have to get his attention.”

As I warned, it’s a bad joke. Nonetheless, it aptly demonstrates the need to sometimes resort to dramatic measures to get attention.

On the Internet, data continually pours forth like water out of a pressurized hose. This informational overload makes the problem of getting people’s attention more acute than ever.

And the Internet, with its continuous river of messages, all competing at the top of their lungs for your attention, is making the problem of getting people’s attention more acute than ever.

Ads are now galloping across our browser pages or ballooning out or popping up to obscure the content we’re trying to read. They’re also flashing, animated and lurid.

But the greatest ingenuity and most diabolical creativity go into the headlines that try to grab us in the 10th of a second when our eye drifts across them. You know what I mean:

•    The World Will End Tomorrow! (How You Can Profit From It)
•    The One Simple Trick That Will Make You Rich (or Skinny, or Whatever)
•    The Huge, Ancient, Shocking, Earth-Shaking Investing Secret That Will Make You Rich Right Now
•    The Good News Behind the Recent Bad News
•    The Bad News Behind the Recent Good News
•    The Investment Secrets of [insert name of famous rich person here]
•    How I Built My Portfolio From 38¢ to $12 Bazillion in just Three Days

I haven’t seen one that says, “Read This or Die!” But I won’t be surprised when I do.

A good headline is hard to resist. However, to uphold sanity and maintain some basis in reality, I’d like to present a quick antidote to investment hyperbole, alarmism and downright lying.

Here are the real rules:

No investment system works all the time, or for everyone.
No investment system works overnight.
There is no way to achieve big investment results without taking on big risks.
There is no investment system that will work without demanding a significant chunk of your time, energy and hard work.
There is no investment system that will not sometimes require you to absorb losses.

Or, to boil it down even more, “Ain’t no easy; ain’t no always; ain’t no perfect; and ain’t no safe.”

So, if you want to do some investing, how do you slice through the mounds of hype and hysteria and find some real investing advice?

My suggestion is to look at Cabot’s lineup of investment newsletters.

I know it sounds self-serving, since I work there, and there’s no doubt that Cabot is in the business of trying to make money.

But Cabot has worked hard to build and maintain a reputation for solid, authoritative investment advice, and our ultimate goal is to turn interested readers and first-time subscribers into long-term customers.

And the only way we can do that is by helping you make money. (Personally, I think we’re darn good writers, but I don’t think we’re good enough to keep people reading if our advice doesn’t prove profitable.)

If you have a taste for action and a tolerance for volatility, the Cabot China & Emerging Markets Report (which I write) is an aggressive stock advisory that any growth investor can come to love. China is still the Big Dog in the emerging world, and opportunities in skyrocketing Chinese companies can deliver big results when the international investment community is paying attention.

Don’t make me hit you between the eyes with a stick. You can get started by clicking here.

Labeling Chinese companies with the names of the U.S. companies that they most resemble is a mixed blessing. Sure, Baidu (BIDU) may really qualify as “the Google of China,” and’s (SINA) Weibo service is a good ringer for “the Facebook (or Twitter, or TwitBook) of China.”

But does it do justice to a tiny, young company like Sky-Mobi (MOBI), incorporated only as far back as 1997 and booking just $96 million in revenue in 2010, to call it the App Store of China?

After all, Apple’s market cap is over $300 billion, and the Apple App Store has officially booked its 10 billionth download.

Maybe not, but stock investors, especially those with a taste for the accelerated pace of growth in emerging markets, are always looking ahead a little farther than most observers. And investors see a company whose Maopao mobile application store is being pre-installed on more and more handsets sold in China.

It’s also a company that signed an advertising deal with (SOHU), one of the most popular websites in China, which will allow Sohu’s clients to publish ads on Sky-Mobi’s MRP ad network.

Maopao software is already pre-installed in over 6,600 handset models in China and Sky-Mobi’s partners offer an enormous range of games, books, music, payment services and social networking opportunities.

What everyone really knows about Sky-Mobi is that the enormous population of China has embraced mobile phones, smart phones and life online with great enthusiasm and that revenue has jumped from $2.7 million in 2008 to $80 million in 2010. That’s huge growth, and the potential has only begun to be tapped.

The combination of a fertile sector and an attractive business model has pushed MOBI, which debuted at 8 last December, but quickly dipped below 5.5 in January, to near 14 in recent trading. The stock is still thinly traded, and the company has just one profitable quarter under its belt.

But for those who appreciate potential and like to get bets down early, MOBI is a great speculation.


Paul Goodwin
For Cabot Wealth Advisory

Editor’s Note: To learn more about high-potential emerging markets stocks like BIDU, SINA, SOHU and MOBI, and the proper way to handle them, click here. Cabot China & Emerging Markets Report is the place to discover the top stocks in these fast-growing markets.


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