The Market You Play In

What’s the most important quality to have as an investor?

I’ll tell you what I told Wealth Eruption subscribers yesterday: emotional stability.

No matter how smart you are or how good you are at financial modelling. You’re bound to hold losing stocks at one point or another.

It would be wonderful if you or I could pick the bottom and top points for hundreds of stocks. If we could do that, you’d have no reason to read this article and I’d have no reason to write it.

But because no one can predict when a stock will bottom out or reach a 52-week high, it’s probably best you keep reading.

Even picking a winner within the week or month is an incredibly hard feat. Sure, you might get lucky once in a while. But you, me and everyone else has about as much chance of consistently picking ASX winners month-to-month as an orangutan.

And it’s because you’re not playing in one market, you’re actually playing in two.

Bearish and bullish on China at the same time

China and a trade war: It’s not a recipe for short-term returns.

It’s why Chinese stocks have fallen dramatically in the last few weeks. As long as Trump continues to increase tariffs, you’d expect the situation to get worse.

Take a look at what The Washington Post wrote earlier this year:

China has more to lose economically in an all-out trade war. The Chinese economy is dependent on exports, and nearly 20 percent of its exports go to the United States. It sold $506 billion in stuff and services to the United States last year. In contrast, the United States sold $130 billion to the Chinese.

“In a serious economic battle, the U.S. wins. There is no question about it,” said Derek Scissors, a resident scholar at the American Enterprise Institute who has helped advise the administration on China.

But why is everyone down on China?

Well, they’re an exporting nation. A lot of jobs, spending and growth in China depend upon these exports. Introducing taxes could shift demand for ‘Chinese made’ to somewhere else.

A similar situation happened in 2008.

But instead of tariffs, it was household wealth reducing demand for Chinese goods. As you may recall, millions of US homes saw their ‘value’ decline dramatically in 2008.

US consumer wealth fell, which caused demand to fall also.

The US was importing less from China. Factories in the Middle Kingdom that were operating on thin margins had to close their doors.

Millions of Chinese workers lost their jobs. 

Not only did this stunt Chinese exports, but spending declined in toe. It’s why China’s gross domestic product (GDP) growth took a big dive in 2008–09.

MoneyMorning 24-07-18

Source: Trading Economics
[Click to open new window]


But what happened shortly after that? Take a look at the chart above. Slowing GDP growth was only temporary.

Yes, it was a blow short-term. But long-term China has continued to steam ahead. And I expect they’ll do exactly the same with a trade war over their heads.

It’s why investors like Platinum Asset Management Ltd [ASX:PTM] are still bullish on China. Reported by The Australian Financial Review:

Last week, Platinum released their quarterly report which showed most of their funds had underperformed during the quarter, which Mr Smolinski (a portfolio manager at PTM) said was due to the company’s big exposure to the underperforming Chinese market and limited exposure to the outperforming US market.

“We’ve got 25 per cent of the portfolio in China,” he said. “We have almost no net exposure to the US market. Net stock exposure is only a couple of percent and we’re in an environment when the US is heavily outperforming the rest of the world.”

He said that while tariffs and trade uncertainty had hurt the Chinese market short term, there was a definite long-term growth story in the country.

“I think you look over the last five years, we’ve generally been positive on China,” he said. “One thing we’ve been fairly clear on, this economy has been an investment-led economy. We’re now starting to see the wealth effect and standards of living starting to rise.

“People will want to consume more, they will want to spend on healthcare, life insurance, consumer goods and household goods. A lot of things can happen in China but companies that are exposed to consumer spending should do well.

“China is a major engine of global growth and people are now starting to question that. We understand short term this may slow the economy but if you’re talking a long-term view, this is an unmitigated positive.

Outlasting them all

This kind of thinking can be applied multiple ways.

For example, you might take a long-term view on iron ore, real estate or individual stocks. While these assets might decline temporarily, the more important question is what will they do long-term?

Long-term thinking about the latter could potentially save you hundreds of thousands of dollars.

Jumping into a stock and expecting to make returns immediately is a fool’s errand. It would be far better to expect huge returns over time and expect you’ll hold a paper loss until then.

This would not only discourage you from selling losers two months in. It could also help you pick up hundreds of missed opportunities.

So when you next enter the market, try to think of the markets you play in. In the short-term you might have to hold some losses. But in the long-term, you’ll be rewarded for correct analysis.

Your friend,

Harje Ronngard,
Editor, Money Morning

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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