Have to Be Ready to Jump Ship

As evidence of how fast China stocks can move, consider New Oriental Education and Technology Group Inc. (NYSE/EDU), which was just mentioned in my previous column.

When I first started recommending this company at the end of October, the stock was trading at $24 per share. Now it is trading at over $34 per share. This is serious capital appreciation in a very short period of time.

Another one of my favorites, American Oriental Bioengineering (AMEX/AOB), is going up right now. I recently recommended the stock at $8.50 per share, now its trading over $10 per share. This is in a span of just one week.

Performance like this is very rare in the stock market, so I feel like my picks have had some good luck on top of good fundamentals. In my mind, it really serves to illustrate the power of the investing marketplace when it settles on a good idea.

China stocks are a good idea for a speculative equity portfolio, but you don’t want to get carried away. Stock market speculating (make no mistake, all stocks are speculative) in China is a high- risk proposition. These American listed stocks also trade on Chinese stock exchanges and there is still an element of what I call “Wild West regulation” in that country.

What I’m saying is that the free market economy and regulation of the equity markets are still at an early stage of development in China. The market action in that country has proven that what can go up can most certainly come down even faster. If you own China stocks in your portfolio, you have to be ready to pull the trigger and get out of them on short notice.

This makes me think of my cardinal rule for investing: Investment risk is always more important than potential return.