The Best Trades Around Are Few and Far Between — But They’re Worth Waiting for

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

A lot of U.S.-listed Chinese stocks have reported their third-quarter numbers and, on balance, the growth is very solid. Clearly, the Chinese economy is improving and you can see this reflected in a number of businesses.

The stock market, however, is all about expectations — expectations for the future and investors are a fickle group. I recently reviewed one small company’s third-quarter financial results and the numbers were great. Top-line growth was impressive and so were earnings. Zero debt on the books and solid growth prospects for the future. Yet, investors sold the stock because the trade was over. It’s a great company with excellent growth prospects for the future, but clearly, investors just weren’t interested anymore.

Now this stock is very attractively priced and, in my view, a really good opportunity for investment. Like a lot of U.S.-listed Chinese stocks, this stock performed exceedingly well over the last few months and I think a lot of traders were waiting for third-quarter numbers to take some money off the table from their speculative positions.

U.S.-listed Chinese stocks are risk-capital securities and there are a lot of professional traders that buy and sell these stocks. As a keen observer, I certainly can say that enthusiasm for them occurs in waves — even if the businesses are still doing great.

In the equity speculation business, timing is everything. If you make a list of some fast growing Chinese stocks, I’m convinced that a speculator can make money trading these securities. But you have to get the timing right or it won’t work. I’ve always contended that great companies have a tendency to remain great companies, so if you can get the names, then the real work begins.

At any given time, there are very few if any very attractive trades in the marketplace. The key, in my view, to successful stock market speculating is to be always be watching and waiting to pounce on only the best stocks and only when the timing is right. Don’t let any broker convince you to buy a stock in a rush. It takes time to learn the ebb and flow of a liquid stock and it’s very useful to watch and see how the market reacts to an earnings announcement, a new contract, or some other corporate development.

A lot of successful pro traders don’t trade very much at all. They do, however, watch a lot of stocks all the time. They wait for all the factors to come together, including valuation, sentiment, positive changes in volume, etc. — and then they pounce on a position only when all the factors come together in one great package.

Often, all the indicators don’t come together to form a great trading opportunity. But when they do, the probability of making money substantially improves.