— by Mitchell Clark, B. Comm.
The stock market is churning, not knowing whether it’s in a mini bull market or not. It’s still amazing to me that Wall Street is now in part, taking direction from the trading action in Shanghai. This is truly a revolution in capital markets that’s only recently developed. At the speculative end of the market, the only really attractive place to be is in U.S.-listed Chinese stocks. There just isn’t the growth or the profitability available in any other sector of the equity market.
For domestic speculators, the number of investment opportunities in Chinese-related businesses is increasing, but the marketplace has become quite attuned to the best stories. This means that great stories don’t stay cheap for very long.
If I wanted to be speculating in equities today, I’d likely put together a basket of the most attractive U.S.-listed Chinese stocks. I’d allocate some risk capital dollars to this specific purpose and it would become my foreign investment fund. At the very least, I’d take this pool of capital and split it up in about five equal parts. Twenty percent of the pool would be allocated to each speculative story as it came up. I’d maintain strong risk management and consider a 30% stop limit on each position and, for any profitable positions, I’d maintain rolling price floors for cashing out.
This is how I approach the equity speculation business. It’s diversified and adaptable with a strong adherence to risk. I’ve always looked at the stock market in terms of risk, not in terms of potential return.
In the end, you have to go with the flow of the marketplace and, like any business, you have to adapt and change your strategy to what works at a particular point in time. You also have to have patience to let the stories develop and for the marketplace to recognize what a business has actually created. There is no right answer to what price is appropriate for a stock. There’s only the marketplace’s perception of that value.
Finally, I have to say that if you want to be in the equity speculation business, it’s awfully difficult to do so without being immersed in the marketplace on a full-time basis. Like the golf analogy, practice makes perfect.