Why Timing Is Everything in Equity Speculation

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

There is a lot of bandwagon investing going on right now and it’s a case of people trying to buy high and sell higher. The broader market is trading on the earnings news of the day, but I can’t escape this feeling that we’re due for a major retrenchment in stock prices. In fact, we’ve been due for a major pullback since early September.

The single most attractive area of the stock market for speculators remains U.S.-listed Chinese stocks, but the pickings now are slim in my view. While this area abounds with opportunity, virtually all of the good companies have already appreciated dramatically in value on the stock market.

There still is a risk premium associated with U.S.-listed Chinese stocks and you can think of it in terms of a lower earnings multiple compared to domestic companies. One thing that’s quite striking about public Chinese companies is that many are exceedingly profitable. You would think, therefore, that the Street would attribute a higher valuation to these companies. But, there is a price for being a foreign business in a developing country.

Successful Chinese companies tend to be exceedingly profitable because their labor pool is so vast and inexpensive. Also, a lot of customers in the Chinese economy tend to be well-heeled government agencies or government-related entities. There is a lot of money floating around China and a lot of it goes right to the bottom line. This is why an equity speculator must pay attention to this sector of the market.

So, we’re left with the question: should investors take on new positions right now? In my view, the answer is no. A trader can certainly try a few momentum trades in some select positions, but I think that investors should now be sitting on the sidelines. Anything could happen to the stock market going forward.

Historically, stocks can do really well in the fourth and first quarters. But, this year has been so wacky. The stock market could collapse again, do nothing, or keep going higher. There is a reasonable case to be made for any eventuality. If it’s one thing I’ve learned over the years, it’s that major wealth creation from the equity market has a tendency to occur in quick, short waves of enthusiasm. In spite of the fact that the main stock market indices are down from their previous levels, there has already been some tremendous upside since March.

In my view, the big money has already been made. Right now, investors who took on new positions after the financial crisis are in full reaping mode. Now isn’t the time to be sowing new investments.