(Public) Memo - Better To Be Lucky Than Good

By: Wilson

On Sept 3, I alerted to subscribers that I would be making some big changes to the HFI Portfolio. As a result of the trade alert, we sold out of VRN and VET at a loss, while we took a sizable position in Alibaba (BABA). Subscribers had advanced heads up beforehand with a memo released on Sept 1.

Fast forwarding to today, Alibaba along with other Chinese tech stocks have gone on a tear as China embraces the equivalent of QE from the Fed back in 2010.

If you think this was skill, please think again. This was 99% luck and 1% skill.

Why?

Because the same long argument for Chinese tech stocks could have been made 18 months ago or even 6 months ago. In fact, I looked at Tencent earlier this year and chose to not make it a meaningful position. What's the catalyst? Why will Chinese stocks re-rate?

However, I think being a beaten-down energy investor has helped improve my process in analyzing other sectors/stocks.

How so?

In energy investing, if you had only invested when things became extremely obvious, you made money. Similarly, if you sold when things became extremely obvious, you exited perfectly.

Anytime the setup gets murky, and things get uncertain (like what we are seeing today), the market always sells first and asks questions later. This perpetual beat-down has forced me to always ask what the catalyst is. Let's be honest, this journey so far in energy is far from easy, and some people have quit as a result. Who can blame them?

So looking back on the timing of the Alibaba long, I think there was a very obvious catalyst (with the benefit of hindsight). It was the conclusion of the antitrust review. What's funny about this event is that if you look at the stock price reaction on that day, it was down slightly. I guess the market isn't always so efficient...

What are my plans next?

I think the surge we are seeing in Chinese stocks is a good sign, but likely a premature one. Both the monetary and fiscal stimulus that China is going to embark on will have to materialize and actions need to speak louder than words. From a very objective view, I think there have been a lot of ticky-tacky fiscal stimulus announcements, and nothing concrete enough to make me think a seismic shift is here. China has far more long-term issues than it likes to believe, so there needs to be enough of a fiscal stimulus to really boost demand here.

But like all things markets, the stock market is usually a good gauge for both sentiment and the economy. Following this initial surge and after the hype dies down a bit, I will want to see 1) improving economic data and 2) material fiscal stimulus announcements.

As for my investment in Alibaba, I plan to hold this as I believe the stock remains extremely undervalued relative to its long-term prospects. I don't have a price target on this name, but if my experience in energy investing is telling, things will get rather obvious when it's time to sell (think crazy bubble signs).

I do wonder...

Now if we look past the Chinese stock market fever, I do wonder about the implications for the global macro markets here. The Fed is starting to ease, China is stimulating, gold is saying inflation is coming back, and oil prices are down?

a = b, b = c, but a (≠) c?

I don't know. Maybe I'm too biased to see the truth for what it is. And it definitely doesn't help that the media is publishing premature/fake news.

On the other hand, WTI is doing precisely what I thought would take place. It's back to where it last broke down, and if my thinking is right, then the move below $67.50 was a false breakdown, which should be validated here.

I think the market attempted to rebound back to the $75 level, but the technical resistance around $71 to $73 was too much. This retest was needed for the market to gain more confidence. We are doing it now, so please watch this area closely. A break below $67 would imply a downside back to $62 and possibly $55.

Other stocks I'm looking at...

Aside from energy and Alibaba, there are other stock ideas I'm looking at that could be worthwhile. They are Paypal, Lululemon, and Nike. I think all 3 companies are worth a look as 1) the brand value is exceptional and 2) I think they are going through a temporary hiccup.

From a valuation standpoint, these 3 stocks will not be as cheap as some of the energy stocks we own, but they are long-term compounders that would be nice additions to the portfolio. I think a balanced approach makes sense going forward, and we will do deeper dives on these names.

Better to be lucky than good...

Maybe it's skill, maybe, but I think it's far more luck than skill. I do, however, strongly believe that my experience as an energy investor will equip me with the skills to handle any other sector. Perhaps this is like the Chinese farmer story, a bad thing is not a bad thing... I don't know, or maybe I'm just trying to cope with the fact that I've sucked at investing since 2016.

I guess time will tell. Have I obtained the skills to translate my energy investing skills to other sectors? I don't know, but I hope I can get more lucky often. It sure beats being skilled.

Analyst's Disclosure: I/we have a beneficial long position in the shares of BABA either through stock ownership, options, or other derivatives.