2008-05-28

What To Do With Wildly Inconsistent Stock Advice, Using China as an Example

Last week, I mentioned learning more about Random Walk Down Wall Street author and Professor Burton Malkiel’s view that most U.S. investors are “underweight” in China—and generally that he expects the China stock market to outperform the U.S. stock market by a couple of percentage points or more. A. Gary Shilling of Forbes seems to think the opposite in his recent column, “Chinese Chance”:

If you still own Chinese shares, sell. If you are daring, short-sell an exchange-traded fund of Chinese shares…. Without the export growth and the foreign investment it brings, China’s economy is in trouble.

Shilling’s arguments include:

  • China’s economy is very weighted toward exports (38% of its gross domestic product)—and the U.S. economic downturn combined with similar bad news in Europe and Japan will hurt China’s economy.
  • Real estate prices in China are starting to fall.
  • Construction spending relating to the Beijing Olympic Games is coming to an end.
  • Inflation in China remains very high, with food costs being up about 23%, year over year.
  • China’s stock market is laden with “irrational exuberance.” Among other things, Chinese citizens—who save 30% of their income—tend to invest heavily in Chinese stocks, because bank deposits are unattractive relative to China’s high inflation rates and because they are not allowed to invest abroad.

In my experience, the more personal-finance advice and stock tips you read, the more you find inconsistencies across the pundits. Some magazines even run regular features that show two professionals’ opposing views on a particular stock.

What’s an average or neophyte investor to do? Here are my thoughts on some options.

  1. Read the advice again. Is there as much inconsistency as it appeared at first glance? In the China example, Malkiel and Shilling may not be so far apart for the short- and medium-term, as Malkiel appears to be braced for some turbulence in the near term. And it is less clear from the one-page column what Shilling thinks of China for the longer term.
  2. Consider the audience to which the advice was aimed—and in turn, which advice fits your personal-finance and skill level, investment style and risk tolerance. Shilling both opens and closes with thoughts on shorting Chinese stocks (and how to do it). That’s not aimed at neophytes; so if you’re a neophyte, Shilling’s advice may not be well-suited for you. Malkiel talks more about the “long haul” and wading gently into Chinese stocks with dollar-cost averaging. But on the other hand, Malkiel seems to project turbulence—so if that’s the kind of thing that keeps you up at night, his advice may still not be for you.
  3. Do further research, both to find other views on the sector or stock and to educate yourself more and, if needed, gain confidence in your own viewpoint.
  4. Consult an advisor whom you trust—who could be (though in my view would not need to be) a professional.
  5. Wade in slowly, using dollar-cost averaging or by limiting your exposure to an appropriately small and manageable part of your portfolio (e.g., money you are confident you can afford to lose).
  6. Stay away—don’t buy, don’t short. Stick with broader-based index funds and ETFs over individual stock picks or sector bets. This is probably the best path for a lot of people.

I have done all of these at different times and with respect to different recommendations or condemnations. I’m still in China in a limited way, owning and continuing to dollar-cost average into an ETF. But I have some aggressive tendencies; I’m willing to take on more risk for the chance of higher returns; and my stomach doesn’t churn all that much when markets go up and down. My wife and I also have a reasonably long investment horizon (over 20 years to the “usual” retirement age), and any play we’re making on China is a relatively small part of our portfolio.


Related Posts:

Get More Exposure to China, According to “Random Walk” Author and Professor Malkiel

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