The economist contrarian indicator strikes again, they made China's economy the cover of their magazine 3 weeks ago. you cant make this shit up
The problem with China equities is fundamental: The CCP does not care whether or not shareholders make money, and China corporates (SOEs of course, and increasingly private companies too) are first and foremost a tool for the Party to achieve political goals. This is doubly true when it comes to foreign investors (portfolio investors; there's a partial exception for politically useful pawns like Elon Musk and VW). And the trends in this regard are in entirely the wrong direction. Xi Jinping is 71, so I doubt we'll be seeing any major shift in his view of the relationship between capital and the Party. The next window for a major secular bull market will open in ~8 years or so, once the succession narrative gets going - depending on who's on deck. Until then I feel confident in saying that a sustainable secular bull market in China is impossible, as the prospect of steadily improving earnings/shareholder returns just isn't there.
This feels like another round of the "China is uninvestable" talk, which usually means sentiment is hitting an extreme—and that is a bullish signal. KWEB has dropped from $110 to $34, so it’s looking cheap, and BABA’s forward P/E is pretty low, making the valuations attractive. Plus, the Chinese government is basically saying they want to boost stocks, which is a solid catalyst. So, with sentiment, valuation, and a government-backed push, it’s a strong setup. I’m skipping all the overthinking and chatter. The tricky part is knowing when sentiment really is at an extreme—people often think they’re being rational, but they’re just going with the crowd because it feels safe, and that’s exactly how extremes work. In the end, any stock market is investable at the right price.
Eh, BABAs PE (ttm) looks to be around 27 which is only slightly below AAPL, META and actually higher than GOOG (34, 30 and 23 respectively). And those cashflows need to be discounted for “CCP risk”. You are at least from Brazil. For Americans and probably Europeans, China equities are certainly un-investable anywhere near current levels. I’d estimate a war over Taiwan has at least a 25% chance of occurring in the next 8 years, and if it does my position, as an American, will be zeroed out with a total loss of capital.
I’m giving a 100% chance that China takes over Taiwan by 2050, a 100% chance nuclear bombs will be used in a military conflict by 2500, and a 100% chance there will be a war between AI and humans by the year 3000. Timing is everything, though. There are a lot of unknowns and possibilities: -China is flexing its muscles to increase the odds of taking Taiwan without a fight, but journalists see this as a rising chance of war. This affects the consensus that conflict is inevitable. People swarm to consensus like ants to sugar. -China might wait until its economy is in better shape before making a move, instead of during their current real estate and economic mess. So, a "buy stocks in a panic, sell into euphoria" strategy could work well. -China took control of Hong Kong with the national security law, and no one did anything. The easiest path forward is for the world to just let China have Taiwan. Sure, the world could hurt China, but China can hit back. Everything is made in China these days, and the disruption to supply chains would be massive. -The U.S.'s best play is to talk tough and act like they’ll defend Taiwan at all costs, but when things get real, they’ll quietly back off while saving face. The odds of that happening aren’t zero. -If there is a war and China stocks get delisted, one could probably buy the same stocks in the HK stock market. In the long-run, those stocks will be valued by their economic prospects, not this political dance I learned a key rule in 2009 which I will never forget: everytime you are thinking of buying an stock index in a country, there will be 10 reasons (or more) why you shouldnt do it, that is not enough not to invest. I do know that sentiment is at an extreme, price is down a lot, valuations are good and the government just told everyone to buy, the odds of this or that to me is just second guessing, most likely that is in the price already
I've been looking to formalize my trading and investing strategy to stick to it with more discipline and reduce mistakes. One idea I've been exploring is rating entries and exits on a scale from 1 to 5 stars (like hotels, essentially rating investments as a "hotel" for my cash). This would serve as a guide on whether I should be buying, adding, selling, or exiting a position, using sentiment (contrarian indicators), price, valuation, and catalysts as the main factors. Take gold, for example. I'm bullish on it from a fundamental perspective, but as an entry right now, with all the buzz around it—Taleb tweeting about its 30% YTD gains (X brags after often a contrarian signal), and gold cheerleaders celebrating—I’d give it 0 stars. Meaning I wouldn’t buy or add at these levels; I’d just hold what I already own. But if it’s 0 stars for entry, I also have to consider whether it’s time to exit. In this case, I’d still rate it as 0 stars (maybe 0.5 for an exit). The contrarian indicators aren’t flashing red yet—mainstream media isn’t hyping it, just finance people, and the price is grinding up steadily, not going parabolic, and the fundamentals (China and Russia buying) still look good. So, with 0 stars on both entry and exit, I’d simply hold. Now, China tech stocks—those get a different rating. Two weeks ago, before the stimulus, I would have rated them 3 stars. Sentiment was in the gutter (when a major stock index is called "uninvestable," it’s usually a bullish signal), Wall Street was hating on China weekly, and valuations were attractive (BABA's forward P/E was in single digits), you would get lynched for simply bring China up as an investment. But there were no catalysts. So, it wasn’t a 5-star setup, more like 3. Fast forward to now, post-stimulus: sentiment has improved, and valuations have risen slightly, but we now have a major catalyst (the government is literally funding stock buybacks). Still, there are risks unique to China that you don’t get in the U.S., so I wouldn’t give it 5 stars (like U.S. stocks in 1974 when Buffett went all-in). But I’d upgrade it from 3 to around 3.5-4 stars. A prime example of a 5-star entry was Bitcoin during the COVID panic in 2020 and 1974 in US stocks during the oil recession. This is the framework I’m building. I always ask: how do I rate this position as an entry? How many stars? If it’s 0, then what about as an exit? If it's also 0, I hold. But if it's above 1, I need to figure out how likely it is to move from a 1-star to a 5-star opportunity. True 4-5 star exits are rare—those are your classic bubbles like Japan in ’89 or Bitcoin in 2017. I can’t count on a 5-star exit; it likely won’t happen. But moving from a 1 to a 3 is possible, or it could flame out earlier, so its an art more than a science. For instance, in 2021, Bitcoin never reached a high star level by my metrics. The price didn’t go parabolic, and mainstream signals were limited in Bitcoin specifically. So my exit at that time was more of a 1-1.5 star exit. But in 2017, when the price doubled in a month and SNL did a skit about Bitcoin, that was a 4-star exit for me. This is the framework I’m trying to formalize, write down, and follow more strictly—to reduce wishful thinking and mistakes. Thanks for coming to my TED talk.
So, let’s say I find a 4- or 5-star entry trade—should I go all-in? The problem is, sometimes even the best analysis will be wrong. The unexpected happens, and tail risks? Yeah, they’re real, and they’ll bite. So you can't go all-in, even when it looks like a sure thing. Take Buffett in 1974. It seems like he was going all-in, right? The media and his own writings make it look like that, but was he really? He bought his house in 1958 for $30K, so he had real estate. I’d bet he also had cash sitting in the bank for emergencies. He even says that when he dies, his wife’s portfolio should be 90% S&P 500 and 10% U.S. Treasury bonds. That 10%, in my opinion, is for tail risk protection. He knew about that risk, so I’m betting he wasn’t ever fully all-in. He was aggressive, but not reckless. It never makes sense to risk losing your ability to live a basic upper-middle-class lifestyle just to chase ultra-high-net-worth status. That’s where Taleb’s "barbell" portfolio idea comes in: mixing safe assets with high-risk ones so you get decent returns but still have downside protection. Going all-in on a medium-risk(or high risk) asset leaves you exposed. If a tail event happens, you lose everything, and you’re suddenly in line at the soup kitchen. The barbell is just more robust across different scenarios. Now, I’ve taken that barbell concept further through hundreds of portfolio simulations in Excel. For example, I consider Buffett’s 90% SPY and 10% UST portfolio to be a barbell—it’s just extremely aggressive. It could blow up if the U.S. enters a depression or a severe debt crisis. It’s not for me, but maybe someone more risk-tolerant would go for it. Then you’ve got people in crypto, going 100% in—totally all-in. That’s even crazier when you factor in risks like hacks, wallet drainers, or losing seedphrases. Even if you secure everything, there’s still a chance crypto crashes 95% and never recovers in your lifetime (and how can you know how long your lifetime will be if you dont know when you will die?). There’s no law that says crypto has to pump every four years, no matter what some cultists believe.
People who get comfortable with the most likely scenario blind themselves to tail risks. That’s how you end up with reckless gamblers making a lot of money, then being praised as some kind of guru or messiah. But their thinking and method are flawed—it just takes time for those flaws to be exposed. That’s why you need some safe assets. You have to be at peace when you see these gamblers making fortunes with high risk. The underperformance from holding cash serves as a reminder to stay humble and control envy. That will do more for your returns—and your happiness—than any extra money will. You won’t find these ideas in most books, on X, or in articles. They come from decades of blood, sweat, and tears, and they’re not popular, but they’re right. Deviating from this approach will lead to pain. Now, when it comes to safe assets, I usually go 50/50—half in safe stuff, half in riskier assets—but that depends on the capital involved, the person's expenses, how much they need to maintain their lifestyle, and how much they can afford to risk trying to make more (also, why they want even more? if its out of ego, problems will soon occur). So, with 50% in risky assets, how much do you put into a 4- or 5-star trade? I haven’t modeled this a lot, but if we assume a total loss in the worst case and a 5-10x gain if it works out, you can plug that into the Kelly criterion calculator. Divide by two to be conservative, and there’s your risk. That's one way to approach it.
I usually go by a more intuitive approach when it comes to how much to risk, percentage-wise. I'll sometimes check the Kelly criterion just to get a sense of how much to risk, but it's too rigid for a world as fluid, complex, and interconnected as financial and crypto markets. So instead, I try to stress test my portfolio and "feel" out how comfortable I am with the extreme scenarios. Position sizing is tricky, though—you can't really apply Kelly to your entire net worth, because eventually, it will lead to a 99% drawdown (that it will then reverse and reach a new high in P&L but thats only in simulations in a computer), which most people just can't handle. Even if you use a 50/50 barbell strategy (so half your assets are protected from that drawdown), seeing 99% of the other 50% vanish would still be mentally brutal. This is why position sizing is tough to formalize in my framework. I just keep in mind the issues with tail risks and the need for safe assets, especially when working with barbell portfolios. Make solid bets, protect a good lifestyle through safe assets, but never go all-in—whatever that means in practice.
This brings me to the role of luck in investing. Let’s say I find a solid 4-star trade. I buy it, hold for two years, and now my analysis shows a 2-star exit opportunity (I’m seeing contrarian signals, price has started to accelerate a bit, valuation says its a bit overvalued). Should I sell? Yes and no. Over decades of observation and experience, I’ve learned that it’s unknowable. Maybe the asset goes ballistic, turns into a 4 or 5-star play, or maybe it crashes back down. You can’t easily predict that ahead of time—sometimes it will, sometimes it won’t. If someone doesn’t sell and it shoots to 4 stars and they sell, they’ll look like a genius, maybe even a messiah. But that same person will likely mess up the next time by not selling at 2 stars and watching their profits evaporate, or they’ll make poor public calls again and again (remember the “oracles” who made billions shorting mortgage-backed securities in 2006-2007? Their track record since then has been pretty bad). There’s a lot of luck in investing and trading. People don’t talk about it enough, but it’s there. What’s more reliable, instead of relying on luck, is having discipline in buying—waiting for 2+ star opportunities and scaling out as the trade hits 1 to 3 stars. Staying in for those wild, insane levels might work sometimes, but it can just as easily blow up in your face. Most of the time, it’ll probably do the opposite of what you expect. It’s a tough game. I say this as a reminder to myself because in bubbles, envy drives people to hold on for a massive profit when they should’ve just taken the good profit. That’s where the cash drag (from the safe part of the portfolio) comes in handy. It gets you used to underperforming riskier gamblers and keeps you grounded. In the end, it’s all about psychology. Buying 3-5 star investments and scaling out at 1-3 stars sounds simple, but psychology will trip you up without you even noticing. Look at how many people were (and maybe still are) bearish on Chinese stocks—that’s the herd mentality at work. People avoid 3-4 star investments because going against the consensus is painful. It takes personality, self-esteem, and inner strength. Same with buying Bitcoin in 2020 or during the 2022 3AC collapse. In my crypto Discords, 90% of people were bearish on Bitcoin when it was at $19,000 in 2022, and these are people working in the industry! Never underestimate how much the herd effect can mess with you. No one is above it—not Buffett, Soros, Druckenmiller, Saylor, or Cobie, I don’t care who it is. These days, I’m suspicious of everyone. Here is one of my rules: at extremes in sentiment, people stop being rational. and that includes all the big names people love to hype up. It’s hard not to be affected by that, it’s human nature. But if you can overcome it, you can make some incredible trades!