The key to being a successful long-term investor is having the patience to weather all of the stock market’s up and downs. As long as the underlying fundamentals remain intact, we can be comfortable hanging on through dips in both share price and the broader environment.
Ultimately, the key is buying low and selling high. Of course, we’ll never time things perfectly, but one of the most profitable strategies we can employ is looking toward periods of weakness to either initiate positions or add to those that have pulled back.
Over the last century and more, the chart of the U.S. stock market has moved from the lower left to the upper right. You can see the most recent example of this trend in the five-year chart of the S&P 500 below.
There will always be bear markets and recessions along the way, but as you can see, they are merely blips on the long-term chart. That means that, while frustrating, they present us with spectacular opportunities to buy stocks cheap.
The Chinese stock market isn’t quite as mature as its U.S. counterpart, but buying on pullbacks still represents a solid strategy. And considering the Shanghai Stock Index is now down more than 20% from its January high and in bear market territory, investing overseas is definitely worth considering.
The Trade Headwind for China Stocks
Still, many investors are hesitant to buy on such large dips because of two major unknowns — the depth of the ultimate pullback and whether you’re catching a falling knife or getting a great bargain. Because it is impossible to know those answers today, we have to look at the current situation and gauge where the Chinese market is likely to be a few years from now.
The biggest headwind for China stocks right now is the back and forth regarding tariffs. At this point, calling the situation a “trade war” is overblown, and the phrase is being used mainly as an attention-grabbing headline by the media.
Trade between the U.S. and China remains strong and I am confident it can revert back to the “good times” very quickly. Personally, I do not foresee the trade situation getting out of hand, and by the end of the year I suspect President Trump and China will have come to some sort of compromise.
Once the fears of a trade war are out of the way, investors can return their focus to true stock market valuations and future growth. Currently, the Shanghai index’s price-to-earnings ratio based on 2018 earnings is around 10, which is its lowest level since the 2016 bear market that saw a lot of panic-selling.
That means that Chinese stocks are trading at a 40% discount to U.S. stocks right now.
That’s huge on its own, but what is even more amazing is that the future growth prospects of many Chinese companies are actually higher than those of their U.S. peers. Put that all together and what we’re left with is a great buying opportunity in an economy that is only going to continue to grow over the long term.
Matthew McCall is the founder and president of Penn Financial Group, an investment advisory firm, as well as the editor of FUTR Stocks and the ETF Bulletin. Matt just launched two new investment advisories focused around the “next” generation investing theme. His trademark three-prong investing approach targets the mega-trends old Wall Street is missing out on. Click here for more information on the “NexGen” Experience.