Last week I wrote about coffee and cannabis and one of our favorite investing strategies – investing in habit-forming products.

Yesterday, the market’s reaction to manufacturing news from China reminded me of another of our favorite ways to make money in the markets.

Both Jeff and I have written about this trend before. It involves a higher tolerance for risk.

We all want to balance the risk of losses against the potential rewards when investing. Yet, sometimes, risks take the form of missed opportunities. In this case, it’s not risking the money you have, it’s risking the vastly greater money you could have, had you made a certain investment decision.

Today, let’s talk about one such decision that deserves your consideration.

And, I’m going to give you a stock pick that’s set up perfectly to illustrate this proven principle for growing wealth.

So, let’s start with yesterday’s news….

U.S. stocks jumped yesterday after China reported positive manufacturing data. The Chinese Manufacturing PMI for March came in at 50.5, rebounding after registering a 49.2 number last month.

In this index, the number 50 separates growth from contraction so this was a positive sign for markets worldwide.

This news, the first positive economic growth news out of China in several months, was widely interpreted to mean that country’s economic stimulus efforts are working.

The Dow rallied more than 329 points and the S&P advanced more than 32 points for the day on this news, plus continued optimism for a U.S.-China trade deal to be completed soon.

High ranking officials from Beijing are in Washington this week to continue trade agreement talks.

Six weeks ago, we wrote about the opportunity in China stocks.

The premise for the Digest was that we were at a risk-reward entry point. From the Feb. 15 issue of the Digest….

Chinese stocks were treated harshly by investors in 2018. Trade tensions between the U.S. and China, plus a slowing domestic economy sent shares of most Chinese stocks into bear territory.

But all that was months ago. Most everyone who wanted to get rid of these stocks has already sold. The bad news about the stock is already baked into the current price.

Now, some Chinese stocks seem to have gone sideways for a bit, caught their breath, and are ready to head back up again.

This sounds like a great example of a chance to get in after the downside of a market, with significant potential upside.

One of the proxies for China stocks is the KBA China ETF. On Feb. 15, KBA was trading around $28.15 and had just broken above its 200-day moving average. As of yesterday, the KBA is trading at $33.01.

I write this not to boast but to reiterate the point made in the February Digest.

If you could spend your investing life betting on stocks that had a big selloff, became radioactive for a time, hit a bottom, and broke through these moving averages on the upside, you’d probably create lots of wealth.

It looks like the textbook illustration of “buy low.”

If you have the patience, now is definitely the time for long-term bets on China stocks.

One Chinese stock is set up for the same scenario.

Luckily for us, this one is held in the portfolio of one of the smartest analysts out there, Matt McCall, editor of Investment Opportunities.

Matt has several Chinese stocks in his portfolio because he sees the opportunity inherent in the country’s closed market. China will not allow some of the biggest Western companies, such as Facebook, Amazon and Google, to do business in the country.

Given that, it makes sense to buy the Chinese equivalents, many of which trade for a fraction of the price of their Western counterparts.

Tencent Holdings (TCEHY) is a Chinese multinational investment holding conglomerate. Matt has described it as a one-stop shop for some of the biggest trends for investors.

Tencent is the world’s largest gaming company, and one of the world’s largest social media companies. In fact, they are the company behind one of the hottest video games in years – Fortnite. The game has made more than one billion dollars for the company, and now has more than 250 million players worldwide.

For a little context to that number, the U.S. population is currently estimated to be 327 million.

Tencent, like all the other Chinese stocks, took a beating in 2018, but let’s look at its chart now, over the same period as the KBA chart above.

Note that TCEHY has broken through its 50-day and 200-day moving averages. Almost exactly the same scenario we saw from KBA six weeks ago.

Here is Matt’s latest Investment Opportunities update on the stock.

Tencent Holdings (TCEHY) has been in a nice uptrend since bottoming in October when sentiment toward the company was historically low. Now Tencent is back in the headlines for positive reasons and investors are once again realizing that this technology giant is still a key player in several high-growth trends.

My favorite is eSports. This global eSports leader recently announced that it is looking to expand its business in China as local governments want to be a part of the trend and are even giving away subsidies. Tencent is taking advantage of that situation. Buy TCEHY up to $52.

Yesterday, Tencent announced that it has started testing a cloud gaming platform call “Start.” Google and Sony have already debuted streaming game services, and now the world’s largest eSports company is testing efforts for a select group of users.

Once again, the stock was beaten up, took a breath and now appears ready to move higher again.

It’s difficult to invest in beaten-down stocks but it’s a proven strategy.

Here is a great description from Matt about the risk and rewards.

How many times have you looked back and wished you had bought a beaten-down stock? There are not enough fingers on my hand to count the number of times I have had that feeling. I know it’s part of investing and that hindsight is 20/20, but in the case of Chinese internet stocks, we don’t want to look back in regret a couple of years from now.

That sounds about right.

If you’re still concerned about risk, you can establish tight stop losses.

But just as I wrote in February, right now the potential downside is low. Tencent, and Chinese stocks generally, have already taken the big hits and established a bottom, so now is the time to invest if you want a chance at a significant upside.

That’s how you get the biggest rewards.

To a richer life….

Luis Hernandez, Managing Editor
and the research team at InvestorPlace.com