Recently, one of our holdings in my Outlier Investor service got hit… and we have the Chinese government to thank for it.
The country recently announced that it was cracking down on education-for-profit companies. It basically put a ban on their businesses.
This prevents tutoring companies from raising money overseas… they can’t teach programs already taught by public schools… and they can’t hold classes on weekends or holidays. This might not sound like a big deal, but private tutoring is a $120 billion sector in China.
And other Chinese companies with nothing to do with education have felt the pain as a result.
Alibaba, a popular Amazon-like e-commerce company, hit lows this week, not seen since the March 2020 crash.
The iShares MSCI China ETF (MCHI) dropped over 12% from July 22 to this past Tuesday. The KraneShares CSI China Internet ETF (KWEB) dropped more than 21% in the same time frame.
Unfortunately, these developments were particularly bad for one of the holdings in my Outlier Investor research service: Tencent Music Entertainment (TME). This company is essentially the “Chinese Spotify.”
TME doesn’t sound like it would be impacted by this ban. But the company has a 20% stake in tutoring app Youanfudao.
And the hits keep coming for TME…
China also informed the company that it will have to forfeit its exclusive music licenses by late August. All told, we’re down about 60% on the position with Tencent. And I’ve gotten more than a few letters from my subscribers as a result.
Unfortunately, when China changes the rules and regulations, there’s not much we can do. When the 800-pound gorilla wants your banana… Well, the choice is up to you.
But believe it or not, I’m not worried. Today, I’ll tell you what I told my paid-up subscribers earlier this week…
Patience, Process, and Mental Fortitude
As regular readers know, my name is Jason Bodner. I’m the editor of Brownstone Research’s newest research product, Outlier Investor.
I’m thrilled to work alongside tech investment expert Jeff Brown to help readers discover life-changing gains in the entire stock market. Like me, Jeff believes in the quality of research above all else.
My mission with Outlier is to pinpoint the outlier stocks that break all the rules. These are the stocks that surprise everybody and turn modest investments into incredible returns.
And as I often tell my readers, it’s not easy to find outlier stocks. In fact, investing in general is not easy. Financial markets do not exist to make us millionaires overnight, sorry to say.
Don’t get me wrong – it is possible to build incredible wealth over time with great investments. But it’s far from a given.
It takes patience, process, and – perhaps most importantly – mental fortitude.
Crazy as it sounds, Warren Buffett knew what he was talking about when he said, “Be fearful when others are greedy, and greedy when others are fearful.”
When everyone high-fives themselves for their investing wizardry… our caution should be high.
And when everyone is drowning their sorrows with a stiff drink, that’s precisely when greed should kick in.
The most critical trick of investing is mastering the mind… It’s no easy feat, but most seasoned investors have had to do exactly this. They’ve seen trouble many times before.
Handling the Volatility
What’s happening in China today is not new. About every year and a half to two years, China rocks the headlines.
We can look at a Chinese stock ETF and see severe dips over time when it’s a China growth scare… or a China regulation scare… or a move like this, banning the for-profit education sector.
It’s happened before. It will blow over. In fact, when everybody’s looking for a reason to beat-up on China and it’s on everyone’s lips, the low is usually near.
So believe it or not, I’m actually optimistic going forward.
And as for Tencent…
Yes, things look bleak. Sometimes, things happen that are outside of our control.
A government cracks down… A product is delayed or shelved… A CEO is forced out… We can’t predict these things. But we can control how we respond.
We’re down 60% on TME. And being in the red like this is painful.
But the reality is that Tencent Music Entertainment is still the No. 1 streaming music company in China and some surrounding countries in Asia.
These people aren’t going to stop streaming music, even if Tencent loses its exclusive licenses. And the company is still growing its sales and earnings.
And even if the fundamentals of the company do change … we’re not going to sell in the pit of despair.
The time to sell is not now, when hell is hottest.
It’s times like these that we need to take a step back and look at the bigger picture.
We’ve seen in the past how we can recover even from these sharp dips. One stock I recommended right before the COVID-19 crash fell as much as 41%. But we didn’t sell into the fear, and now we’re now up over 65%.
While I can’t guarantee that will happen in every case, we improve our odds by choosing a basket of strong outlier stocks and having the right mindset even when things get rough.
And let’s always remember that one stock like TME does not make a portfolio. Across all of our open positions in Outlier Investor, our average gain is about 65%.
And we’ve had some truly monstrous returns like…
-
NVIDIA (NVDA): 351%
-
SolarEdge Technologies (SEDG): 394%
-
The Trade Desk (TTD): 831%
I frequently tell my readers that if someone says they can win all the time, we should run away. But here at Outlier Investor, we win more than we lose. And our winners are much bigger than our losers.
In the long run, that’s a winning strategy.
Equity markets don’t exist to make us rich. But we can create incredible wealth with a basket of great outlier stocks.
All it takes is patience, process, and a little bit of mental fortitude…
Talk soon,
Jason Bodner
Editor, Outlier Investor
P.S. If you’d like to learn more about how Outlier Investor works… and how we put the odds in our favor, you can go right here to discover the whole story.
I’ve been so excited to have Jeff Brown’s endorsement for my work… and I look forward to helping investors navigate the markets to find the latest and greatest companies that are seeing unusual “Big Money” buying.
This is a big part of how we’ve achieved our successes like NVDA, SEDG, and TTD. Simply go right here for the details.