How (Not) to Invest in China

The bottom line is that you don't want to lose money. Therefore, don't buy companies that are losing money.

An example of a Chinese company that has been losing money is Heckmann Corp.(HEK Quote) There are all sorts of companies like Heckmann out there that are losing money. The stock market is like a store. It doesn't force you to own or buy anything (unless you're a mutual fund). If you don't like any of the deals at the store, don't buy.

Step 2: Figure out who (not) to listen to.

Berkshire Hathaway's (BRK.A Quote) annual meeting is also called "Woodstock for Capitalists." Basically, Warren Buffett, who invests through Berkshire, has a legacy of beating the market by not making dumb decisions. Listen to people that do what you want to do. In the realm of investing, Buffett, Joel Greenblatt, Peter Lynch and Benjamin Graham should give you a good start. People (in sports, business, life, whatever) who aren't great at what they do have a tendency to make a living commenting on:

1. What might happen by reading historical charts, tea leaves, or the stars.

2. What is happening.

3. What just happened five minutes ago.

4. What happened today.

5. What happened so far this year.

6. What the "greats" are doing or did according to their latest filings.

The bottom line is that you don't want to learn from commentators.

An example of a Chinese company that gets so much coverage that it's likely to be overpriced is Baidu(BIDU Quote). It's roughly 4.7 times as expensive as Sohu.com(SOHU Quote), even though Sohu has been growing faster. I would recommend reading about Lynch and his use of the price/earnings to growth ratio if this confuses you.

Step 3: Figure out when (not) to take action.

Back in December when I called the bottom of the Hang Seng would have been the best time to buy Shanghai or Hong Kong stocks. The good news is that there are still stocks out there with more than 1,000% upside potential. When you have a country growing gross domestic product at a faster rate than the rest of the world, that is forecast to continue that growth, and is priced cheaper than the rest of the world on average, it's time to buy. In my opinion, it's still a great time to buy China.