At the end of my last post, I mentioned that I would write a follow-up piece that went more in-depth on my investing strategy and specific investments I’ve made. Unfortunately, since then I’ve moved to Shanghai (more on that in a future post hopefully) and have been busy settling in so I haven’t had a chance to write until now. Before I even moved to Shanghai, I got greedy and went against my original investing philosophy that ended up with a different result than I was hoping for. Wondering what happened? Let me explain!
Previously, I mentioned how I focus on buying stocks using a strategy I call “short-term value investing.” Up until that point, I had followed this strategy pretty religiously, trading various stocks and flipping them a few days, or at most, a few weeks later. These investments included Hubspot, Shopify, Facebook, Adobe, Five Below, Zscaler, and Micron. All of these, I made profits on following the same strategy, except Micron.
At my peak, I was roughly at a 40% return in only four months. Not bad. Unfortunately, earning this much in such a short amount of time got to my head and I assumed I could continue to make good bets and make quick returns.
In the summer, there were a lot of Chinese companies going public and I thought this would be an interesting opportunity to capitalize on. My thinking was simple – China has ~1.38B people, so even if their propensity to spend was 30-50% of what a service cost in America, as long as they acquired more customers, there would be a good revenue opportunity. And as the middle-class in China expands, acquiring more customers wouldn’t be too difficult. As these companies were just going public, I believed they were in their growth phase and the stock would appreciate in value as a result of that.
Buying on Hype
The one stock that I was watching most closely was Iqiyi – “the Chinese Netflix” – as many had named it. Iqiyi had its IPO at the end of March 2018 and while its stock price tanked at first, it quickly rose and continued to rise. All of the Chinese tech startup stocks were skyrocketing at this time, so I was a little iffy, but I still decided to buy based on the hype. Up until the middle of June, I saw great returns daily. Then there were impending trade wars between China and the US, so I knew the stocks were going to start tanking, despite them being in the tech sector. Iqiyi had a few minor dips but nothing too deep.
All of the major Chinese tech stocks followed the same trend during the trade war news releases, and on June 18, I saw Bilibili, a Chinese gaming and live streaming company tanked by ~10%, so I quickly sold my Iqiyi shares.
I was pretty happy with my decision as I wanted to realize my gains. The next day Iqiyi fell by 3% but bounced back by 4% the following day. I was watching the price carefully and wanted to buy back in, thinking I could make money on the short-term shifts in the stock price. Unfortunately for me, I decided to buy back in on the next dip which was ~$41. The stock dipped even more and I put even more in thinking I was getting an even better buy price. I had almost all my cash tied into Iqiyi at this point. Today, Iqiyi trades at ~$30/share.
Value Creation Doesn’t Happen Overnight
That brings me to the point of this post. Everything in life that seems too good to be true, is probably too good to be true. Iqiyi rose like crazy and I completely disregarded all fundamentals. Iqiyi’s stock had appreciated ~50% since I originally bought it and it only one-quarter of financial results as a public company. The first blowout quarter was fueling all the hype and the term “Netflix of China” also was contributing.
If you’re investing, find the companies that you think are undervalued, build your personal investing strategy, and then stick with it. Don’t buy into hype as stocks take time to generate value.
Disclaimer: I’m now a long-term shareholder of Iqiyi.