Sunday, 17 November 2013

What is it about those Chinese shares?

This is going to be a quick post. First thing to report is that I have bitten the bullet and bought US shares in my ISA. Just a toe in the water and sadly no China shares. But I have picked what appear to be the best selection criteria based on what worked between November and February in the past three years. China shares were there in the selection but they were not eligible for purchase in a ISA. The list I ended up with was BWEN RAD GTN LEE DRAD. I had to cough up 2% to convert £s into $s and will have to pay another 2% when I sell up. So the shares will have to do very well. And so they should judging by the back tests I performed.

Just a quick recap on how I set about picking shares. I use Vector Vest's data base to discover which selection criteria successfully found the shares that went on to perform best over a set period of time. The criteria typically look at PE ratios, expected rates of growth in earnings per share and past price performance. Vector Vest makes it possible to compare the success of different combinations of selection criteria. I look for ones which regularly outperform over different periods of time and then pick my shares by looking for those that currently match those criteria.

A theoretical example. Lets say that I discover that shares with a PE of less than 10, expected earnings per share growth of more than 20% and price growth of 12% in the previous three months have shown share price growth of over 25% over the next three months each year in the past three years. I would now look for the shares which currently possess those characteristics and buy them with the reasonable expectation that over the next three months they will achieve a price rise of around 25%. It's not rocket science if you have the data base capacity to make the calculations.

Now those Chinese shares that I bought. They made 18% in the past six days. This was the culmination of a roller coaster ride. The campaign started on 24th October when I bought half of the shares. I was fully invested on 5th November. If I take the capital I had invested on November 5th as my money at risk, my return over the 17 trading days was 14.6%. This is despite the fact that I foolishly pulled out and went back in one day resulting in the sacrifice of 2-3% of potential profit. It also included a couple of days of horrendous loss. You may remember I said that this was not a game for the faint hearted.  You need balls of steel to play the game.

So what are the characteristics of the shares I picked? They had an average PE ratio of 11 (earnings yield 9%) The expected earnings per share growth rate was 31% and they had a high price growth rate over the previous year. In short these were cheaply priced shares with exceptional earnings growth potential and a history of rising share price growth. Just the sort of companies in which one would want to invest one's money.

Another reason for putting one's money in China now is the relative performance of the Chinese stock market compared with the US one. The US market is bloated with all that QE cash while the Chinese market is packed with bargains.

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