How to think about Chinese Stocks

Vitaliy Katsenelson has a skeptical piece on China’s economic “miracle” at MSN Money. As we pointed out earlier this month, skepticism has never been a strong suit of the Raging China Bulls and it’s refreshing to hear intelligent, contrarian voices like Vitaliy on the investment side or Derek Scissors for a broader economic/political view.

But there’s a fine line between intelligent skepticism and completely missing out on a gigantic investment opportunity for the sake of your beliefs. Like Vitaliy, I used to be a China skeptic. A couple years ago I published a scathing critique of the iShares China fund (ticker: FXI) at Forbes.com.

While I stand by my reasoning to this day, it was the wrong call. Period. And it was one of the worst I’ve ever made. After I had told the whole world that FXI was a dog, the fund rose in pretty much a straight line for more than a year. By October 2007 it had tripled. I was the laughing stock of the message boards. I suppose I was ultimately vindicated in some sense last fall, but that was only because, you know, the world almost came to an end. Other than that, it worked out just fine.

I’m still skeptical about parts of the China investment case, and I still think that FXI is a lousy way to invest in China even if you are bullish. But I also recognize that there are a lot of different ways to think about “China” as an investment theme and that dismissing the whole thing as “unsustainable” only guarantees that I’ll probably miss out on some great ideas. I like being a contrarian, but I like making money a lot more.

Bottom line: A lot of the things that you hear about China might be full of hype and hooey, but at the end of the day, China is the real deal. It’s up to you to figure out how it fits into your portfolio.