Outside The Box Logic About Why Baidu Is Not A Buy

| About: Baidu, Inc. (BIDU)
This article is now exclusive for PRO subscribers.

Well here we go again. Almost every day now I see articles praising Baidu (NASDAQ:BIDU). Everybody is praising the company's revenue growth, profits and the fact that with the way China is growing, Baidu will end up becoming the next Google (NASDAQ:GOOG) and so on.

But as in the case of Apple (NASDAQ:AAPL), investors are not looking at the ticker tape -- meaning their computer screens. And the reason why I am saying this is because many investors are willing to take a chance on Baidu going against the tide.

I have told you many times not to buy Baidu (my Baidu logic here). But even assuming that I thought Baidu was a buy (which I don't), here are several reasons why I still would not buy it, even if I thought it was cheap.

Please note these reasons have nothing to do with fundamental valuations, but with investment rules outside the valuation spectrum, that I think are important to keep in mind for any stock.

Baidu is a Chinese company

Well what's the big deal you might say. Well the big deal for me is that I don't trust Chinese accounting. I am not saying Baidu is cooking the books or anything, but that I am biased when it comes to buying companies from that part of the world. I simply don't trust any Chinese company across the board.

Yes I might be missing out on many Chinese growth stories, but I don't mind. I prefer not to take chances. It's hard enough avoiding irresponsible management and scam pot holes in the U.S., I don't want to have to deal with China also.

Cost average up not down

Even if Baidu proves to be a very good long-term investment from these levels (which I doubt), it is preferable to buy any stock in an uptrend than a downtrend.

The main reason for this is you don't know how low a stock might go before it decides to go up again and reward you. As the case of Apple proved, stocks can correct much lower than anyone can imagine, even if everyone is gung-ho about a particular stock.

For example, if you decide to buy 10% of your portfolio in Baidu stock, but the stock falls month after month (as has been the case for many months now), then you will end up losing a lot of money, even if after many years you end up winning. One way to avoid this trap is to never buy a downtrend.

So always dollar cost average to the upside and not to the downside.

Technical issues

Expanding on the previous reason, you should never buy a falling chart. I am of the school of thought that says investors should use both technical and fundamental analysis when investing in stocks.

(Click to enlarge)

You use fundamental analysis to find stocks that you think might appreciate, but you should use technical analysis to spot entry and exit points. As such, the chart above is not indicative of a chart that I would buy. At the very least, I would want to see a positive simple moving average slope on a weekly scale before I decide to commit long term to any stock.

The market knows better

In the end, it's not about what I think, want or wish. In the end the market always has the final word. As such, you should never go against the market.

Remember markets are forward looking and the current price of a stock today reflects what will happen in the future and not the company's current performance.

So we should always be mindful of a downward chart, because maybe the market knows something we don't know. Always doubt what you think you know, no matter how sure you are about your investment thesis -- even more so when you have bad technical indications (and we have a bad chart in Baidu's case).

Bottom line

You can indeed take a chance and buy Baidu to test if the market can be wrong longer than you can remain solvent, but I highly advise against it.

But if you decide to buy Baidu for any reason, at least wait until you have evidence of confirmed technical strength. In the absence of this, you are actually going against the market and testing the market's resolve.

Finally, markets are like the devil in disguise. Their purpose is to deceive us and make us doubt about our decisions. One way to lower our chances of failure is to go with the trend. And when going long, your friend is an uptrend not a downtrend trend.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.