I Was Wrong About China

China has been both the boon and the bane of my existence.

As a country, China's importance to the global economy is only growing, and its still-high GDP growth and need for raw materials has thus far been enough to keep the economic gerbil running on its wheel despite growing macroeconomic uncertainty.

In 2007 and 2008, buying into fast-growing Chinese companies was akin to buying an Internet company back in 2000 -- you could do no wrong. Growth prospects were high, results were handily coming in ahead of what few expectations existed on Wall Street, and forward earnings multiples were significantly lower than U.S.-based companies that were operating in the same sector. Things looked too good to be true from the start, and as I soon found out, they absolutely were.

Before we get into why I was wrong on China, I want to give you a taste of just how wrong I was. Last October, I created a Motley Fool CAPS account dedicated to my belief that Chinese-listed companies were set to outperform over the next three years and I even dedicated a blog to this assertion. Over the course of a few days, I filled this CAPS account with 200 Chinese stocks and figured in three years I would have achieved an accuracy of 70% and around 4,000 CAPS points. What I have done in just over a year is achieve almost the lowest possible CAPS ranking with an accuracy of just 13.5% and a CAPS score in excess of minus 8,000!

Why I was wrong
I wouldn't say there was just one reason that I could point to that explains why I wrongly placed my bet on China's outperformance, but rather a series of miscues.

My first mistake was in not realizing that results which seem too good to be true often are. I can think back and remember when Orient Paper (AMEX: ONP  ) , Telestone Technologies (Nasdaq: TSTC  ) , and China Sky One Medical were some of my top picks from China, and they turned out to be absolute disasters. These companies traded at mid-single digit forward earnings multiples in most cases and often had very limited analyst coverage. Rather than focusing on why they traded at a discount to their peers I just assumed the market had overlooked them and blindly bought into the hype -- mistake No. 1.

The second mistake I made was assuming that corporate governance in China was comparable to what we're used to in the United States. Oh, how wrong I was on that point; and not just wrong, but way-out-of-the-ballpark wrong! Chinese corporate laws are evolving constantly, but they are still considerably more relaxed than in the U.S., and as such have fostered corruption to a level we haven't seen since the savings and loan scandals of the 1980s. The result has been a scandalous lineup of fraud allegations against companies including RINO International, ChinaMedia Express, and even a former holding of mine, Jiangbo Pharmaceuticals, just to name a few. In short, I bought into these stories without really understanding how these companies were run -- mistake No 2.

The final mistake I made was in chasing the past performance of these stocks. As I mentioned, 2007 and 2008 were generally good years for Chinese-based stocks listed in the U.S., and I figured that as long as China's GDP was growing rapidly, there could be little doubt that any company with the name "China" in its title was heading higher. Again, how wrong I was. Rather than looking forward, I was placing bets on results that were already in the books -- mistake No. 3.

What I've learned
The great thing about the stock market is you always have a second chance to get better and learn from your mistakes. Let's take a look at my three miscues and I'll give you a brief synopsis of what I learned.

Mistake No. 1: If a stock looks too good to be true, it probably is.
If you've ever wondered why I'm such a skeptic and not a diehard bull like many of my Motley Fool colleagues, it's because of China. This mistake taught me to criticize every stock I own and look for what could go wrong rather than assume that everything is peachy. Not only will you understand what can affect a company better, but you'll have even more conviction with your purchases.

Mistake No. 2: Assuming China's corporate governance is the same as in the U.S.
One of the most important rules in investing is to know your management team, and I failed brutally on this account. Understanding that different countries could have different laws in place is important to know, but having a transparent and trustworthy management team is paramount to your stock's success.

Mistake No. 3: Chasing past performance.
There's a reason financial brokerages put a disclaimer on their front page alerting you that past performance is no guarantee of future results: The stock market is forward looking and we as investors need to be as well. It's great that Hanwha SolarOne (Nasdaq: HSOL  ) turned a profit over the trailing-12-month period, but its prospects going forward look bleak. Looking forward rather than backward is the key to long-term investing.  

What to do now
After reading about my experiences with China, you might assume that I have no desire to ever invest in a Chinese company again, which is actually not the case. There are plenty of investment-worthy China-based stocks that have built long track records of trust, have transparent management teams, and are still growing like wildfire, such as Baidu (Nasdaq: BIDU  ) , SINA (Nasdaq: SINA  ) , and Sohu.com (Nasdaq: SOHU  ) . While my opinion on these three is mixed, one thing I am sure of is that I will be investing in China again. The difference is that this time around, I'm armed with better information than I was before.

Interested in avoiding my mistakes? Then I invite you to get your free copy of our latest report, "5 Stocks The Motley Fool Owns – And You Should Too" with companies hand-picked by our top analysts.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong , track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. Motley Fool newsletter services have recommended buying shares of Baidu, SINA, and Sohu.com. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that doesn't charge extra for the truth.


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  • Report this Comment On November 29, 2011, at 12:22 PM, WikiCPA wrote:

    Why is YONG missing from your list? I believe they are one of the better Chinese companies with a transparent management team.

  • Report this Comment On November 29, 2011, at 3:06 PM, jimmyz10 wrote:

    Why you're still wrong about China: the duration of public listing status is, unfortunately, not an indicator of legitimacy. Three more points to remember lest they become mistakes 4 through 6:

    1) Legal Structures: The VIE entities that each of SINA, SOHU and BIDU use to enable their foreign public listings are not at strictly legal under Chinese law.

    2) Operational Inaccuracies: While the focus to-date has been on fraudulent financial reporting, even basic operational data capture and reporting is inconsistent and rife with mis-statements. In that online media company valuations are dependent on metrics associated with their users, the same degree of mis-statements should not be ignored.

    3) Hard Landing: In a country of 1.3 billion with a shadow banking industry that may be up to triple the size of reported balances, it is not reasonable to believe that official economic estimates are accurate or are even that they could be. The real data points strongly indicate that what exists of China's domestic economy, which is a fraction of its export economy, is almost entirely supported by FDI and real estate. FDI (which, in China, is a euphemism for non-recourse loans) remains strong this year, but the official statistics on property prices have registered their first month-over-month drop since data has been collected. Given that last year's official 10% rise was correlated to more accurate 100% rise data points, any drop is far more likely to be well in excess of the official figures. China's $3 trillion in foreign reserves are considerable, until they are compared with it's approximated $10 trillion + black market banking system, most of which is backed by real estate. A 30% drop in property prices, a conservative estimate by all accounts, will effectively wipe out the foreign reserves balance and force the government to ease and print. In the world's most civil societies that strategy as led to demonstrations, rallies and calls to action. In a society with significantly less to lose, those social unrest will be magnified.

    There are indeed plenty of solid companies that are reasonable bets over the long run and deserve to be given special consideration as they make every effort to overcome the nation's endemic levels of fraud and corruption -- of SINA, SOHU and BIDU, BIDU is probably the only one among them. In the near term, however, the time to go long China, in general, is when the world decides that the RMB is no longer a legitimate potential alternative reserve currency.

  • Report this Comment On November 29, 2011, at 4:12 PM, tjsimone wrote:

    2 questions-

    If its different, does that make it a fraud?

    Is it Macro or micro with China related stocks currently?

    Chinese stocks are down more on the macros, than the micros...

  • Report this Comment On November 29, 2011, at 5:16 PM, TMFDukenewkirk wrote:

    I've even dropped Baidu myself. The Chinese government has already started a little PR blitz against them. Consider the battles Google goes through even in N.America with the government. Now consider how the Chinese government will handle the matter once they finally decide they aren't comfortable with Baidu having that much control over information on their internet. We N.Americans would likely have trouble ever even contemplating how the issue could be handled in China.

    Now my exposure to China is wrapped up in only big N.American companies that have expanded operations into China. There is little logical reason for any of us in the west to put any faith in the integrity of the Chinese government or their financial regulations.

  • Report this Comment On November 29, 2011, at 5:17 PM, saikumareddy6 wrote:

    Stock markets are volatile every where. Chinese stocks are down and may be down for while, nothing unusual about this. I do take an exception to your statement that Chinese corporate governance is worse than America's. This is not true, they are all equally bad. This myth that American or European companies have better corporate governance standards is just that, a myth! Especailly after the collapse of Tyson, Enron, the saving and loans crisis and not to mention the massive fraud perpetrated by managements of banks leading to the crisis of 2008.

  • Report this Comment On November 29, 2011, at 5:28 PM, Bonefish100 wrote:

    I have two rules that serve me well:

    1. Never trust a financial advisor who is under 60 years old, and

    2. China is corrupt. Never assume that you know what is going to happen.

  • Report this Comment On November 29, 2011, at 5:31 PM, TMFUltraLong wrote:

    saikumareddy6,

    I don't question the fact that there are "shady" U.S. and European companies because as you mentioned, Enron, Worldcom, Tyco are a great start. But the sheer magnitude of problems we're witnessing in Chinese accounting all at once is rivaled only by the savings and loan issues of the 1980s. Yes, the U.S. had bigger companies that went belly up, but the magnitude of companies involved was nowhere near what we're witnessing in China. Just makes an investor very skeptical of parting with their money....

    Thanks for the comment,

    TMFUltraLong

  • Report this Comment On November 29, 2011, at 5:44 PM, xiaoqiao75 wrote:

    Affluence does funny things to people who are not accustomed to it. Having lived in Korea for five years during the go-go days of the late 80s and then the most recent five years in China, I have now seen this happen first-hand twice. Emerging markets are dangerous places to invest in directly. Unless you live there...and are willing to play the game of craps that most local investors are doing...you are better off placing your bets thru global companies who are expanding there and who hopefully play by proper governance. The '33 and '34 acts occurred in the US nearly 80 years ago. You can fast forward technological development by purchasing it...but you can not buy cultural development. That only comes with time.

  • Report this Comment On November 29, 2011, at 5:48 PM, RealityCheck1930 wrote:

    Bonefish100,

    1. Never trust a financial advisor who is under 60 years old,

    R: In that case, you probably trust Jon Corzine. The crook bankrupt MF Global and laundered billions of dollars of his clients' money.

    2. China is corrupt. Never assume that you know what is going to happen.

    R: USA is also not a corrupt country with a corrupt government. You are living in it and still do not know what is happening right now, and don't bother to talk about what will happen on tommorrow.

  • Report this Comment On November 29, 2011, at 5:53 PM, joectravel wrote:

    I have been doing business in China for 15 years, and I am married to a woman born and raised in China. I still would not claim to understand how Chinese business people really think. Thus, it was always a bit puzzling to me when you would write opinions about a company after visiting them once or twice and interviewing an owner/manager.

  • Report this Comment On November 29, 2011, at 6:00 PM, skypilot2005 wrote:

    On November 29, 2011, at 5:31 PM, TMFUltraLong wrote:

    saikumareddy6,

    I don't question the fact that there are "shady" U.S. and European companies because as you mentioned, Enron, Worldcom, Tyco are a great start. But the sheer magnitude of problems we're witnessing in Chinese accounting all at once is rivaled only by the savings and loan issues of the 1980s. Yes, the U.S. had bigger companies that went belly up, but the magnitude of companies involved was nowhere near what we're witnessing in China. Just makes an investor very skeptical of parting with their money....

    Thanks for the comment,

    TMFUltraLong"

    Ultra,

    I'll add; Fool me once, shame on you. Fool me twice, shame on me.

    I've invested in one Chinese company with terrible results. I won't again. There are plenty of other countries and companies to invest in.

    The country is run by dictators, after all....

    Sky Pilot

  • Report this Comment On November 29, 2011, at 6:02 PM, xiaoqiao75 wrote:

    Joectravel...I completely agree with your observation about the short visit and drawing conclusions after a few probably very well-orchestrated interviews.

  • Report this Comment On November 29, 2011, at 6:04 PM, richardruan wrote:

    China is still a communist country rule by the Party.

    The rule of Law is dictated by the Party. If you have connections to Party officials, you will do alright as long as your connections stays in power.

    Nothing is in black and white.

    The rich chinese are rushing to get out, and the poor are stuck. There is rampant corruption.

    Tourists who visit China, think all is well. Ask season investors and they will tell you horror stories regarding corruption and influence. Most invest managers from the West have taken the bitter pill and realized that what that glitters is not gold in China. Even Buffet's investment in BYD is going the wrong way after making headline share price gains when story broke out of Buffets investment in the company. STAY TUNE

  • Report this Comment On November 29, 2011, at 6:08 PM, hbofbyu wrote:

    @JimmyZ

    Some good points about China.

    From my experience the business ethics in China and India are lacking to the point that it will impede their growth; from pollution payoffs to IP theft. I see it engrained in their respective cultures for at least a generation. No concept or respect for intellectual property (sounds like the younger generation in America).

    It makes it difficult to deal in things other than commodoties. Mexico and Latin America are still caught in this mindset but making improvements. Hopefully China will do the same.

  • Report this Comment On November 29, 2011, at 6:10 PM, PeakOilBill wrote:

    BREAKING NEWS : there is no real rule of law in Russia or China. Russia is run by mobster ex-intelligence agents, and China is run by the Communist Party, which will shoot you if you stage a mass protest that they fear might threaten their control of the society and ownership of all the major industries.

    Both countries can steal all your money any time they like, and you can do absolutely nothing about it. (They won't right now, because they still need the latest Western tech, and the cash that Western market access brings them.) Our own Wall Street bankers lie (see latest Bloomberg article on the bank bailouts and the lies they told Congress.) so you should know not to trust foreign commies and murderers. (The Russian government kills women reporters that try to investigate government corruption by shooting them in the head on the public street. They let ill lawyers who expose government theft die in jail from no medical treatment.) I could go on, but I think you get the idea. Eventually, the West WILL come to realize what a mistake investing in China was. I'll be dead by then, but your kids won't. They will get to experience the true face of dictatorship.

  • Report this Comment On November 29, 2011, at 6:14 PM, fundfooll wrote:

    Why not just buy Apple? Great company, no debt with +$70 billion of cash, and growing! Sales continue to explode all over the world, China included.

  • Report this Comment On November 29, 2011, at 6:18 PM, TMFUltraLong wrote:

    fundfooll,

    Yeah, recommended that already =)

    http://www.fool.com/investing/general/2011/08/28/10-large-ca...

    TMFUltraLong

  • Report this Comment On November 29, 2011, at 6:21 PM, mamarazednofool wrote:

    Invest in what you know! Face it folks, every company in China is always just this side of bankrupt with the rampant dishonesty and corruption that has been a part of their business culture for the past 3000 years+. Investing in China is gambling. You might still get rich doing it, lots of people make money not knowing what they are doing in the market, but if you like to sleep at night, I would treat China like a person with ebola and RUN! I'm just sayin'....

  • Report this Comment On November 29, 2011, at 6:30 PM, quovadisalimage wrote:

    Having a brief experience with a Chinese high tech imaging company, I would certainly say they have a great deal to learn in how to do business. After dealing with undocumented product changes, undated price lists, non disclosures and like, I finally said enough.

    Maybe I'll be back in 10 years or so to see if its gotten better, but there are more than enough companies that know how to do business and what the basic rules are. Given my experience with the high tech sector of China, I would not trust products, especially medical ones, that were not manufactured without oversight by an experienced management team from a corporate culture that knew the rules had reason for being.

  • Report this Comment On November 29, 2011, at 6:44 PM, dvdcunn wrote:

    It's quite alright. I take everything from Motley Fool with a grain of salt. I certainly do not make investment decisions based on what I read in Motley Fool.

  • Report this Comment On November 29, 2011, at 7:25 PM, Educationist wrote:

    Motely fools was wrong not something of a surprize. The US has never understood foreign countries let alone the communist China. Hu Jin Tu is a person with an X-ray memory; he has a navigator and knows which way the nation is moving. We live to understand and not to judge.

  • Report this Comment On November 29, 2011, at 7:37 PM, TMFTomGardner wrote:

    The funny thing is that someone might choose NOT to listen to an investor who openly admits their mistake. That is a core trait of two of the world's greatest investors of the last century: Warren Buffett and Peter Lynch.

    Ignore at your own peril the person who is open about their mistakes and aims to learn from them. The long-term, business-focused investor loves to see this on display. Great article. Fool on.

  • Report this Comment On November 29, 2011, at 8:02 PM, suntzu101 wrote:

    I'd like to suggest one reason why foreign stocks in emerging countries are dangerous and why doing business in China or some other countries is fraught with peril. The rule of law--yep--the idea that one can make a contract, if you break it, you can sue, recover damages or stop something bad from happening and a fairly decent regulatory system backed up by independent judges for the most part. Where do you find that except the US, UK, Australia, Canada? Certainty of contract makes capitalism possible--Chinese, Indian, many African nations and certainly Russia are awash in corruption--how is it possible to believe anything that comes from these nations? Look at Yahoo's China deal--where was there certainty of contract? The comment by Educatonist is fascinating--we live to understand & not to judge? Well, that's an expression of a servant, one who is controlled by those who hold power. But, the Anglo-American system, certainly since the 17th Century Enlightenment, has been we live to understand, to judge, to question, to demand, to assert our rights, and to have facts. I suggest we understand the Chinese quite well--duplicity is an art--read Sun Tzu's Art of War--and there one will find that feigning is an art form as well. The ancient Chinese were brilliant, I'd say the same for the present leadership, but something there is about human beings--the desire for fairness, for a chance to live a good life, and for freedom--and a system of law that tries to give life to those simple desires.

  • Report this Comment On November 29, 2011, at 8:41 PM, Yesid1084 wrote:

    I read the above article and the comments, very useful information I had invested in CNTF a Chinese company. The company is sitting in loads of cash, no debt, steady revenues, the CEO bought 100,000 shares not too long ago but the share price keeps falling. Does anyone has any insight in this company? Any information will be appreciated.

  • Report this Comment On November 29, 2011, at 8:42 PM, GrumpyOldGuy wrote:

    <<The difference is that this time around, I'm armed with better information than I was before.>>

    No you're not. You are armed with the info they choose to provide. GIGO

  • Report this Comment On November 29, 2011, at 8:47 PM, Merton123 wrote:

    One Warren Buffet most profitable investment was Petro China. I remember reading that when he sold a portion of his stake in Petro China that the capital gains tax was enough to cover a couple months of running the USA government.

    Yes - there are challenges in investing in emerging markets. The emerging market is like the wild wild west.

    As a contarian investor I shun China because that is where all the attention is. Toyko Power looks very attractive. The Japanese government is not going to allow Toyko Power to go under. And when Toyko Power starts investing in small modular nuclear reactors - look out investment world.

  • Report this Comment On November 29, 2011, at 8:58 PM, mikecart1 wrote:

    No need for all the long paragraphs. One sentence: Chinese companies are corrupt 100% of the time. Short and to the point. Look at GIGM. Been watching this like a seed in the ground for over 2 years. I bought at $2/share. Guess how happy/unhappy I am now. :o]

  • Report this Comment On November 29, 2011, at 9:09 PM, bjasleep wrote:

    China as a country will do well but I don't think we as individual investors stand a chance of making money from chinese stocks. For every one winner that MF has recommended (BIDU), there are several losers (CCSC, CGA, JOBS, SINA, CMFO, AOB, ...). Many of these names were chosen after MF team visiting China. A basic frequency count model would tell that the odds are so much against us. Perhaps MF should stop recommending pure-play China stocks.

  • Report this Comment On November 29, 2011, at 9:19 PM, TopAustrianFool wrote:

    I don't know why you were wrong but I will tell you that 2012 will be the Year of China. Yes, that's right, the Year of China, since you will see the largest economic collapsing bubble the world has ever known. The Chinese bubble is obscenely humongous, and they are starting to have run-away inflation which they cannot control. The 1st sign is their interest rates rising. It's going to be ugly. The imminent Euro dissolution is going to look like kids play in comparison.

  • Report this Comment On November 29, 2011, at 9:31 PM, kmarkt2 wrote:

    joectravel:

    Yes, amazing isn't it, how the young Wall Street investment bankers know it all when they write their reams of documents for the IPO and analysts given their tour de royale and interviews of companies.

    Not that US/Western corporations are that sanitize with the failures of the SEC and auditors, the same applies, you need a troika of cheat-investment banker-greed to be in alignment, regardless of residence of domicile.

    www.rise-co.com

  • Report this Comment On November 29, 2011, at 10:23 PM, akakroke wrote:

    "For every one winner that MF has recommended (BIDU), there are several losers (CCSC, CGA, JOBS, SINA, CMFO, AOB, ...)."

    Bjasleep, just for the heck of it keep an eye on CCSC and get back to me in 2013.

  • Report this Comment On November 29, 2011, at 10:54 PM, Darwood11 wrote:

    I've always been somewhat cautious about investing in China. For one thing, there is a lack of transparency by the government and some of these companies. For another, there is the significant difference in accounting rules. Finally, such a different culture! I realize it's a "huge market" but so what? Companies fail every day in the US, and we are a much better environment than China as far as I am concerned.

    We have the SEC and specific reporting rules here in the US. China has a different set of rules, and even Chinese companies which might "allegedly" follow US financial reporting rules are questionable, if only because who can really trust the data provided?

    I've decided to avoid direct investment in Chinese companies and have invested in broader emerging market indexes. And that's after subscribing to several MF services, reading the information provided and checking out some of the more attractive companies. Nothing I've seen to date has been sufficiently compelling to make me change my mind.

  • Report this Comment On November 29, 2011, at 11:30 PM, TMFBreakerRob wrote:

    I appreciate your candor on your Chinese investing saga! As to retaining an interest in some remaining companies there, it would be worthwhile to consider the points raised about the legitimacy of some corporate structures and the potential for government intervention due to their illegality. That was the final straw for me....I'm completely out of direct Chinese investment, fortunately at a profit.

    My only remaining exposure there is primarily through Ford and Apple...I trust them! Regarding trust in direct Chinese investment....um.... not at this time for me! They're off limits, just like Russia.

    Too many crooks spoil the broth....LOL

  • Report this Comment On November 29, 2011, at 11:36 PM, opjkl7 wrote:

    W@@W, where do i even begin.

    I saw this mess a thousand yards out.

    1-china's government never tells the truth.

    2-USA companies are corrupt even with the SEC.

    how much more in a over seas.

    3-if you can't see it down the street, don't expect to know how it's doing on wall street behind closed doors.

    4-start over again?....really at age 47?

    i don't think so!

    5-this is soooo 101.

    6-don't follow guru's...your gut tells more

    truth then your broker ever will in a life time.

  • Report this Comment On November 29, 2011, at 11:36 PM, Zugersee wrote:

    What about Longtop and SinoForest.

  • Report this Comment On November 29, 2011, at 11:41 PM, opjkl7 wrote:

    P.S.

    thank you for your honesty. It was a good article.

  • Report this Comment On November 30, 2011, at 12:04 AM, babyballa5987 wrote:

    Good stuff Sean!

  • Report this Comment On November 30, 2011, at 12:58 AM, pedigreebull wrote:

    Good candor...but I thought those so called 'mistakes' are rather fundamental. When investing in a company with a culture different from what one is used to, I would have thought we need to understand that culture and mindset before investing...?

  • Report this Comment On November 30, 2011, at 1:32 AM, TMFUltraLong wrote:

    pedigreebull,

    That was one of the mistakes I made was in assuming that just because it was listed in the U.S. that it was therefore easily comparable to other U.S. companies. In actuality it's not. Comparing the two is like trying to compare an apple and an orange in most cases... but I did not realize this in 2009-2010. Fool on!

    TMFUltraLong

  • Report this Comment On November 30, 2011, at 2:23 AM, awallejr wrote:

    Well a lot of posts, so this will be lost I suspect. Chinese are basically gaming the system. They learned how to try to basically steal from the west and they did. I am sure they need natural resources over time, since that is something they can't steal. But caveat emptor when investing in Chinese companies.

  • Report this Comment On November 30, 2011, at 2:24 AM, awallejr wrote:

    P.S.: I did try to warn you Ultra.

  • Report this Comment On November 30, 2011, at 9:56 AM, eatenbybears wrote:

    I was thought to have gone over the edge for almost screaming about the Chinese companies that were recommended and their practices. Finally just had to move on though I hated to.

    Sorry that the lesson was learned so late, but I must also admit that the glitter from China was blinding

    Eatenbybears

  • Report this Comment On November 30, 2011, at 11:08 AM, Merton123 wrote:

    I found all the comentary fascinating. China right now is in pre Security Exchange period (i.e., prior to the 1930) for their companies. This was a period of time in the USA where companies didn't have audited financial statements. After the great Depression the SEC was formed and publically traded companies were required to have audited financial statements. A student of investment history will find in each generation examples of companies who fooled their auditors (e.g., Enron and so-forth). The Chinese publically traded companies with time will become safer investments. They have a place in a "Well Diversified Global Index Fund" like what Vanguard offers. Warren Buffet right now is overseas looking for investment opportunities in the large cap stocks. I personally have the majority of my money invested in index funds and scour the large cap universe for investment opportunities. The Wall Street Journal just came out with an article that the Dog of the Dow stock picking methodology has had some good results lately. MF in one of their investment books popularized Dog of the Dow strategy

  • Report this Comment On November 30, 2011, at 1:39 PM, JackieBelleT wrote:

    I agree l00% with everything that TopAustrianFool said. The dictators have hidden China's enormous debt and economic burdens for years now. Tick-Tock. And his truth makes every other comment irrelevant - except for those who pointed out that China stocks and businesses are totally dominated by a Communist, corrupt (but I repeat myself) "government"....JackieBelleT

  • Report this Comment On November 30, 2011, at 2:29 PM, jm7700229 wrote:

    @ xiaoqiao75: loved your comment.

    I was kind of astonished that Motley Fool sent a team to investigate China and came away impressed after a couple weeks. What could you possibly learn about a culture thousands of years older and worlds different from the West?

    Large western companies are taking very large risks in hopes of outsized rewards. But this is Communist China. The rewards will go to the government and some of the biggies have already pulled out. If they can't figure out how to invest profitably in China, how can I?

    Investing in China will pay off for some people. Not many of them will be round eyes and most will be party members.

  • Report this Comment On November 30, 2011, at 2:45 PM, DJDynamicNC wrote:

    @JackieBelle - what is the extent of China's debt, and what measures have the dictators taken to hide it? I'm not familiar enough with China to answer those questions, but you seem to know the answers and I'm quite curious.

  • Report this Comment On November 30, 2011, at 11:52 PM, cwoperator wrote:

    I did a lot of business in Asia over the past 3 decades. I got burned badly the first time.

    In Asia doing something wrong is not ethically or morally prohibited. It is the shame and disgrace of being caught that is the issue. It's as though Asia is a society of sociopaths without conscience.

    America still suffers from the Christian ethic. We assume truth unless a lie is proven (innocent until proven guilty) and we assume that people are more fearful of God at Judgment Day than anything else, so they will simply tell the truth under oath so as not to be damned.

    As we move further from this belief our institutions fail to function, just as Jefferson predicted they would.

    So you cannot create a list of rules that would protect you or incorporate ethical analysis any more than our lawmakers can codify the kind of behavior that once was widespread in America, though they continue to try.

    Bottom line is you have to assume everything you are told is a lie, all data is false, all agreements will be broken, and if there is a way to take advantage of you it will happen.

    You must shed the ethical and moral assumptions that remain from your exposure to American life to effectively understand Asia. Then you will be successful in your dealings and opportunity evaluation. This is nothing new. People dealing in Asia have recognized it since the 1700's.

  • Report this Comment On December 01, 2011, at 11:52 AM, Tadapocus wrote:

    I have read these posts with interest and agree with much of what has been said about China and Chinese companies. That is why I suggest you investigate U.S.-based China Direct Industries Inc. (CDII).

  • Report this Comment On December 02, 2011, at 11:18 AM, Bcco11 wrote:

    Hello!!! Better get youself a Christmas present. I suggest "Poor Charlie's Almanack," edited by Peter Kaufman. All your Foolishness could have been avoided with a thourough understanding of the "The Psychology of Human Misjudgement." You'll never be a pro until you do!

    I'm a new subscriber. This expose' makes me question any of the advise presented.

  • Report this Comment On December 02, 2011, at 11:28 AM, skm1965 wrote:

    The person I value most in Motley fool is David Gardner.

    The rest who write articles bring nothing extraordinary--have hardly invested anything in these stocks or in others.We do not know their "Track record" like we know for David Gardner.

    Before you write an article--make sure that it does not bring down the reputation of MOTLEY FOOL.

  • Report this Comment On December 02, 2011, at 11:41 AM, hnderson wrote:

    200 chinese stocks? Perhaps over diversification may have also been a mistake.

  • Report this Comment On December 02, 2011, at 11:54 AM, pmagnier wrote:

    Re the comment to the effect that all MF's recommendations for China are down: I doubled and tripled my money, respectively, in CGA and CTRP. I did leave my original investment in there after realising the profits.

    APWR is another story, but I'm still well up overall in China.

    China is a risky investment okay, but an economy that will be the biggest in the World in x years is worth investing in.

  • Report this Comment On December 02, 2011, at 12:02 PM, whyaduck1128 wrote:

    I didn't invest much in Chinese companies, even when TMF was recommending them. Something just didn't feel/smell right. Call it investment conservatism, call it fear, call it semi-enlightened self-interest, call it lack of cultural understanding, call it being a chicken.

    If I'm going to swing for the fences, I prefer to go with businesses I understand, working under a set of rules I understand.

    I endorse xiaogiao75's advice--"you are better off placing your bets thru global companies who are expanding there and who hopefully play by proper governance."

  • Report this Comment On December 02, 2011, at 12:02 PM, Junster wrote:

    you are wrong to start with and now you are wrong again to make you looking even bad.

    growth hyper is never going to pan out well. be reasonable is what you need.

  • Report this Comment On December 02, 2011, at 12:29 PM, BillMacL wrote:

    I have invested in China on the advise of Motley Fool and made over 1k% and am now selling off part of these equities

    I certainly will be taking advice again from MF

  • Report this Comment On December 02, 2011, at 12:43 PM, burdoboy wrote:

    I could hope this message gets read by Tom and David but I am a realist. The MF has plunged from a light-hearted straight-laced set of newsletters that could help the average investor fare well in the market to an over-hyped, used-car dealer style of shoving new, less useful subscriptions down people's throats.... The quality of the advisors has sank to abysmal depths and been diluted beyond repair. Please refund me! I've been a fool not a FOOL!

  • Report this Comment On December 02, 2011, at 12:54 PM, ldwalaska wrote:

    What is there about a centralized, communist economy that is not recognized in the PRC's manipulation of its currency, and its economy?

    You invest in slave, substandard labor, using substandard materials, and, at times, hazmat in their finished products. Gee, guys, nothing like paying for the missiles that will strike one night. The PRC has a first strike policy, and we are the boogy man for the PRC's leadership.

    GOLD.

    Try investing in mines and mining operations in the U.S. for a change. Money is used here, money stays here.

  • Report this Comment On December 02, 2011, at 1:08 PM, Vulcluz wrote:

    To has assumed that China has the same or similar governance rules as America is as basic an error as assuming that they look like Africans or that Seattle and Xiamen have the same or similar cuisine.

    China is a 5000 year old culture. Its perspective on the US is as a young foolish culture, that has managed even its best accomplishments badly.

    In a civilisation based on direct rule, corporate governance must satisfy elites within the system and therefore, the pretense we maintain on Wall Street of good governance is utterly absent. What is prohibited in China is actually prohibited. As Professor Gilbert NMO Morris - a former Chinese advisor has written: "a 5000 year old culture will take its time in adopting our practices; particularly when we abandon them so wantonly with such devastating results".

  • Report this Comment On December 02, 2011, at 1:12 PM, jobrfool wrote:

    While I appreciated the honesty, I felt that these were rookie mistakes for reasons well-covered above. I haven't touched China or India directly for all those reasons because I thought that they were obvious, and I am certainly no expert on either country. I rate my investing knowledge and skills as modest. I still think directly investing in China and India has unusual risks related to cultural and structural factors that change slowly.

    That MF would underweight these considerations demonstrates again that we are responsible for ourselves. MF recs are a fertile source for ideas but just the beginning of the decision process.

    If you want peer review of recs and opinions within MF, see the CAPS area. It's messy, but that's what real research is like. At least there is a results-based rating system for CAPS participants.

  • Report this Comment On December 02, 2011, at 1:27 PM, ecm3131 wrote:

    I haven't touched China for an entirely different reason. The LAST thing I want as a "partner" is the communist government in China.

    I live here, and I invest where I live. The Chinese don't want to buy from us, and money invested there has a zero % chance of coming back around. As far as I'm concerned stock purchases in Chinese companies are a sell out, and I am no money whore. I have enough that I don't need to make it that way.

  • Report this Comment On December 02, 2011, at 2:12 PM, SwingStockSurfer wrote:

    LIWA = Transparent, accurate reporting with American CFO. Looks like it will be taken private in a few weeks. Frauds don't get taken private.

    http://seekingalpha.com/article/310322-is-lihua-internationa...

    http://seekingalpha.com/article/308578-lihua-international-i...

  • Report this Comment On December 02, 2011, at 2:19 PM, wileyTwo wrote:

    If you made these rank amateur mistakes why should we listen to anything you say?

  • Report this Comment On December 02, 2011, at 4:07 PM, personalwm wrote:

    You mention corporate governance being different between China and the U.S. True, not just between China and the U.S., but also between many countries. Never assume your laws are the same as in another jurisdiction.

    This holds true for accounting standards, business practices, business law, securities requirements, etc. So be careful when comparing companies in different regions. It is not always apples to apples.

    With China, and certain other countries, A major issue is a lack of transparency. General economic variables impact companies to a great extent. At times, it is hard to truly discern what is happening in China (and some others) with respect to legitimate GDP, unemployment, etc. What comes out of official channels often differs from reality. To me, this is the key issue in dealing with certain less open countries.

    For additional financial commentary, please visit www.personalwm.com.

  • Report this Comment On December 02, 2011, at 5:20 PM, josephfumich wrote:

    I agree with burdoboy's comments---every week it seems MF is pushing some new "get rich" plan.

    Am about ready to call it quits ---I don't know when I should have sold my CGA----now at a b ig loss'

  • Report this Comment On December 02, 2011, at 7:47 PM, ChaseKimball wrote:

    I think at this point the best way to play China is really to invest in a company that is not Chinese. Find out what the Chinese want and invest in the offshore companies providing it to them (because no self-respecting wealthy Chinese person would ever want anything "made in China").

    The best way to get specific here is to think of the entire country of China as a rapper that just got a record deal. In other words, recognized brand name luxury.

  • Report this Comment On December 02, 2011, at 10:16 PM, CarefreeInvest wrote:

    China is going through a "growing pain" phase during which there are many poorly run or mediocre companies got weed out in the process. This phase could be very long or short depending on how management of the Chinese companies embrace changes to become mature ie. respect of corporate governance and transparency. The good companies like SINA, Sohu and Baidu listed out by Williams happened to be all Internet companies are no coincidence. The CEO or management of these companies are all well educated either in China or in the West. They are eager to manage their companies in the best interest of shareholders. On the other hands, most of the other poorly managed companies are in traditional industries window dressed as Hi-tech stars trying to make some quick bucks from shareholders. In short knowing management is the key in public equity investments just as in private equity.

  • Report this Comment On December 02, 2011, at 10:58 PM, portefeuille wrote:
  • Report this Comment On December 03, 2011, at 7:54 AM, Smiffys wrote:

    I live in Australia; I'm investing in China by owning shares in BHP & Rio Tinto. BHP is listed on Australia's ASX & NYSE and RIO is listed on the ASX and London's LSE.

  • Report this Comment On December 03, 2011, at 9:00 AM, earlylearner wrote:

    Not trusting anyone is a v good start. Do the people in the country generally respect the role of law, private property, not fiddle their taxes, and is there a genuine democracy? If the answer's no, I wouldn't invest there directly. Investing in multinationals who trade there is the most sensible way to get exposure to growing parts of the world that I am aware of.

    Not trusting anyone also applies to anyone recommending investments that pay a commission!

  • Report this Comment On December 03, 2011, at 9:02 AM, globeflyer wrote:

    Some good thoughts on here; some of the best are the ones who remind us of facts. China is a Communist country who can do anything they want at any time, including "turning off the tap" without prior notice. They turn a deaf ear to Geithner, or anyone like him, regarding how they handle the Yuan. Why should they, they are in the driver's seat. Secondly, after hearing the news this week that China has thousands of miles of tunnels, with nukes stored inside (that The West had no previous knowledge of) it kinda make one want to run to Wal-Mart and buy some more "stuff" doesn't it? The World has been delusional regarding China's "Capitalism"; they have primarily utilized it to strengthen their global hand. One only has to look at Australia, Africa, and South America to see that "reach".

  • Report this Comment On December 03, 2011, at 9:59 AM, F111Driver wrote:

    Okay, I'll give you kudos for admitting you made a serious mistake with your assumptions.

    But considering your profile indicates that you are a Financial Journalist and you were a former investment adviser, I am frankly appalled that you would commit such a gross error in judgement.

    I don't invest in China, Russia, Iran, Iraq, Nigeria, Mexico, Liberia and many others for a very simple reason - they are utterly corrupt! But, I digress, and since you were invested in China, I'll stick to China.

    1) A Communist regime is not friendly to free (and therefore, fair) market trade...read some history books.

    2) I've been hearing for the last 15 yrs of how US companies (GM, MOT, etc, etc) were expecting HUGE profits from the investments in China, only to be disappointed on the next earnings call. Always the same excuse...regulatory obstacles. I refer you you back to point number one.

    3) You mention Warren Buffet in your profile. I would remind you that Warren is where he is today because he NEVER invests in a business he doesn't understand. I would suggest that very few people understand China, most notably the idiots on CNBC and the rest of their ilk.

    4) Successful, LONG term investing is based on the per-supposition that you know the rules, that those rules will remain relatively stable, and that those rules will be enforced by the government. I that regard, have no faith whatsoever that China will fit into my investing plans in the near future.

  • Report this Comment On December 03, 2011, at 5:06 PM, SteelThumb wrote:

    It looks like a lesson from China is that all bull and bear markets share some common themes, regardless of the country or economic system. During the bull market phase, the market was perceived as wholesome and inviting. As mood shifts and the Bear takes hold, with the Shanghai index down 50+%- bad news, market villains and market rejection become prominent traits.

    Will Chinese society more broadly reject their financial institutions as Europe and the US are now doing? How soon before OWS appears in China? :-)

  • Report this Comment On December 03, 2011, at 7:35 PM, HKrainman wrote:

    I was born in Hong Kong and returned to Asia for the last 23 years, doing business with pretty much all of Asia. Whenever you hear an expat saying how they lived in China or marry a Chinese wife for the last 10 years. It’s like me saying I marry Greek women and lived in Greece for last 10 years. Therefore I am an “Expert” regarding all matter of EU.

    China is a bigger country than the States. Here’s the bottom line. First of all, Westerner need to understand that the Orientals belive in balances, not extreme science We say to ourselves it’s ok to slow down or not get as tall, as big or as heavy. Westerner tends to do it because “They can”. Thus you have a country like America, a country of extreme.. extreme obesity, extreme diet. Leverage.. well, you get it.

    The biggest investment mistake I see all westerners made was to bypass real China Experts such as Hong Kong and go directly in to China. Most of the big SOEs are based in Hong Kong, not Shanghai.. The most “Credible” source is not in Chin

  • Report this Comment On December 03, 2011, at 8:44 PM, Sunny7039 wrote:

    My god. Somebody who calls himself RealityCheck something or other doesn't know basic logic.

  • Report this Comment On December 04, 2011, at 1:43 AM, cmxdx wrote:

    China is a communist country. Their SEC is Auschwitz.

  • Report this Comment On December 04, 2011, at 1:51 AM, ageofknowledge wrote:

    China's going to be a democracy in a couple years and they're looking out for America's interests. Haven't you been listening to the modern liberal media in the U.S.. They've guaranteed it.

  • Report this Comment On December 04, 2011, at 9:31 AM, byrontx wrote:

    So in a communist country there are not enough regulations and captalist U. S. is crippled by regulations. The reality is a fairly and tightly regulated market is the best environment for small investors.

    Btw, I constantly see reference to the "liberal media" and I am wondering where it is. Fox is the top TV news, the newspapers are for the most part owned by Hearst, Cox and Murdock (famous liberals, I suppose), and radio bias is so obvious as to dismiss the need for description. I think the MSM is actually the conservative noise machine. This country needs some liberla press just for counter-balance.

  • Report this Comment On December 04, 2011, at 9:49 AM, DrVonSteiner wrote:

    I agree with most of the China skeptics above. Having lived in Shanghai for a while doesn't make me an expert, but I saw and heard things that all the China bulls seem to ignore. (I now live elsewhere).

    The bottom line with the Chinese government is that it is the law - it will do what it wants one way or another if need be. If your company is in the way, buh-bye investment. Even if the company is technically outside the PRC, its business is presumably based on the Chinese market, and therefore subject to the government's rule - doesn't matter if it is NASDAQ or NYSE-listed.

    IMHO If you think you understand China, you probably don't. I lived there for 18 months and understood when I left much more about how things worked, but not *why*. I also had the feeling that what I knew was a tiny, tiny fraction of what was needed to feel comfortable doing business there. I don't see how someone who visits a couple of times to see their target businesses' Potemkin villages, attends a few business banquets and then heads home to write an expert "brief" can claim any understanding at all.

    Most of the US firms in China seem to struggle at the vast differences in culture and market, applying their own domestic strategies there. See Best Buy, etc.

    One last comment: I have a friend who works at a Big 5 accounting firm in Shanghai who says that if a client has 2 sets of books he's suspicious and wants to know where the 3rd set is. They commonly have a set of books for the tax authorities, one for the shareholders and one for themselves.

    Personally, I'm going to sit on the sidelines for now and wait until the Chinese market looks a little more familiar to my western eyes.

  • Report this Comment On December 04, 2011, at 10:56 AM, z572243 wrote:

    We have dealt with Chinese for generations. We learnt what to do and what to avoid with China. To understand China businesses and mentality, you must be living with them. Chinese consider China is the one and the only country should flourish and exist. They do not accept the co-existance of other countries or people. They will do anything to annihilate others. Corruption is their tradition, and in everyone's blood stream, resulting lawless ,or actually, law-can-be-broken-anytime society. If people think China can change and play by the rule, think again. It is only doing fair trade with their own ethnic groups, and only if those groups on their side.

  • Report this Comment On December 04, 2011, at 11:23 AM, Firsttimer1 wrote:

    Only one thing I have to say to all or most of you have commented about how China is bad, how it is a communist, this and that. I would say to all of you that you are all HYPOCRITES. Look what most of the businesses in US or in the West do with china because Chinese labor is cheap. As a matter of fact most of the average Americans or western citizens enjoy the cheap products of china as a result and can afford to buy what they buy now –let it be house hold products, clothing, machinery etc. If you label China as a monster and does not have western standards in doing business, and its political system is opposite of the west, then tell the big corporations of America and the west not to invest a dime in China at all. Better yet, not to have any diplomatic relationship until it becomes a democratic country. Because they are communist, there is no democracy, human right violations is rampant, etc, right, then don't deal with China in any aspect and practice what we preach-in favor of democracy. We claim to have invested in achieving democracy in Iraq, Afghanistan, Libya, etc in many ways. Why don't we do it with china, at least by suspending our relationship until it become democratic. Otherwise all you cry babies are hypocrites. FYI – I don’t buy any Chinese products or I try to avoid any products made in china. I buy made in USA, CANADA, ETC products so I would support the average Joe worker, keep the business and economy here.

  • Report this Comment On December 04, 2011, at 11:35 AM, Bobburnitt wrote:

    When will you guys learn that buying a damned old stock, is the same as placing a bet on a Horse at the Racetrack EXCEPT the TRACK is MORE HONEST!!! I would NEVER put one counterfeit USA Dollar in any of them.

    Start when you are YOUNG, buy LAND, Physical Gold and Physical silver, let everybody else chase the "quick bucks". Hang ON to these assets, the OTHER Fools will make you rich!!! Land out performs EVERYTHING else!!! Bob Burnitt Ellis County Texas

  • Report this Comment On December 05, 2011, at 2:16 AM, Mike5Davis wrote:

    I'm a guy with "L plates".However reading the mails, really guys ;the East ;(China, Malaya, Singapore, Viet Nam and Others) which I haven't been to, have similar standards. Family/political ties and a common negative response to overseas visitors who speak in loud voices. An earlier comment about different lifestyle and in our terms, business standards is real.We all assume they the Chinese etc will follow our rules. Sorry we are playing on their ground to their rules. So when you shake hands, sign a document and thats it, not really ,thats when the negotiations really start. We do have a choice: play by their rules or stay at home and play safe. Or learn to live in the real world, one where the West is getting less important each year.I have just fnished a contract with a major Chinese overseas company and nothing has changed in the last fifty years. But I must say I enjoy it!!

  • Report this Comment On December 05, 2011, at 3:46 PM, sampa7 wrote:

    Here is the problem with this analysis....ALL major emerging market stocks have fallen this year. So you could have done the same with a Brazil portfolio, an India portfolio or a Russia portfolio. Your analysis has nothing to do with China, which is still, after oil and gas soaked Russia, the best performing EM YTD despite the losses. You also pick low volume, hedge fund stocks that trade like penny stocks. Why? Where is Sina? Where is Baidu? They beat GLD YTD. Where is Galaxy Entertainment? If I told you I bought HSOL and JASO and the market tanked on me, that's not because of China or corp governance there 100%. It's also because Italy is falling apart and decided it was going to dump its solar energy policy, of which HSOL and JASO benefited. Over the last five years or so, the US econ grew 0.5%. China grew 40%. Will it continue to grow at 40%? Maybe not. HOw about 20%? Most definitely. China bears have been calling for a collapse of China for 20 years. They've been wrong every single time. It's as if they are hoping for it based on ideology alone, as if a China collapse in the housing market proves that U.S. capitalism was better. The two economies are incomparable, as are the two housing bubbles. All in all, if you had chosen small cap stocks in Brazil or India instead of China, your fund would have done even worse.

  • Report this Comment On December 06, 2011, at 7:37 PM, Sunny7039 wrote:

    What I find most striking is that everyone assumes that regardless of what happens to the Chinese economy and the Chinese worker, there will be no radical social or political change in that country. What makes you so sure that their workers would not revolt far sooner than our own? As matters stand, we owe them money -- a LOT of money -- and not vice versa. What makes you so sure (a) they don't realize that, or (b) they know but are willing to go along with this status quo? And in exchange for what? Access to our markets? You're sure about that?

    China is an enigma. We have no clue what may happen there over the next decade.

  • Report this Comment On December 28, 2011, at 11:16 PM, fjfjfjjfjjfj wrote:

    I just started a portfolio on onp and expect to make at least $10.00/sh in 2012. I bought into sprd after the attack from MW. Since then, I cashed in $13.50/sh and now rebuild my portfolio. I did the same on fmcn after MW's attack and cashed in $3.00/sh and started to rebuild my portfolio again. I expect to have $10.00/sh profit after yr-end report. Never invested in svm and sino-forest because of Chinese rules on foreign ownership of natural resources. Never trust drug companies US or Chinese because of risk involved. Never trust any internet company because the price of their company is based on rapid growth. One small slip can send the stock down. Stay away from TSTC because of their receivable is too high. Everybody thinks that Chinese economy is going to crash in 2012. That is exactly why you should invest. Inflation is down, economy cools off and everybody is afraid. Sell stocks when economy is booming. Buy stocks when the economy bottoms out. Remember what Buffet said, "Buy when everybody is afraid." Don't buy any telephone manufacturer because of competition. Cellphone is a fashion item and not a necessity .Take a look at rimm, Nokia and motorola. Buy suppliers to those companies with a dominant position such as sprd. It seems that most of the readers of MF are amateurs. By the way, with the recent drop in price of BYD due to losing market shares of their car division, Buffet still have 50% profit on byd shares which is more than any of us can say.

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