Trust Management or Don't Buy

Investing can be a leap of faith.

Investors seemed to have forgotten American Oriental Bioengineering (NYSE: AOB). Last week, the purveyor of traditional Chinese medical products bought a $70 million building to use as a "Convention and Training Center," according to its 8-K filing.

With not much else to go on but the sparsely worded 8-K, investors sent the stock down almost 22%. It seems investors were worried that the company with hopes of becoming the Johnson & Johnson (NYSE: JNJ) of China was trying to zoom past being a health-care giant and head straight to being a multi-industry conglomerate like General Electric (NYSE: GE) and Tyco International (NYSE: TYC).

Lost in translation or just lost
A follow-up press release wasn't much clearer, but at least it didn't mention using the property as a convention center, so it's likely the company isn't going into the hospitality business; the building will more likely be used for core functions. In fact, management said as much when asked about a deposit for some land in the second quarter's conference call: "The land is going to be used for R&D as well as administrative function, together with some training purposes." Still, it's possible this isn't the same property and that the proposed use could have changed since last summer.

Frankly, I think investors who sold after the drop made a mistake. I have a hard time seeing this as a Satyam Computer (NYSE: SAY) sequel. In the end, it basically comes down to trusting management.

Sure, management has done some seemingly weird stuff:

• The company went public in the U.S. via a reverse merger into a worthless shell company and, while on the Pink Sheets, management paid a stock promoter to hype its shares.
• In an act that looked like financial schizophrenia, it announced a stock buyback program, and then less than 24 hours later said it was issuing convertible preferred stock in a private offering.
• Management announced that it was buying a distribution company and then later said it would buy a different, cheaper one.

But if you did your homework beforehand, then you were comfortable with all that and should trust that management is making the right decision about buying a building and land. Quick reactions are often what cause investors to lose money, not make it.

Investing in the Chinese roller coaster has to be, in part, an act of faith. Whether it's American Oriental Bioengineering, China Mobile (NYSE: CHL), or Baidu.com (Nasdaq: BIDU), investors should be comfortable with their decision and stick with it unless there's a fundamental change in the company. If you can't trust or understand management's decisions, invest elsewhere. There are plenty of fish in the sea.