Poor china ? Poor world !

The Motley Fool has a good piece on the current state of Chinese stocks. The recommendation is to avoid small cap stocks, as they are just too hard to figure out right now.

One has to explain to people who are not into stock investing that "too hard to figure" is  a nice phrase of a situation in which it turns out that quite a bunch of  Chinese companies have turned out as frauds. Their reports, numbers, data have turned out to be completely invented. And we are talking here about Chinese corporations that have been enlisted for trade in the U.S stock markets. and have undergone a due diligence process in which international accounting firms were involved.

The conclusion, for me, as a person who has invested in several Chinese stocks, small and large cap, is clear.
I'll wrap my Chinese investments, which are worth now much less than they were, put them aside and wait patiently for the time until that specific area of the stock market returns to its senses. Selling would mean losing too much, and as I've said It isn't clear whether the numbers are real or not. If they are real - then once the market gets back to its senses, these are good investment in the old price and huge investment in the current price. But if the numbers are falsified, then any Dollar added in, is a Dollar thrown away.  Hence the sit-it-out-and-wait approach.

Until that time, and as a lesson learnt, I'll avoid any new investments in any other Chinese stocks.
If you can't trust the reported numbers, you DON'T KNOW ANYTHING. Which means that buying a Chinese stock, regardless of the stock market it is registered in, or the proclaimed due diligence process it has underwent, is an equal act to buying a lottery ticket.

One important lesson of the China adventure is that Warren Buffet's old rule number 1 has been reinvigorated. It is much better to invest in a known and trusted fields for a smaller yield, than to seek ways to recover from exotic adventures.

What really makes me sad is the implication for all developing countries. If China, the new economic giant, is hiding such skeletons in its closets, and international standards are helpless in helping rational investors make decisions, it will be much harder from now for the developing nations to recruit investments.

Don't get me wrong. I know the greed of humans ensures that there will always be a flow of money to places where huge yields are promised. But One cannot create thriving economies on speculative fortunes. It is the finance of rational investments that enables true, viable growth.

And that finance is going to be directed, once again, to the trusted economies of yesterday, thanks to China. 


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