China
Last week's 400 pt. plus drop on the DOW started with a sell-off on the Shanghai stock market. Now that the dust has cleared somewhat, I wanted to share my experiences with China and why I don't investing in China directly.
I have been to China twice since 2002- once on vacation, once on business. The last time I was in China was August 2005. The last time I was there my business associate and I took a cab into downtown Beijing from the airport. As we drove in, all we saw was construction crane after construction crane putting up new office towers. Here's the catch- all the finished buildings were vacant. One building would be built, be completely empty and another new office tower would be built right beside it. We ended up having drinks with a North American ex-pat and I asked him if office towers were built before anchor tenants are secured in 5 to 10 year leases (like in North America). He said no.
Basically, buildings were being built for the sake of being built. If anyone studied Japanese economic history, a similar patten emerged in the late 80's (and the Japanese banking system went into crisis in the 1990's). At some point in time, the banks can only finance so many office towers with no cash flow before the country's economic system experiences some shocks.
The other thing that worried me was whether economic growth was being fueled by throwing bodies at the problem with concern for efficiency. We took a walk in Shanghai one night and there were at least 20 men at a construction site surrounding construction equipment- one guy operating the machine, one guy supervising and the rest of the guys standing around. Its not like they didn't want to help but you can't put 18 guys at work on a construction site which is 10x10 at the very most. However, statistically speaking, this company employed 20 people.
So I wonder if these economic growth is being made by just employing people for the sake of employing people (whether for economic or political reasons) or there is proper productivity gains being made.
Third observation- while we were there, the news reported that the government was bailing out the 5th largest investment bank in the country since it was in financial trouble. Does this inspire confidence if a supposedly pillar of the financial community is in trouble? Imagine what the American economy would be like if the 5th largest investment house in the United States needed to be bailed out?
These observations really scares me- I wonder how stable the fundamentals of the financial system are if this is what is happening on the street level. Peter Lynch, who is a successful mutual fund manager and author, teaches his readers that you should invest in what you know and what you are comfortable with.
Based on my experience, I am not comfortable with the economic development of China supporting a public traded company I would buy (note I am not down on China, I am down on investing on a Chinese publicly traded company). I do believe the country is growing and becoming an economic super-power but at this point in time, I do not want to invest in any public traded company based in China based on concerns about the underlying economic fundamentals.
An investment advisor once told me that the cheaper way to invest in a trend is to invest in fundamentally solid companies that support the trend. For example, when eBay was at its peak, purchasing stock in UPS or FedEx would have been a good idea (after all who's going to deliver all of these purchases?). If China is growing, and you want to invest, think of shipping companies, warehousing and logistics companies- companies that would benefit from the growth of the country.
I have been to China twice since 2002- once on vacation, once on business. The last time I was in China was August 2005. The last time I was there my business associate and I took a cab into downtown Beijing from the airport. As we drove in, all we saw was construction crane after construction crane putting up new office towers. Here's the catch- all the finished buildings were vacant. One building would be built, be completely empty and another new office tower would be built right beside it. We ended up having drinks with a North American ex-pat and I asked him if office towers were built before anchor tenants are secured in 5 to 10 year leases (like in North America). He said no.
Basically, buildings were being built for the sake of being built. If anyone studied Japanese economic history, a similar patten emerged in the late 80's (and the Japanese banking system went into crisis in the 1990's). At some point in time, the banks can only finance so many office towers with no cash flow before the country's economic system experiences some shocks.
The other thing that worried me was whether economic growth was being fueled by throwing bodies at the problem with concern for efficiency. We took a walk in Shanghai one night and there were at least 20 men at a construction site surrounding construction equipment- one guy operating the machine, one guy supervising and the rest of the guys standing around. Its not like they didn't want to help but you can't put 18 guys at work on a construction site which is 10x10 at the very most. However, statistically speaking, this company employed 20 people.
So I wonder if these economic growth is being made by just employing people for the sake of employing people (whether for economic or political reasons) or there is proper productivity gains being made.
Third observation- while we were there, the news reported that the government was bailing out the 5th largest investment bank in the country since it was in financial trouble. Does this inspire confidence if a supposedly pillar of the financial community is in trouble? Imagine what the American economy would be like if the 5th largest investment house in the United States needed to be bailed out?
These observations really scares me- I wonder how stable the fundamentals of the financial system are if this is what is happening on the street level. Peter Lynch, who is a successful mutual fund manager and author, teaches his readers that you should invest in what you know and what you are comfortable with.
Based on my experience, I am not comfortable with the economic development of China supporting a public traded company I would buy (note I am not down on China, I am down on investing on a Chinese publicly traded company). I do believe the country is growing and becoming an economic super-power but at this point in time, I do not want to invest in any public traded company based in China based on concerns about the underlying economic fundamentals.
An investment advisor once told me that the cheaper way to invest in a trend is to invest in fundamentally solid companies that support the trend. For example, when eBay was at its peak, purchasing stock in UPS or FedEx would have been a good idea (after all who's going to deliver all of these purchases?). If China is growing, and you want to invest, think of shipping companies, warehousing and logistics companies- companies that would benefit from the growth of the country.
Labels: Investment strategy
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