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dillbeans (42.52)

The Antibubble, Final Chapter

Recs

16

March 03, 2013 – Comments (9) | RELATED TICKERS: LPIH , SIHI.DL , HEAT

I was wrong. Spectacularly and expensively so. If anyone was influenced by my arguments and lost money as a result, I apologize.

In previous posts (The Antibubble and The Antibubble, Part 2),  I argued that the market was over-reacting to revelations that a few Chinese RTOs were fraudulent and was irrationally valuing this group of companies, offering opportunity for the strong of stomach to buy on the cheap. Well, the market was right and I was wrong. Fools Valyoo and TMFBabo took me to task; I argued back. My arguments were terrific, or so it seemed to me. They were also flat wrong. Even at their extremely low valuations, and even using a "basket" approach to minimize the damage from flame-outs, Chinese RTOs were not a good investment. Here's how it worked out for me:

Shengkai Innovations (VALV): Mysteriously went from incredibly profitable to unprofitable; threw out their profitable business model because some investors were calling their customers, in favor of a model they predict won't generate much profit for a few years. An 85% loss for me.

Sinohub (SIHI): Dissolved in a fit of internecine squabbling. A 97% loss.

SmartHeat (HEAT:) Imploded amid accounting irregularities. A 99% loss.

Longwei Petroleum (LPH): The last domino to fall. Trading has been halted for more than a month amid accusations of blatant fraud and a response that doesn't even qualify as anemic. I think it's fair to anticipate a total loss.

Lest you think I merely suffered from bad selection, check out how ChinaRTO has fared over the past couple years. He indiscriminately red-thumbed every Chinese RTO he could find.

I've paid cash dollars for this schooling. I might as well study up on my lessons so as to get something of worth from the episode. Here, in no particular order, is what I think I've learned:

A. Extreme value is not value. If it's that cheap, respect the reason.

B. Bad logic can draw the correct conclusion. One reason I thought the market was mis-pricing these assets was the tenor of many arguments against them. Arguments seemed overly emotional, xenophobic, and over-generalizing. I still disrespect these arguments; but they were a lot better on the facts than I was.

C. Never invest more than you can afford to lose. Knowing these companies were a dicey proposition, I limited my allocation. As a result, the outcome was painful but not devastating.

D. Antibubbles seem to be rarer than bubbles. This is disappointing to me because to profit from a bubble, you have to go short, which is against my personal rules of investing. Perhaps this means that in the end, greed is stronger than fear and loathing.

E. Stick with Bogle and the Fool. I long ago observed that, left to my own devices, I can significantly underperform the market. I have tested that observation repeatedly over the years and it seems to have remarkable staying power. I hereby resolve that my future investments will be in index funds or stocks recommended by one of my two Fool newsletters. That lesson right there, if anything, was worth the price of my tuition.

9 Comments – Post Your Own

#1) On March 03, 2013 at 7:20 PM, awallejr (83.83) wrote:

Well that is how you have to look at losses, the cost of learning.  We've all made them.

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#2) On March 04, 2013 at 12:09 AM, zzlangerhans (99.70) wrote:

Should get 1000 CAPS points for admitting you were wrong about something. Seems to be one of the more difficult things for people to do around here.

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#3) On March 04, 2013 at 10:36 AM, JaysRage (88.77) wrote:

I gave my mea culpa on the Chinese stocks a while back too. If you search my blog history, you'll find a series of "how-to" blogs on Chinese small caps, followed by an apology.   

B. was the hardest for me to swallow, because I actually do my homework and can tell when someone else doesn't.   However, I realized that even a poorly articulated counter-thesis is worth evaluating.   However, Valyoo and Babo usually have the goods.

I became a MUCH better investor because of that up and down.      

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#4) On March 04, 2013 at 11:51 AM, Option1307 (29.70) wrote:

Takes a lot of courage to admit you're wrong, especially on the Internet where everybody claims to be "the next great investor" ha ha.

However it's important to admit our faults and learn from them. So I give you props for being able to do that.

+1 

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#5) On March 04, 2013 at 11:51 AM, Option1307 (29.70) wrote:

Takes a lot of courage to admit you're wrong, especially on the Internet where everybody claims to be "the next great investor" ha ha.

However it's important to admit our faults and learn from them. So I give you props for being able to do that.

+1 

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#6) On March 04, 2013 at 12:00 PM, EnigmaDude (94.22) wrote:

LPH fooled a lot of top Fools, including me!  Fortunately I got out before things got too bloody. 

Good post.  It's always helpful when one can learn from mistakes whether your own or others!

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#7) On March 04, 2013 at 1:46 PM, awallejr (83.83) wrote:

Today was a lesson I had learned from a past mistake.  I had bought ATPG preferreds and pretty much let them trade to near zero in hopes that the company had sufficient assets.  Looking like they don't and so will lose my investment.

I took a gamble last year on another preferred play (GMXR).  But this time I kept stop losses protecting at least some of my profit as well as having received a year's worth of dividends.  Looks like GMXR may file BK as well but this time I learned my lesson to protect some gains and move out and on.  It might still turn out as a nice speculative play but I don't care to chance it.

That is all you can do in the end.  But one thing I do urge is not to put all your money in one basket unless you are prepared to lose it all.  I don't like having any one stock exceeding 5% of my portfolio.

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#8) On March 05, 2013 at 1:46 AM, Valyooo (99.42) wrote:

I heavily applaud you for making this blog.  I rarely hear admissions of being wrong.

 

I am wrong all the time.  I made big bets against on vix thinking "it's too low".  Wrong.

 

However, I made a caps character shortingchina   I think he is like #35 on the site now haha 

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#9) On March 05, 2013 at 1:48 AM, Valyooo (99.42) wrote:

dillbeans email me at info1@theschmeisserfunds.com , because I like that you admitted you were wrong and I want to just give you some support instead of you becoming discouraged.  I've been there before multiple times.

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