The Antibubble, Final Chapter
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.