Buying Straw Hats in Winter

CDII

China Direct Industries, Inc.

As part of my position at China Direct Industries, I oversee the public and investor relations component of our company, as well as a number of our publicly traded China-based advisory services clients.  As you can well imagine, that has me travelling quite often to investor and corporate conferences across the globe.  Very recently, I attended a conference in New York, sponsored by a major law firm, centered on the topic of China.  This conference was unique in many ways, but most strikingly so because of its main topic: fraud. The reason I found this topic so striking was that, for the last four years, when it came to China, the conferences were more about growth, the opportunity of a lifetime, and the sheer power of numbers that China possesses compared to the rest of the world.  It made me think about what a difference the last nine months has made for China stocks in the U.S. As I was watching some noted China bears go at it with some few remaining China bulls in a white collar Jerry Springer-like format, I could not stop my mind from drifting nostalgically into the past when I worked in the brokerage industry.

Having spent the better part of twenty years in the investment banking and brokerage industry, I have heard a great many clichés.  Classic sayings like “The trend is your friend” or “Bulls and bears make money, pigs get slaughtered” could be heard every day as brokers talked to their clients or managers tried to pump up the sales force. But, my favorite cliché, which I first heard from a retail sales manager who still remains one of my closest friends, was a bit more obscure “You should always buy your straw hats in winter”.  Maybe it struck a chord with me because I lived close to, dare I say it, the “Jersey Shore” and know that, come the day after Labor Day, all the beaches are free and every straw hat, umbrella and beach towel sold at the local shops gets marked down 40%, 50% and 70% as each week goes by.  Is investing with that philosophy the key to long term success? By itself, of course it’s not.  Nothing takes the place of doing your homework on individual stocks, but buying companies in a sector that is very out of favor can lead to huge returns over time.

History gives us many examples of hot sectors that have gone bust only to rise up again even stronger to handsomely reward the straw hat buyers willing to buck the trend.  In my past, I can vividly recall how the “Dot Com” sector went from “wave of the future” to “four letter word” in the span of six months in the year 2000.  High profile telecommunications companies like Lucent and World Com, which grew tremendously servicing that sector, turned out to basically be “cooking the books” to use another industry cliché.  Back then, every internet company and most tech companies were “a lie”, “a fraud”, and “going to zero”.  Sounds familiar, doesn’t it? Many internet companies did go bust or were swallowed up by larger companies for next to nothing, but many also far outperformed the market in the next 5 to 10 years.  Two that come to mind for the savvy straw hat buyers of 2001 were Captain Kirk’s Priceline, trading as low as $1.80 from a high of over $100 in 2000 (prior to a 1 for 6 reverse stock split), and a debt ridden online bookstore trading as low as $5.51 down from over $90 in 2000. I think its name was Amazon.com.

Closer to the present, when thinking of “fraud” or “worthless”, my mind settles on the banking industry and auto companies like GM.  The near collapse of our financial industry created a panic that briefly ushered in a new penny stock era with the likes of Citibank, Bank of America and Ford as its new ambassadors (all of which were trading close to a dollar or two a share).  In fact, there were so many cheap straw hats created by the panic of 2008 that the straw hat buyer did not even need to be that savvy to make a boat load of money in less than two years. And, for the record, I did make money on a few shares myself.

Sometimes it just gets too easy when a sector is hot, resulting in shoddy due diligence, overvaluation and sheer greed taking over.  The China sector is no different, and the problems now surfacing in accounting irregularities and, in several instances outright fraud, have certainly raised the risks for investors to very high levels.  But, sheer panic makes the pendulum swing too far the other way.  When it does, a company like Harbin Electric (a straw hat I happened to make some money on) traded at a 50% discount to an all-cash takeover offer of $24 per share.  The fact that this offer was vetted by several major law firms and financial institutions was lost in a high profile short-long tug of war.  Harbin did get taken over for that cash price in November of 2011 despite the widely publicized assurances of several major short sellers that it definitely would not happen.

So, as my mind wandered back into this conference and I listened to some really smart people make mostly negative comments about pretty much all China-based companies, I kept wondering if I had enough room in my closet for a few new hats.  While what has happened in China is very unsettling in terms of accounting irregularities, fraud and, more importantly, the difficulty in pursuing legal remedies where improprieties exist, it does not mean that every company in China is “a fraud”, “a lie”, and “going to zero”.  To the contrary, China is the only major country with a surplus that is still growing at a good pace. Compare that to the Euro Zone or even our country.  I guess that means to me that I will do a great deal of homework on China stocks and follow the actions of my favorite fictional straw hat buyer, Mr. Potter from the classic movie “It’s a Wonderful Life” who bought when others were in sheer panic during the Great Depression.  And guess what? He certainly wasn’t the nicest man in the little town of Bedford Falls, but he was by far the richest and he kept getting wealthier all the time!

Richard Galterio

Vice President

China Direct Industries, Inc. (NASDAQ:CDII)

431 Fairway Drive, Suite 200

Deerfield Beach, FL 33441

Office: 954.363.7333 ext. 316

Toll-Free: 877.680.7333

Fax: 954.363.7320

Email: richard.galterio@cdii.net

Website: www.cdii.net

Corporate Social Media Sites
http://twitter.com/ChinaDirectCDII/
https://cdiichinadirect.wordpress.com/
http://www.linkedin.com/company/cdii

Subsidiaries Websites.
http://www.magnesiumgroup.com/
http://www.cdiitrading.com/

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  1. Can’t wait for other articles similar to this.

  2. Good tips. I totally agree with you. More article please!

  3. Good day. Mainly needed to submit and express that I liked this content. I’ll be bookmarking your page and looking to find out if you post any additional ones. Many thanks!

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