Sino-Forest: Monkey business in China? Really!

Those who were not long the stock (I was a lucky one) are keenly following the banter between the press and the company, and those who owned it are selling it as quick as they can so they can deny having owned it all.

I have no idea if there is fraudulent reporting or activity at the TRE company, but then I have no idea whether North American standards of fairness apply in China ethically or legally?  Should there prove to be some suspicious transactions, it won’t be the first, nor will it be the last instance of wealth destruction by smart folks willing to exploit the public’s appetite for a great story overseas.

In my first book, Resources Rock (2004 Insomniac Press) I discussed Bre-X:

“The little white lie grew to astronomical proportions, but whose fault was it really?  It was our fault.  Virtually everybody who was a layer in the stock market succumbed to the lure of this golden egg.  Those who deny ever owning shares in Bre-X probably weren’t players in the stock market or they’re telling their own little white lie.  We were all taken aback when the egg broke and turned out the be rotten inside, but deep down, none of us were really that surprised.”

Places like Indonesia, or Eastern Europe and the Middle East have standards of ethical behaviour remarkably different from what we’re used to.  What we would consider abhorrent, is often ordinary practice.  In a bizarre way, despite being publicly listed in Canada or the United States or Europe, and therefore subject to a multitude of (often misguided) regulatory requirements, a company operating in a foreign market can actually claim it is dealing honestly – since honesty as we strictly define it in the West is a foreign concept for most of its employees; and likely a foreign concept to that country’s government as well.

This is why larger institutional investors have large departments devoted to assessing ‘country’ risk.  A novel way of disguising country risk is to have the headquarters and public listing in a more developed market – and it’s no secret Canada loves to provide this role.  Actually, the London Stock Exchange and the Toronto Stock Exchange are kindred spirits in this respect.

Whether it’s country risk, or what I call the suspicious management factor (there are many more such flags) I generally lump all such things as the ‘heebee-jeebies.’  When I get that feeling which can’t be quantified or explained I’ll be extra wary.  It doesn’t mean I won’t own the stock, it just means I’m buying it fully aware of the added risk.  Shareholders in Sino-Forest or any company (mining, pharmaceuticals, energy, whatever…) that has the bulk of its operations overseas must assign a non-trivial probability that something unexpected (i.e. bad) might occur.  In extreme circumstances, the heebie-jeebies can often save your bacon.  This quote is from my more recent A Maverick Investor’s Guidebook:

“I cannot explain it, but something “smelled bad” to me during that meeting with company management.  It have have been the demeanor of the individuals or the “to good to be true” packaging.  Nevertheless, I didn’t buy into it.  In March of 1998, YBM Magnex International Inc. was still boasting of its plans to become “the world’s leading producer of high-energy magnets.”  Six months later, the company was under investigation for laundering money for the Russian mafia and filed for bankruptcy protections.  It was a hoax of mammoth proportions.”

And then there’s Worldcom (Canadian born Bernie Ebbers convincted of fraud) and the many others over the years.  Not surprisingly, the regulatory burden that has handcuffed the financial services industry serves only to increase the cost of doing business which is passed along to investors – and does nothing to prevent liars and cheats from exploiting us.  Kind of like the gun registry in Canada the conservatives are anxious to do away with.  Perhaps Jim Flaherty should introduce a leaner national securities administration focussed on crime rather than burdening the innocent with paperwork…..and maybe China’s golden monkeys can make that country into a democracy.

Invest to Live, Live to Ride

About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He recently authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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