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chart of stocks

Chinese stock performance over time

via rp-pix.com
@ResearchPuzzler is a sensible mid-Western C.P.A. He created this chart in April 2011, to demonstrate the risks of investing in shares of Chinese* companies.

All four stocks above were part of reverse merger or IPO mania earlier this year. All halted trading during March 2011. The most dramatic performer was China MediaExpress (CCME).

The y-axis represents total return** since end-of-month June 2010. That is, once these stocks start trading again. IF they trade again. And that is what investors in CCME must wait for in order to realize any profit, or even recoup their initial investment in common stock holdings of CCME.

@ResearchPuzzler followed up with a post on the same subject matter today. He mentioned that investors in the four companies charted above are still trapped.

Just as a fraudulent stock can cause grievous harm to a portfolio, a widely held investment thesis gone wrong can disrupt the very nature of the investment ecosystem.

If one is not an expert in Chinese accounting practices, nor has done due diligence, it is impossible to size the gap between truth and reality.

As we do with other countries, we rely on Chinese government statistics to inform our decision-making. How much do we know about them? How good are they?

Official government statistical data about China is published and available online. Finding someone with the expertise to interpret this data correctly is another matter.

@ResearchPuzzler is not predicting a melt-down in Chinese markets. This is the message to take away, and one with which I agree:

Information about China’s economy and companies is generally being taken at face value. Investors must consciously decide whether that is an acceptable strategy or whether a margin of care needs to be applied.

“China” refers to The People’s Republic of China, not Taiwan. Taiwan’s equity markets are entirely separate and different.
** Total return assuming a liquid market in these securities resumes.