China Investor Comes Clean

Zack Buckley is an external contributor to TheStreet whose commentary is unrelated to TheStreet's news coverage.

To his credit, out of all the major figures (Alan Greenspan) was the only one who promptly said 'I was a horse's ass' ... I think we need more of that sort of thing. -- Charlie Munger

NEW YORK (TheStreet) -- Over the past two years, I have not only been buying and recommending Chinese companies to other investors, but I have also had a substantial amount of my own portfolio invested in Chinese companies listed on U.S. stock exchanges.

Many of these companies seemed like an investment opportunity of a lifetime, so I set out on a trip to China in an effort to understand them better and confirm that they were indeed excellent investment opportunities run by honest, capable Buffett-type managers. Instead, my trip had the opposite result.

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After spending two months in China visiting 50 publicly traded companies listed on the U.S. markets, my thoughts on investing in China have changed drastically. It is tough to admit when you've been a "horse's ass," but I believe my own investing in China and recommendations of Chinese stocks have made me exactly that.

As a value investor, I only invest when I feel I have a solid understanding of the company and that the company is worth substantially more than its current market cap. Before my visit, I knew that I did not understand the Chinese companies as well as I would a company in the U.S., but I felt that the valuation of the Chinese companies, as well as a basket approach to ownership, would more than compensate for this risk. I now feel that investment approach is deeply flawed.

I discovered that American investors generally have little to no understanding of what is actually happening in the Chinese companies that they own for two main, interconnected reasons: Not only is business in China more likely to be fraudulent (as most native Chinese citizens will tell you), but American professionals also are not protecting U.S. shareholders the way they should be.