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    (Original post by The Financier)
    Just to add to this, I think it's important to stress that "cheap" has to be looked at in context as to why they have become cheap. If companies are cheaper because they are highly exposed to FX movement or general trade (import of components, exports of products etc.) then Brexit clearly impacts their fundamentals significantly and a fall in the price isn't necessarily an overreaction by the market. When there's blood on the streets, it's usually a good time to buy but won't always end well (dead cat bounces etc.) if looked at purely from a price movement perspective without consideration of the long term implications.

    What are your thoughts on whether US equities are too expensive relative to Eurozone equities?
    Yes. In many of my posts and my post for beginners I stress the importance of understanding the business before you invest. Somebody who understands the business would therefore know why it is selling at the price it is selling and what it's really worth.

    What I emphasized on the post is not to buy securities just because they're cheap. Rather, if you have a batch of companies you would like to buy now (and they appear to be overvalued) and you believe a crash is imminent, to wait and buy them during a downturn when they turn cheap. There are two ways to approach this:
    1) Hold off investing in them until the downturn occurs.
    2) Enter a position in the companies now and add more to your position when the downturn occurs. In other words, average down.

    Eurozone is a really vast category. Having said that, there are opportunities everywhere. It depends on how deep you look. In general, I don't find the US market to be cheap at the moment, although there are still bargains to be found.

    What is your approach to investing? Have you started any sizable positions as of late?
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    Update No. 29: Investing in Value and Risk Management


    Today I’m answering the third question from the batch selected on Update No. 24: How To Start Investing.

    Question: How do you invest and what do you invest in? Do you go long and short or just long? Do you invest in stocks or in other asset classes too? Finally, could you provide tips on risk management?

    ~ Ellen from Tianjin


    Answer:

    Hi, Ellen. Thank you for your question. It’s great to know that there are value shops in Mainland China as well. I will break up my answer into segments so that it is easier to read for you and other readers.

    How I invest and what I invest in:

    My main goal in investing is to identify securities that are selling at a big discount to their intrinsic value. This provides both a margin of safety in case the unexpected happens and value erodes, and it offers great upside potential.

    I perform extensive due diligence in all my potential investments. This means that I look at all the available filings for at least the last five years, although I will usually look over the last 10 years of data. I will look at the financial filings and analyze the numbers for quality of earnings; I will go over management and ask around about their behavior, how they treat other stakeholders, their words and actions, etc.; I will go over the legal documents and analyze all relationships and covenants; I will look into the history of other large stakeholders; and I will make a lot of calls and inquiries.

    In short, I look through every nook and cranny to see how I could lose money. I always attempt to kill the company and see what remains. By analyzing the entire capital structure, I can perform credit plays. Sometimes the equity can be a capital-losing investment, but the debt gets full recovery or receives the fulcrum security in a reorganization; the fulcrum being the post-reorganization equity. Sometimes things look good and the equity is both safe and offers great upside. Sometimes, the company in its totality is a bad investment and it’s better to simply avoid it.

    I look across all asset classes globally. Having said that, equities are usually the best bet as they offer the most upside. In tough times however, there are more opportunities in debt than in equity. I stick to the markets I understand financially, legally and culturally. Although most of my investing activities are in the US, Canada, the UK or Australia, I will also look at other markets such as Japan, Hong Kong, Singapore and Western Europe.

    Long, Short or both:

    I am willing to go both long and short, though I usually stick to being long. I will usually look at the equity first, and if it looks terrible, I will look at the debt. If both are terrible I usually just leave the company alone. When considering going short I usually look at sector downturns and then take it from there. For example, if you had been analyzing the energy sector for the past two years, you could have noticed that a storm was brewing and you would have shorted offshore drillers and coal companies. You would have made a lot of money. The thing with shorting is that you may be right about the company, but the market can stay irrational for far longer than you expect.

    On risk management:

    The best risk management tactic is to truly understand the business you are investing in and its capital structure. Nothing beats thorough understanding.

    There are several ways through which I approach risk management and I will list a few.
    1. By having an asset allocation plan – I will set percentages of how much in total I will allocate to a specific asset class. This also means always having a certain percentage of cash & cash equivalents available.
    2. By having a situation allocation plan – Here I divide it into situations, such as a focus on cheapness, growth, distress, special situations, etc.
    3. By having a sector allocation plan – I set a maximum percentage of how much I will be invested in one sector at a given time.
    4. By having a concentrated portfolio – I set a cap on the number of my holdings. This ensures that I understand all the business that I own and that I am able to keep track of changes in their fundamentals.
    5. By having a long-term philosophy – Value can take time to be unlocked and this usually takes more than just a year, unless we are talking about special situations such as mergers, liquidations and spin-offs.
    6. By being flexible and objective – I have an investment strategy to which I stick. The rules of the strategy aren’t built in stone, however, and if the situation merits a different course of action, then I will take it. I am in the investing business to make money and to not lose any, not to fall in love with names – I must never forget that.
    All of these tactics are part of my investing philosophy or strategy. By developing a system built through experience, common sense and objectiveness I can approach investing in a practical and rational manner. At the end of the day you must remember that you eat the fruits of your labor. If you take proper measures, you will reap the rewards. If not, you will rightfully suffer the consequences. Hopefully, my answer has given you some insight on how to better build your own investment philosophy.

    As always, you can ask me any questions you have and I will be glad to answer.

    Cheers,

    Jean

    Disclaimer: My writings are my opinion only and do not represent professional financial or legal advice.
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    (Original post by jcarlo)
    Eurozone is a really vast category. Having said that, there are opportunities everywhere. It depends on how deep you look. In general, I don't find the US market to be cheap at the moment, although there are still bargains to be found.

    What is your approach to investing? Have you started any sizable positions as of late?
    Haha yeah of course. Just meant in terms of the market in general (S&P vs Euro Stoxx).

    I'm currently readjusting my approach significantly. I'm thinking of having a core of passive investments (a bunch of ETFs in essence) whilst I'll look at small companies for my active segment.

    What are your thoughts on Smart Beta ETFs?
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    (Original post by The Financier)
    Haha yeah of course. Just meant in terms of the market in general (S&P vs Euro Stoxx).

    I'm currently readjusting my approach significantly. I'm thinking of having a core of passive investments (a bunch of ETFs in essence) whilst I'll look at small companies for my active segment.

    What are your thoughts on Smart Beta ETFs?
    What kind of approach will you take for your active segment?

    I'm not a big fan of ETFs or indexes in general. The only index I might support if you push me would be the tried and true S&P 500. It's a good option for those who can't be or don't want to be very involved; It sure beats not investing and it's the benchmark for a reason.

    As you might have noticed, I don't recommend investing in things you don't understand, and most people don't understand the underlying securities in whatever ETF they are planning on investing in. Imagine the panic during a meltdown.
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    Update No. 30: Learning From The Investing Greats

    Optimum learning is achieved through three methods:
    1) Learning best practices from the best
    2) Learning what to avoid from others' mistakes
    3) Experience

    The process of optimum learning is done through being constantly exposed to #1 and #2, and then finally doing #3 and putting things into practice.

    In investing, just as in everything else, I encourage others and myself to constantly seek knowledge. Today I want to write a brief post on method #1: learning best practices from the best.

    While there are many ways to invest and many ways to make money investing, today I want to share three methods of investing. These three ways of investing greatly influenced my investment philosophy and they come from two of the best investors in the world.

    In no particular order, here they are:

    1) Warren Buffett on traditional value investing – buying cheap companies

    2) Warren Buffett on buying great businesses – qualitative investing

    3) Stanley Druckenmiller on investing in the future – taking note of the environment

    Extra video:

    1) Warren Buffett on investing within your circle of competence

    Warren Buffett made his first millions investing in cheap companies, where the real value of the business greatly exceeded the market price. Later coined “cigar butt investing”, the approach isn’t greatly concerned on whether a business is doing great or not; rather, it focuses on the difference between the intrinsic value of the business and the market price. It emphasizes a margin of safety and is to a great degree quantitative. This is video #1.

    After making millions and growing to have a lot of money, Buffett then moved on to investing in great businesses. The focus was no longer on quantitative cheapness, but on the qualitative earnings power. Buffett was looking for businesses with great returns, competitive advantages, great management and a great future. This is video #2.

    Stanley Druckenmiller has been one of the few people who have had investment returns that can be compared to those of Buffett. His investing approach is different, however. While Druckenmiller also pays great attention to the underlying conditions of a security, he also pays great attention to the views of the market. When considering an investment, Druckenmiller assesses how the market will view a security 18 to 24 months from the present, and he takes it from there. While Druckenmiller is greatly famous for shorting the British pound and breaking the Bank of England, his approach has made him and his investors billions. He looks across all asset classes globally and looks into the future to determine what to invest in.

    While Buffett and Druckenmiller might have differences in their approach, they also have similarities. Both have invested long and short and both invest across all asset classes around the world. Both investors run a concentrated portfolio, don’t like diversification, and analyze their businesses intensely. Both understand what they are investing on and when they invest, they invest big.

    Successful investors all have one thing in common – they know what they are doing. I’m sure you will find the four videos above greatly helpful in your never-ending learning quest to greater wealth and greater knowledge. As always, if you have any questions, feel free to send me a message.

    Cheers,
    Jean
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    Update No. 31: The Elements of a Valid Contract

    We enter into contracts regularly in our lives. Even though we do so, and even though we understand that there are consequences to breaking a contract, most people don’t understand the contracts they agree to. Most people don’t even know what constitutes a valid contract, and whether whatever contract it is they are agreeing to is valid or not.

    Today I want to lay out what makes a valid contract. I will cover both the American and British legal systems. You will notice that they are in fact very similar.

    Understanding what makes a valid contract will help us not only in determining whether a contract we are presented with is enforceable or not, but it also enables us to write our own.

    Without further ado, here are the characteristics that must be present for a contract to be valid:

    1. Offer and Acceptance – One party offers to enter into a legal agreement, and the other accepts the terms of such offer. You ask the bank manager: “Will you give me a loan of $5,000 for five years at an annual rate of 10%? (offer) If the manager accepts, there is offer and acceptance.
    2. Intention to Create Legal Relations – In English law, the law assumes that in business and any professional transactions, the parties have an intention to create legal relations. If a party were to argue that no legal relations were intended, then the party must prove otherwise.
    3. Contractual Capacity – Both parties entering into the contract must have the capacity to do so. That is, they must be of sound mind. Mentally ill people cannot enter into contractual relationships unless certain conditions are met.
    4. Genuine consent – Consent must be voluntary and not obtained by fraud, duress, pressure or threat. If you threatened the bank manager in order to obtain his acceptance, no binding contract would exist.
    5. Consideration – Any promises made must be supported by valuable consideration. As long as a promise is paired by the promise of the other party, valuable consideration exists. Valuable consideration consists in some benefit, interest, profit, or right being given or some detriment, forbearance, loss or responsibility given or suffered. In simple words, the parties either give or suffer something that they wouldn’t have given or suffered were the contract not existed.
    6. Legality – The object of the contract must be legal and not go against public policy.
    7. Form – Some contracts require a specific form to be enforceable, such as to be in writing.
    8. Possibility of Performance – Performance of the obligation must be possible. No valid contract exists between John and Tom, where Tom promises to sell property in the “mountain of Olympus”.
    These eight characteristics must be present for a contract to be valid. Now that you know them, I encourage you to learn more so that you are better equipped in both business and in life.

    For an entertaining look at contract analysis, see the following link. A lawyer analyses Bilbo’s contract in the movie ‘The Hobbit’.

    Disclaimer: My writings do not represent professional legal advice and must not be considered so. For professional help, please see a lawyer.


    References:

    Barker David (2014) Law Made Simple, Thirteenth edition, Abingdon UK:
    Routledge.
    CLARKSON, K., F. CROSS, and R MILLER, 2014. Business Law: Text and Cases. 13th ed. California: South-Western College.
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    Update No. 32: On Your Dreams (A Practical Guide)

    We all have dreams and goals in our lives. Some of us are born with a dream; others discover it on the way. Some people are born into privileged families and have the connections and encouragement in front of them; others aren’t. I want to talk to the latter group.

    We all have a dream, a vision of who we want to be and how we are going to live. In our lives circumstances present themselves, there is no money, your family doesn’t encourage you, nobody encourages you. Suddenly that vision hides in the back of our minds. Suddenly it transforms into something that we would love to achieve but that seems unachievable, just a fantasy. We come to the realization that life is tough and that some people have it easier than others. Yet, there is hope.

    Don’t lose that hope, because your dream can be your reality. It sounds cliché, it is easier said than done, I know. We see that there are some who seem to have risen from nothing and achieved more than they could ever hope for. Jack Ma, Li Ka Shing, Howard Schultz, Ken Langone, Oprah Winfrey, Kirk Kerkorian, John Paul DeJoria, Ralph Lauren, George Soros, Larry Ellison. These are just but a few. How did they do it?

    Persistence. Determination. Character. Let me tell you that if there is something these people possess more than others it is character. When everyone said no to them, when the circumstances were dire and all the odds seemed to be against them, they pushed forward. At the end of the tunnel, all we have is this one life, all we have is ourselves, and it is our character that will either make us or break us. Character comes from hardship. After a man grows an illusion and decides to fight for it, life strips him naked and beats him mercilessly. The friends we thought we had, the family support, the encouragement – they’re all gone. The worst type of pain is the psychological, because everything crumbles and we question ourselves. Push forward. Push forward even if it all seems meaningless and ineffective.

    The best example of character and what never giving up can bring us comes from one man. This one man suffered it all, and what I am about to say is not fiction to make you feel better. It is history. I encourage you to look it up. That one man is Genghis Khan. He was born into a life of violence. His father didn’t love him and was killed, his mother at times called him a monster and he witnessed death every day. His wife was kidnapped, he was kidnapped and imprisoned, and everyone was after him. Yet, through all of this, he kept his vision of uniting the Mongols. Slowly, methodically and ruthlessly, even after life presented him setback after setback, he looked for a way around and he united the people. He ruled over his land and destroyed all his enemies. His empire was the largest the world has ever seen and unlike many other conquerors, his death was from natural causes.

    Never give up. Focus on that vision and do whatever it takes. Always push forward even when it seems to bear no fruit. Put your name out there. If you need to write daily to encourage yourself, do it. Whatever you need to do to keep yourself motivated, do it, no matter how silly it may seem.

    We live in a world of people. Without the help of others we can’t go very far. No one figure ever achieved great things by himself. We also live in a world of lions. Some people might seem noble, but they are out to hurt us. Some people just outright want to see us fail. Make as many friends as you can, help them whenever in need and value loyalty above anything else. With your enemies, show no mercy. Learn the best practices from the best, keep updated in your chosen area, strive to be the best, help others as you would have liked to have been helped, and destroy all your enemies.

    Character is all we have. Let no one ever question who you are. Always put things into perspective – we are all humans, we all feel, we all tire, we all have weaknesses. When thinking about the achievements of others, remember that they are merely humans and that if they did it, you can do it too – just push forward. When thinking about people who stand against you, remember that they are merely humans and that the feelings of jealousy and insecurity lie in their hearts. Push forward. To the people who stand with you, show generous affection; to the people who may be of help to you, show help, determination and appreciation in return; to the people who stand in the sidelines, show them how great you are and will be and do not antagonize them; to the people who stand against you, strike them down strategically and absolutely.

    I stand with you. I have suffered as you have suffered. Like you, I also have a vision. Even if the world is burning around you, never give up, because you are still alive. You can do it.
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    (Original post by jcarlo)
    What kind of approach will you take for your active segment?

    I'm not a big fan of ETFs or indexes in general. The only index I might support if you push me would be the tried and true S&P 500. It's a good option for those who can't be or don't want to be very involved; It sure beats not investing and it's the benchmark for a reason.

    As you might have noticed, I don't recommend investing in things you don't understand, and most people don't understand the underlying securities in whatever ETF they are planning on investing in. Imagine the panic during a meltdown.
    Primarily Value Investing. A slight thesis of mine is that a lot of worries around the world have meant most of the money is going defensive, leaving opportunities to get some shares at a cheaper price than usual. Need to do more analysis of course, and if I'm going small-cap, I'll need to do a LOT more.

    Why not? 99% of investors have no evidence of consistent multi-year out-performance and it is all too easy to become greedy/arrogant after a few winners. In today's market in particular where information is extremely readily available, it is a bold statement to go against the flow especially in the larger, more efficient indexes like the S&P. That is not to say that such market efficiency exists in all areas (and part of the reason why I think Small Caps are an area where investors can still have an edge when choosing individual companies is the much smaller amount of research and analysis in the area), but completely eschewing index ETFs in the larger markets does not seem wise in the long term to me.
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    (Original post by The Financier)
    Primarily Value Investing. A slight thesis of mine is that a lot of worries around the world have meant most of the money is going defensive, leaving opportunities to get some shares at a cheaper price than usual. Need to do more analysis of course, and if I'm going small-cap, I'll need to do a LOT more.

    Why not? 99% of investors have no evidence of consistent multi-year out-performance and it is all too easy to become greedy/arrogant after a few winners. In today's market in particular where information is extremely readily available, it is a bold statement to go against the flow especially in the larger, more efficient indexes like the S&P. That is not to say that such market efficiency exists in all areas (and part of the reason why I think Small Caps are an area where investors can still have an edge when choosing individual companies is the much smaller amount of research and analysis in the area), but completely eschewing index ETFs in the larger markets does not seem wise in the long term to me.
    Investing in the S&P 500 is a great idea for those who don't have the time or capacity to do extensive due diligence.

    You asked me a question, I answered. Everyone has different ways and different methods of making money. Warren Buffett picks his own stocks and consistently outperforms the market. Ray Dalio buys the index along with picking stocks and also earns great returns. Do what works for you.

    The market is inefficient; otherwise there wouldn't be any money to be made. There are areas where there is more inefficiency than others (e.g., distressed), but the inefficiency still exists. Those who do their research get amply rewarded for it. As an interesting fact, over here in New York I have many doctor friends who manage their own accounts and pick their stocks, and have consistently earned returns of over 20%.

    Have you invested before? Will you be investing solely in the UK or internationally?
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    (Original post by jcarlo)
    Investing in the S&P 500 is a great idea for those who don't have the time or capacity to do extensive due diligence.

    You asked me a question, I answered. Everyone has different ways and different methods of making money. Warren Buffett picks his own stocks and consistently outperforms the market. Ray Dalio buys the index along with picking stocks and also earns great returns. Do what works for you.

    The market is inefficient; otherwise there wouldn't be any money to be made. There are areas where there is more inefficiency than others (e.g., distressed), but the inefficiency still exists. Those who do their research get amply rewarded for it. As an interesting fact, over here in New York I have many doctor friends who manage their own accounts and pick their stocks, and have consistently earned returns of over 20%.

    Have you invested before? Will you be investing solely in the UK or internationally?
    Take it easy. I'm not criticising your process, I'm just asking you to explain/clarify a couple of areas. As before, I do not say that it is impossible to beat the market, but that the vast majority of people will be unable to do so over a prolonged period of time, especially as large-cap markets are more efficient now than before (Buffett arguably had the advantage of reduced efficiency during his days, when information was not as easy to obtain). The likelihood of someone having the sustained performance of Buffett, Dalio et al over the time they have achieved those returns is extremely small.

    By principle, I am sceptical with regards to anecdotal evidence and do not see it as an accurate reinforcement of a point. Your friends may be performing well now, but it only takes a few losers to under-perform the market.

    Spoiler:
    Show

    As a side note, I don't think it does people good if doctors are focused on stock-picking analysis. A doctor who is worrying about their holdings during a market crash or is busy wondering about a company's balance sheet is not a good one to have operating on you as their mind is understandably elsewhere in something they've extremely vested in.


    I have. I will likely have a UK focus for my stock-picking, with an international focus for my ETFs.
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    Update No. 33: Understanding and Keeping Track of the Financial Markets

    Post summary: I provide a resource to track the main financial markets and I provide resources to better understand the economy.

    Understanding how the economy works and keeping track of the financial markets is essential not just for profiting in business, but also for understanding the world.

    Be you an investor in the financial markets, a businessman, or simply a person interested in understanding the world better, an understanding of the economy and keeping up to date is one of the best investments you will ever make. At best, you profit wonderfully, at worst, you can have something to talk about with others.

    A couple of weeks back I created the webpage “Nornir” for personal use, both as an exercise in programming and to keep track of certain markets. The page tracks five indexes and is updated regularly. I track the S&P 500 Index (USA), the Nikkei 225 Index (Japan), the Hang Seng Index (Hong Kong), the DAX Index (Germany) and the Rogers International Commodity Index.

    It is very interesting to see in the graphs how the previous financial bubbles built up and exploded. Readers will also see how, even though booms and busts have occurred throughout history, every financial bubble is bigger than the last.

    I updated the page regularly, so if you want to track those five indexes, I recommend bookmarking the page.

    I am planning on either building more into the webpage or creating a separate website. I will be adding more resources to track (among other things) crude oil, natural gas, gold, copper, the junk bond vs. investment-grade yield spread, high-yield bond issuance and Debt to GDP. Depending on whether readers are interested in it or not, I may keep it private or share it publicly once finished.

    Tracking the financial markets can benefit investors in multiple ways. For those focused on domestic markets, it can help them anticipate booms and busts in particular sectors. This can be useful in multiple ways: (a) investors could plan for buying low and selling high (or simply not losing money in a predictable downturn), and (b) investors could short a looming bust. As a recent example, many investors who understood and kept track of the energy sector were able to short energy stocks as the downturn unfolded; others were able to hold off buying.

    Another relatively recent example is the 2008 crisis. Some investors who tracked the real estate sector were able to short securities and bank stocks and profit from the downfall. Some were also able to go long institutions that the government publicly stated would protect. Billions were made.

    Below I will provide resources to better understand the economy, understand how booms and busts occur, and be better prepared to profit from the markets.

    For a basic introduction to understanding the economy, I recommend Ray Dalio’s “How the Economic Machine Works.”

    This document is free to download and was authored by renowned fund manager Ray Dalio. It introduces the reader to how the economy works and discusses the past and future.

    If you don’t want to read the full file or would like a “fast preview”, you can also watch the video. It explains the economy in a simple manner, in less than 31 minutes.

    For understanding how economic booms and busts occur, I recommend reading “Manias, Panics and Crashes.”

    It is a great book for understanding how previous financial bubbles came to be and the factors behind them. You will not only learn history, but you will also learn how to explore for signs of financial bubbles and looming busts.

    For an even better understanding of economic history and financial markets, I recommend the books “The Wealth and Poverty of Nations” and “The Ascent of Money”.

    Both of these books are excellent. They provide the reader with an in-depth understanding of the economy, financial markets and the world. The book “The Ascent of Money” also has a very nice video series, which readers might opt for.

    An understanding of economics and the financial markets is beneficial for everyone, even if they do not invest in financial securities. People who understand and follow the financial markets will understand when prices in X go up and down. Stocks, real estate, gas prices, interest rates. The price movements of these can be understood, at least in a functional manner, by simply doing a little reading. The resources I have shared above will provide you with a basic, yet useful understanding of how our world works.
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    Update No. 35: Ever-Glory International – Value or Value Trap?

    In the hunt for bargains, I recently took a look at Ever-Glory International Group (NAS: EVK).

    Ever-Glory is an apparel supply chain management provider, distributor and retailer based in China. It offers apparel to women under its own brands “La go go”, “Velwin”, “Sea To Sky” and “idole”, and focuses on middle-to-high end casual wear, outerwear, and sportswear brands.

    The financials look pretty good, with stellar returns, a P/E of less than 2, and insider ownership over 8%. Shares sell for under $2 and under Net Current Asset Value. From a quantitative point of view, EVK is your traditional Graham stock.



    Although returns look great, being a retailer, you could also find a couple of red flags, such as increasing Accounts Receivable over the last five years, a decrease in Raw Materials & Components (inventories) and an increase in Finished Goods (inventories). Trouble brewing?

    It mostly looked too good to be true, so I took a quick look at their latest annual report and asked around with my contacts in China and Hong Kong.

    At first glance, you find the following corporate structure:



    Interesting isn’t it?

    Then, from a quick look at their Overview and Corporate History, you find this:

    “The following is a description of our corporate history and structure:

    Perfect Dream Limited (“Perfect Dream”) was incorporated in the British Virgin Islands on July 1, 2004. Perfect Dream was originally formed as a holding company, and it became our wholly-owned subsidiary as a result of a share exchange transaction completed in November 2005.

    In January 2005, Perfect Dream acquired 100% of Goldenway Nanjing Garments Company Limited (“Goldenway”). Goldenway, a wholly foreign-owned enterprise in People’s Republic of China (“PRC”) was incorporated on December 31, 1993. Goldenway is principally engaged in outsourcing and sale of garments. Prior to acquisition by Perfect Dream, Goldenway was a joint venture held by Jiangsu Ever-Glory International Group Corporation (“Jiangsu Ever-Glory”).

    On November 9, 2006, Perfect Dream entered into a purchase agreement with Ever-Glory Enterprises (HK) Limited (“Ever-Glory Hong Kong”) whereby we acquired a 100% interest in Nanjing New-Tailun Garments Co, Ltd. (“New-Tailun”) from Ever-Glory Hong Kong. New-Tailun is a 100% foreign-owned enterprise incorporated in the PRC and is engaged in the manufacturing and sale of garments.

    On August 27, 2007, Perfect Dream acquired Nanjing Catch-Luck Garments Co, Ltd. (“Catch-Luck”), which further expanded our production capacity. Catch-Luck is primarily engaged in the manufacturing and sale of garments in China.

    Shanghai La Go Go Fashion Company Limited (“LA GO GO”), a joint venture of Goldenway and Shanghai La Chapelle Garment and Accessories Company Limited (“La Chapelle”), was incorporated in the PRC on January 24, 2008. Goldenway invested approximately $0.8 million (approximately RMB 6.0 million) in cash, and La Chapelle invested approximately $0.6 million (RMB 4.0 million) in cash, for a 60% and 40% ownership interest, respectively, in LA GO GO. In connection with the formation of LA GO GO, Goldenway made a strategic investment in La Chapelle by acquiring a 10% equity interest in La Chapelle with a cash payment of RMB 10 million (approximately USD$1.4 million). The business objective of the joint venture was to establish and create a leading brand of ladies’ garments for the mainland Chinese market. On March 23, 2009, Goldenway transferred all of its ownership interest in LA GO GO to Ever-Glory International Group Apparel Inc. (“Ever-Glory Apparel”), a wholly-owned subsidiary of Goldenway. On April 23, 2010, Ever-Glory Apparel acquired the 40% non-controlling interest in LA GO GO from La Chapelle for approximately $0.9 million (RMB 6.2 million), bringing our ownership in LA GO GO to 100%. In connection with such acquisition, and in order to focus on our core business, Goldenway sold the 10% equity interest in La Chapelle to the original shareholders of La Chapelle and, in return, received a total cash payment of RMB 12.4 million (approximately $1.8 million).

    Ever-Glory Apparel was incorporated in the PRC on January 6, 2009. Goldenway invested approximately $6.6 million (RMB45.0 million) into Ever-Glory Apparel. Ever-Glory Apparel is principally engaged in the import and export of apparel, fabric and accessories. Ever-Glory Apparel began to function as our primary import and export agent since 2010.

    On March 19, 2012, Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”), a wholly owned subsidiary of Ever-Glory Apparel was incorporated in PRC. Tai Xin is primarily engaged in the purchasing of raw materials used in the garment manufacturing.

    Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”), a wholly owned subsidiary of Perfect-Dream, was incorporated in Samoa on September 15, 2009. Ever-Glory HK is principally engaged in the import and export of apparel, fabric and accessories.

    Ever-Glory Apparel and Ever-Glory HK focus on the import and export business. Goldenway focuses primarily on quality and production control, and coordinates with outsourced contract manufacturers. New-Tailun focuses on the Japanese market, and has strengths in the design, production, sale and marketing of jeans and trousers. Catch-Luck is geared toward the European market, and it designs and makes products that complement the product lines of our other subsidiaries. Tai Xin is primarily engaged in the purchasing of raw materials used in the garment manufacturing. LA GO GO focuses on establishing and creating a leading brand of ladies’ apparel for the mainland Chinese market.

    On November 20, 2013, Jiangsu La Go Go Fashion Company Limited (“Jiangsu LA GO GO”) a joint venture of Ever-Glory Apparel and Catch-Luck was incorporated in PRC. The business objective of Jiangsu LA GO GO is to carry out our retail operations in different geographic markets than LA GO GO.

    On January 26, 2014, Shanghai Ya Lan Fashion Company Limited (“Ya Lan”) a wholly owned subsidiary of Shanghai LA GO GO was incorporated in PRC. The business objective of Ya Lan is to establish and create another leading brand “Velwin” of ladies’ garments for the mainland Chinese market.

    On March 19, 2014, Xizang He Meida Trading Company Limited (“He Meida”) a wholly owned subsidiary of Ever-Glory Apparel was incorporated in PRC. The business objective of He Meida is to develop online operation of our retail business in the mainland Chinese market.

    On April 29, 2014, Tianjin La Go Go Fashion Company Limited (“Tianjin LA GO GO”)a joint venture of Ever-Glory Apparel and Catch-Luck was incorporated in PRC. The business objective of Tianjin LA GO GO is to carry out our retail operations in different geographic markets other than Jiangsu LA GO GO.

    On July 24, 2014, Chuzhou Huirui Garments Company Limited (“Huirui”), a wholly owned subsidiary of Ever-Glory Apparel was incorporated in PRC. Huirui is primarily engaged in the management of our outsourced manufacturing factories.

    On June 26, 2014, Shanghai LA GO GO entered into a contract with Shanghai Yiduo Fashion Company Limited (“Shanghai Yiduo”) to acquire 78% of the shares of Shanghai Yiduo. The Company gained effective control of Shanghai Yiduo by the end of March 2015 and Shanghai Yiduo was consolidated on March 31, 2015. The business objective of Shanghai Yiduo is to establish and create another leading brand “idole” of ladies’ garments for the mainland Chinese market."

    Source: EVK Annual Report

    The company appears to be your traditional roll-up, with asset transfers all over the place.

    My contacts in the PRC revealed that most of the stores in China are not that popular. Although the clothes aren’t expensive, there aren’t that many stores and most believe the business isn’t doing that good. Funnily enough, the business that they held a 10% stake of, La Chapelle, was doing somewhat better than all the other shops. This 10% stake however, was sold back to La Chapelle shareholders in 2010, and so the company currently stands with okay stores.

    If you read a bit further in their latest annual report, you’ll also find that their five largest customers made for 41.5% of sales, that there may be conflicts of interest, and that they talk about financial controls and bribery in an interesting way.

    Most investors shy away from Chinese companies due to murky financial controls and funky transactions. Ever-Glory looks great on paper, but it looks a bit too great, the company seems to have an insatiable appetite for acquisitions and in reality the underlying businesses aren’t doing that great.

    What I have seen so far has been enough for me to decide that putting money into the company would not be investing, but speculation. For this reason I don’t plan to hold the stock in the foreseeable future. I do find it an interesting situation though.

    I shared my findings with the purpose of helping other investors who might be looking at Ever-Glory International. If someone else has looked at EVK, I welcome you to share your findings and your thoughts.

    For those interested in how the stock has performed over the years, here’s a chart:



    Could you make money off the stock? Perhaps. From a market perspective, the stock has had multiple $3+ levels within the last five years. The facts seem to point that an investment would be more of a speculative play than a rational investment, then again, that’s cigar butts for you. Traditional speculation story – You either make a lot of money or lose your shirt.


    Disclaimer: This post does not represent professional financial advice. The author is not a financial advisor nor holds a position in the company now or in the next 72 hours. The sole purpose of this post is to share information.
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    I recently wrote about FireEye (NAS: FEYE), a publicly-traded cyber security firm, on my blog. The tables came out pretty ugly-looking when I pasted them here, so to see the company brief in all its glory, click here.

    If you have also looked at the company, similar companies, or have been active in the space, I would love to read your thoughts.

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    New post on short-selling, visit Update No. 40: Short-selling, Bad Conditions and Excessive Leverage.

    In the post I talk about some of my previous short suggestions, links to interesting developments and some book recommendations.

    By the way, how are my fellow investors doing? Have you been active in the markets recently? What are your thoughts?

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    A couple of days ago I went over how some of the investments I have discussed have fared so far.

    You can see the blog post here: Equity and Distressed Debt Review

    In summary: Two of the equity investments have more than doubled in less than a year, and the bonds are also up.
 
 
 
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