Tiger Woman on Wall Stree Read online

  Copyright © 2014 by Junheng Li. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a data base or retrieval system, without the prior written permission of the publisher.

  ISBN: 978-0-07-181844-5

  MHID: 0-07-181844-8

  The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-181842-1, MHID: 0-07-181842-1.

  E-book conversion by codeMantra

  Version 2.0

  All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps.

  McGraw-Hill Education books are available at special quantity discounts to use as premiums and sales promotions or for use in corporate training programs. To contact a representative, please visit the Contact Us pages at www.mhprofessional.com.

  This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, securities trading, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

  —From a Declaration of Principles Jointly Adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations

  TERMS OF USE

  This is a copyrighted work and McGraw-Hill Education and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill Education’s prior consent. You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited. Your right to use the work may be terminated if you fail to comply with these terms.

  THE WORK IS PROVIDED “AS IS.” McGRAW-HILL EDUCATION AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. McGraw-Hill Education and its licensors do not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free. Neither McGraw-Hill Education nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom. McGraw-Hill Education has no responsibility for the content of any information accessed through the work. Under no circumstances shall McGraw-Hill Education and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise.

  This book is dedicated to my father, who gave me a strong mind;

  to my mother, who taught me perseverance;

  and to my grandmother, who exemplified resilience.

  It is also dedicated to Middlebury College,

  for teaching me that life is an art, not a science.

  Contents

  Author Note

  Introduction

  1 * Tiger Dad, Tiger Daughter

  2 * Working in the Gold Mine

  3 * Growing Up Under Mao

  4 * Window of Opportunity

  5 * Dreaming of a New Land

  6 * An American Education

  7 * Wall Street 101

  8 * Learning, Burning, and Crashing

  9 * The Red Party: Instant Alpha

  10 * The New Chinese Reality Check

  11 * Walking with My Father

  12 * The Human Cost of the Economic Miracle

  13 * Muddying the Waters

  14 * The Power of Investigative Research

  15 * What Keeps Me Awake at Night

  16 * From Shanghai to New York and Back Again

  Note to Investors: Do Your Homework

  Notes

  Acknowledgments

  Index

  Author Note

  The opinions, analyses, and comments in this book are my own personal views based on my experience and research from public sources that I believe to be accurate and reliable.

  For the companies I analyze, my team and I spend a tremendous amount of time collecting intelligence on their businesses by, among other things, online data mining and tracking and on-site customer surveys and reviews. To analyze the raw data collected, my team and I employ proprietary technologies and methodologies, which I believe give me a unique insight into the performance and prospects of the companies I review.

  I hope that what I have written will provide my readers greater insight into and a better understanding of investing, especially in China, but readers should not take what I write as investment advice—they should do their own independent research or consult with their own investment advisors before making any investment or trading decisions in the United States, China, or anywhere else.

  I have based this book on my recollections of my life and my work. Some names and identifying characteristics of companies and individuals have been changed. All conversations are based upon my best recollections and should not be taken as verbatim transcriptions.

  Introduction

  WHEN I WALK INTO ANY BUSINESS GATHERING, I AM AWARE that all eyes are on me. I don’t say this to be vain. As a Chinese woman living and working in the financial capital of the world, I know that my presence provokes conversation. People want to know my opinion on China’s economic surge. They are curious about my journey from Shanghai to New York. They often ask if I was raised by a tiger mother and where I stand on the tiger parent controversy. They are endlessly curious about China and the Chinese ways of business and life and what I think of them.

  I was born and raised in Shanghai, the commercial and financial center of mainland China. My childhood and adolescence mirrored the rise of capitalist China in the 1980s and 1990s. My parents, like everyone else in their generation, were survivors of the Cultural Revolution, the starkest period in modern Chinese history. That movement left a burn on the nation’s psyche, the impact of which is still felt today and will be felt by many generations to come.

  I had what Western critics would call a brutal upbringing, raised with strict discipline and harsh consequences. My father’s tiger-on-steroids parenting style neither broke nor made me, but I do carry the memories into my adult life.

  Somewhere between the Hollywood movies my father and I watched together and the Voice of America radio broadcasts we listened to together, I latched onto the American concepts of individualism, freedom, and diversity. My thirst for an American life drove me to pursue an American education. I accepted an offer for a four-year scholarship to Middlebury College in Vermont in 1996. At Middlebury I encountered a universal code of ethics for the first time in my life, and it has proved to be an important principle in my career in fi
nance—especially where Chinese investments are involved.

  My experience at Middlebury was also the first time I was exposed to the concept of an idea-based rather than a knowledge-based education. I was challenged to think and not just memorize—to recognize the how, not just the what. Study took place in collaboration, not isolation. I began to recognize on a deeper level something I never could in China: American values are not based on clichés of freedom and individuality, but rather on the importance of independent thinking, the courage to question the norm, and the belief in universal ethics.

  At Middlebury, I became an avid student of the market economy. My endless curiosity about and passion for economics were both philosophical and personal. My study of economics has helped to cultivate a critical mind and a precise logic to understand how the world works—not just regarding monetary exchange, but also the role of government and citizenry in an increasingly global world.

  * * *

  In 2000, I graduated summa cum laude in economics, and I accepted one of the job offers I got: to work as an investment banking analyst at Credit Suisse First Boston in its New York office. A year later, I was recruited to join Franklin Templeton Fiduciary to help launch an international small- to mid-cap fund focusing on developed markets in Asia. In 2002, I enrolled at Columbia Business School to get my MBA.

  Soon after Columbia, I joined Aurarian Capital Management, a long- and short-equity hedge fund known for its investigative research into under-covered and under-researched companies. I focused on the technology, medical device, and renewable energy industries globally, and I worked my heart out to become an expert on a myriad of complex and controversial investment subjects.

  At Aurarian, I learned over and over again that an investment can be profitable if and only if the marketplace misunderstands and misprices part or all of the company’s businesses. A stock analyst’s job is to explore and develop variant views from the marketplace. If there are no variant views, the stock is considered fully priced and therefore is not interesting for investors seeking alpha, an above-the-market return.

  While working on U.S. stocks first, I started to witness waves of Chinese companies raising capital in the United States. As I followed a group of listings closely, I noticed a lack of skepticism toward Chinese companies on and off Wall Street—in corporate America, among the general public, and among the mass media around the world. As the unchecked enthusiasm for Chinese stocks gained momentum, I saw a bubble forming and inflating.

  The process of the bubble forming, and later bursting, is a result of classic push-and-pull dynamics: if there is a buyer, there is a seller. Greedy and lazy investors play off immature companies that have questionable ethics and practices, whose stocks are pushed out to the market by private equity investors, packaged by bankers, and cross-checked by auditors, accountants, attorneys, and other institutional managers. Most of these players are American-born.

  * * *

  The world’s general lack of cynicism about China got me excited. I launched JL Warren, an independent research firm, in 2009 to plug the gap between the corporate and commercial reality in China and curious investors in America, leveraging my combination of a Chinese background and Wall Street experience.

  The idea of an independent research firm came from years of observation that traditional sell-side research is inadequate for serious investors who invest heavily in China. Despite the theoretical presence of a Chinese wall, sell-side research continues to serve the banks’ underwriting and advisory businesses. The desire to preserve existing relationships and develop new ones in the investment banking area creates an inevitable bias in a bank’s research products that institutional investors can hardly rely on for investment purposes. Analysts are constrained from candidly expressing their views.

  The need for unbiased research is even greater in the field of China-focused research as China’s importance in the global economy has surged.

  China makes or breaks the state of our global economic recovery and what comes afterward. As China goes, so goes the global economy. If China sneezes, the rest of the world catches a cold. For global institutional investors, the stakes of getting China right are high. So is the need for fact-based, meticulous, and accurate research.

  I am fascinated by China, not just because it is my home country and I am emotionally and practically vested in it, but also because it is vastly complex. Complexity always intrigues me. Because of its unique structure—it is still a command-based economy, but it is bolstered by market instruments—China offers the chance for endless decoding, learning, risks, and challenges. And consequent opportunities.

  Most of the public domain commentaries on China’s economy, companies, and businesses are simplistic, characteristic of the American media, in which sensational sound bites are far more important than nuances. These attitudes have left the United States with black-and-white opinions about China. With this book, I want to share my work and to plug the gap between what I see as the reality and the perception on Wall Street about China.

  My conviction that the market is not efficient—the underlying premise of this book—contradicts one of the great canons of modern finance theory: the efficient market hypothesis of Eugene Fama. Inefficiency exists because accurate information takes time to travel and surface; analysis and human intelligence are subject to errors and biases by investors and fraud by management.

  In the case of China, inefficiency prevails. This book aims to show you how mindful investors can profit from market inefficiency.

  * * *

  America is the strongest nation in the world in terms of its economy, military might, and influence in global affairs. Yet it is also among the youngest. This combination of its number one ranking and youth makes America consistently cocky but also insecure about falling behind. Washington’s deep political divisions over fundamental and philosophical beliefs have been stagnating its political system and stirring doubts about whether America will continue to lead the world in the twenty-first century.

  At the same time, China has emerged and appears to be a formidable competitor. Energized by the return to capitalism, its 1.3 billion people are demonstrating great manufacturing prowess and are modernizing at an astounding rate. But if you look beyond the surface of its impressive achievement, you will see what China has yet to develop: the rule of law, a functional and effective business and financial infrastructure, an imaginative and innovative workforce, free independent media, and social mobility driven by merit, not by class, ethnicity, and family background. Until the software—the quality of its citizenry and society—matches the government-led hardware of infrastructure buildup, China is far from constituting a credible threat to America.

  At the same time, China is essentially caught in a prison of its own success: the staggering and unprecedented achievement of lifting 500 million people out of poverty in a bit more than 30 years. This achievement is based on a single economic mode—that of mass production of low-value manufacturing products, along with plenty of government-led investment in massive infrastructure projects. In the process, China has singularly focused on GDP growth at the expense of profitability, innovation, R&D, and productivity.

  Today, that growth model has stalled. Excess capacity has been built in many sectors. Low pricing power has put pressure on corporate profitability, while the lack of R&D and innovation hinders Chinese companies from moving up the value chain and increasing, or even maintaining, global competitiveness. China is kept afloat by taking on more corporate and government debt.

  The Chinese economy has become increasingly inefficient, driven by weak corporate governance, a historic misallocation of resources, and a political process hamstrung between an itch to westernize and a desire to remain a Communist regime. Those deficiencies will become more pronounced and damaging as China’s economic growth slows.

  * * *

  Although it’s a cliché, do your homework means there is no shortcut to sustainable wins in the market, in business, and
in life. For investors, doing your homework means reading the company’s filings and understanding the products, services, and people (including their families and mistresses) you invest in. Keep in mind that losing money is worse than not making money. Dare to be a contrarian, and if your view is the market view, move on to find an idea with which you can find an edge. There is never a shortage of ideas for a curious and able mind.

  To participate and catch up in the global competition, China’s policy makers must drastically improve corporate governance and transparency; continue market reform by allowing more foreign ownership and competition; and make banks lend on commercial criteria only, not for and on behalf of the government. To be a global player, one must respect established global standards, compliance, and regulations.

  Just as there is no shortcut to sustainable profit in the market, there is no shortcut to corporate growth and to building a structurally sound economy. Today, China is at the tipping point, where the lagging quality of its institutions and people poses serious threats to its further economic growth.

  * * *

  For the 16 years I have lived away from China, I have been consumed by work—first academics, then a demanding career. While my family back in Shanghai has always been unconditionally supportive of my work and any pursuit in my life, I have spared little time for my parents. For that, I live with guilt every day.

  Tiger Woman on Wall Street is a way for me to describe and explain my life and work since I left Shanghai in 1996. I want my parents to know that I have inherited their courage, discipline, and perseverance—and that I thank them for what and where I am today. With a tremendous amount of hard work and infinite curiosity, I am now an independent thinker, savvy investment professional, and humble student of learning.

  My parents’ parenting—although tough by any standard, Western or Asian—was an expression of selfless love and anxiety, the outcome of China’s cultural traditions and its modern historical tragedies.