This past Sunday I watched the premier of HBO’s Too Big to Fail, the story of the collapse of Lehman Brothers and the subsequent bailout of AIG (AIG) and the creation of the Troubled Asset Relief Program (TARP).
While most of the movie seemed like a rather simplified version of events, one thing did resonate with me: the inability of many financial professionals to realize the true value of the “assets” in their portfolios. If the likes of Dick Fuld, with all his acumen and resources, lacked the perspective to realize he was standing on a pile of garbage, what chance is there the normal, everyday investor would correctly assess his or her own portfolio?
To that end, let’s play devil's advocate and take a look at some equities of questionable value.
On April 26 and 27 of this year, Longtop Financial Technologies (LFT) dropped nearly 50% following a report of fraudulent financial statements from Citron Research. How could the average investor have protected himself or herself better, you ask? Simple: Appropriate riskmanagement. By always having an eye on the risk, investors could have protected profits and at the very least prevented the eventual outcome -- possibly losing 100% of their investment when the stock was halted last week.
If the fundamentals of a company are flawed or outright fraud, how is it possible to assess the true worth of a company? All you can do is mitigate your risk and make sure you have the right shoes on when you wade through those “muddy” waters.
AsiaInfo-Linkage (ASIA) is one of the plethora of Chinese software companies that have come seeking investors in US markets, for example. The stock began to really plummet toward the beginning of April when accusations of fraud began to circulate and then cut through the 210-day moving average with conviction. After a brief bounce back to the 210, it has continued its dive and may seek the low single digits from whence it came. Smartstops has the short-term stop at $16.68 and the long-term stop a scant $0.40 away at $16.21. In the unlikely event the stock reverses course, our reentry price is $20.49.
Another company to beware of is VanceInfo (VIT). Oppenheimer beat me to the punch when they downgraded it this morning. According to Oppenheimer, “The firm downgraded the stock because it has limited confidence in financial statements for Chinese IT services companies that have been audited by Deloitte, after the SEC launched an inquiry into Longtop Financial.” VIT, too, looks to return single digits if not to zero as it follows its current trajectory. It is close to 10 points below the 210-day moving average. Smartstops has the short-term stop at $20.56 and the long-term stop is $18.65
Another company that may be attractive for would-be Chinese real estate investors is E-House Holdings Limited (EJ). For those of you who think they know better than Jim Chanos, think again. If this stock is a leading indicator of a Chinese real estate bubble, the world is in for some rocky times ahead. The stock is trading below its 55- and 210-day moving averages. Some part of this phenomenon is related to the Chinese government's desire to reduce speculation in the market. Smartstops has the short-term stop at $9.85 and the long-term stop is at $9.59
It may be tempting to stay in these companies if you own their stock, or even enter here if you feel like rolling the dice. But remember the lessons of 2008; the speculators at Lehman Brothers, Bear Stearns, and AIG brought down those venerable names by ignoring risk management.
Rarely is the juice worth the squeeze.
Editor's Note: This content was originally posted on SmartStops.net.
While most of the movie seemed like a rather simplified version of events, one thing did resonate with me: the inability of many financial professionals to realize the true value of the “assets” in their portfolios. If the likes of Dick Fuld, with all his acumen and resources, lacked the perspective to realize he was standing on a pile of garbage, what chance is there the normal, everyday investor would correctly assess his or her own portfolio?
To that end, let’s play devil's advocate and take a look at some equities of questionable value.
On April 26 and 27 of this year, Longtop Financial Technologies (LFT) dropped nearly 50% following a report of fraudulent financial statements from Citron Research. How could the average investor have protected himself or herself better, you ask? Simple: Appropriate riskmanagement. By always having an eye on the risk, investors could have protected profits and at the very least prevented the eventual outcome -- possibly losing 100% of their investment when the stock was halted last week.
If the fundamentals of a company are flawed or outright fraud, how is it possible to assess the true worth of a company? All you can do is mitigate your risk and make sure you have the right shoes on when you wade through those “muddy” waters.
AsiaInfo-Linkage (ASIA) is one of the plethora of Chinese software companies that have come seeking investors in US markets, for example. The stock began to really plummet toward the beginning of April when accusations of fraud began to circulate and then cut through the 210-day moving average with conviction. After a brief bounce back to the 210, it has continued its dive and may seek the low single digits from whence it came. Smartstops has the short-term stop at $16.68 and the long-term stop a scant $0.40 away at $16.21. In the unlikely event the stock reverses course, our reentry price is $20.49.
Another company to beware of is VanceInfo (VIT). Oppenheimer beat me to the punch when they downgraded it this morning. According to Oppenheimer, “The firm downgraded the stock because it has limited confidence in financial statements for Chinese IT services companies that have been audited by Deloitte, after the SEC launched an inquiry into Longtop Financial.” VIT, too, looks to return single digits if not to zero as it follows its current trajectory. It is close to 10 points below the 210-day moving average. Smartstops has the short-term stop at $20.56 and the long-term stop is $18.65
Another company that may be attractive for would-be Chinese real estate investors is E-House Holdings Limited (EJ). For those of you who think they know better than Jim Chanos, think again. If this stock is a leading indicator of a Chinese real estate bubble, the world is in for some rocky times ahead. The stock is trading below its 55- and 210-day moving averages. Some part of this phenomenon is related to the Chinese government's desire to reduce speculation in the market. Smartstops has the short-term stop at $9.85 and the long-term stop is at $9.59
It may be tempting to stay in these companies if you own their stock, or even enter here if you feel like rolling the dice. But remember the lessons of 2008; the speculators at Lehman Brothers, Bear Stearns, and AIG brought down those venerable names by ignoring risk management.
Rarely is the juice worth the squeeze.
Editor's Note: This content was originally posted on SmartStops.net.
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