International Investing

Is there an internet bubble brewing in China? Should you invest in youkou.com? Is it a good idea to invest in Sina.com? Should you invest in Tudou.com? What about investing in renren.com, the supposed “Facebook of China”? I’m going to say no and I’ll tell you why…

First of all, let me ask you a question, have you ever used any of these sites or do you have a clue about what is good or bad about each of them? Do you know what real Chinese people think of them? My guess is no and that’s the truth for most of the investors in these companies. That’s scary and makes for an easy breading ground to blindly lead naive investors with simple reasoning:

“China and the internet are growing like weeds so you’d be a fool not to hop on to any internet stock coming out of China because you don’t want to miss out on something like this”.

I’m living in China and have been for 9 years. I vividly remember the dot com bubble in the US during the late 90′s and this is shockingly similar. Why? People are buying companies that have no real intentions for ever making a profit.

I’m a big believer in the continued growth of China and also the continued growth of the internet. The problem is that I’m not the only one, not even close. Many Chinese internet stocks have been dumped onto the US stock markets and people just blindly buy companies they know little or nothing about. This blend of greed, herd mentality, and naivety, fuel the bubble.

I learned to read and write Chinese, it’s not as hard as you’d think actually, and I can and do use all of these major websites. I understand how these sites work and can personally formulate an objective opinion of how good they are from a user’s perspective and get a real feel for the business model.

Since a lot of investors want a piece of the Chinese growth pie, they dive on any stock coming out of China. The Chinese businessmen know this and love to list their companies in New York for this reason.

Many of these companies are not bad, but they are far overvalued. The P/E ratios are enormous and the future prospects of these companies don’t deserve such valuations. A lot of the companies are losing money and I can’t see how many of them could realistically ever become profitable.

Remember that the Chinese know that it’s relatively easy for them to raise money from American investors and this fact makes the companies try to get listed in New York. The founders of the companies stand to make a killing regardless of whether or not the companies ever become profitable.

If you do decide to invest in Tudou, Sina, Youku, Baidu, or any of the other Chinese internet stocks, I’d highly recommend reading as much as you can about each company and also read their financials and plans. Don’t fall for the trap of thinking that “China + Internet = big profits”. It’s not that simple anywhere and you really need to be vigilant before making any investment decision. I’m not saying that these companies won’t work. I’m just saying that there is a lot of research that needs to be done before a smart decision is even possible.

Are Chinese internet stocks a good investment? I honestly don’t know but I’d be extremely careful or you may lose your shirt. Proven multinationals that do a lot of business in China like Apple and Starbucks might be a safer and more reasonable China play with much less downside risk.