GEO Investing

Investing in companies in emerging markets can be a great way to enhance performance returns. Many emerging markets are still in the early stages of their economic boom, creating an opportunity to invest in companies with growth rates that can’t be achieved in developed nations like the United States.

The acronym that represents emerging markets is BRIC, which stands for Brazil, Russia, India and China. The most recognizable way to gain exposure to investments in companies from these countries is to either invest directly in the foreign markets or in mutual funds designed to represent a cross section of certain global regions.

However, investing directly into emerging markets does not come without challenges. For example, some countries may limit your ability to invest their companies. Furthermore, there are a myriad of businesses to choose from, and unique risks associated with them preclude the logical actions to actually invest in them. 

One such risk involves financial statements fraud that can come with investing in BRICs. Investing in these companies also requires a keen understanding of acceptable regulatory standards that come with both the political and economic landscape.

Better than average returns in emerging markets

For those that are looking for better than average returns, mutual funds are typically not the answer. Luckily, investors have the option of investing directly in BRIC companies that went public in the United States, particularly Chines companies. While this addresses some of the hurdles of trying to gain exposure to companies on foreign soil, the unique risks will still pose challenges that must be navigated in order to secure winning investments and limit losses. Anyone who has invested in U.S. Listed China stocks can relate, but the risk wasn’t as obvious only a short time ago.

GeoInvesting: From Bull to Bear…to the Silver Lining

In 2009, in what was ironically the Year of the Bull in China, investors began to find a largely unnoticed market sector of over-performing U.S listed Chinese stocks, the group of companies which we refer to as “ChinaHybrids”. As we rolled into 2010, the Year of Tiger, the momentum continued to lift many of these companies’ shares as more investors discovered this space.

Interestingly enough, select micro-cap investing China Hybrid companies began to attain price to earnings ratios in line with what had historically occurred with many growth stocks. When we first stumbled upon this sector soon after the turn of the millennium, we could not believe our eyes; stocks with earnings per share growth in excess of 30%, P/E multiples of less than 5, bullish guidance and prices well below book value. This, so we thought, presented an opportunity to exploit the inefficiency of the market.

We sensed that the methodology we utilized to find the tremendous success we experienced investing in the micro-cap the U.S. stock sector over the last 20 years could be replicated with exponential returns in ChinaHybrids. And with literally hundreds of stocks yet to be analyzed, from their entrance into the U.S. markets to their unique stories of growth, the sky was the limit. Our bullish outlook on China went full steam ahead, of course until a major roadblock surfaced not too long after 2010. To say the least, we and our followers profited handsomely from during this period.

Eventually, fraud started to surface, and did so in a big way with some of the most respected companies in the ChinaHybrid space. And while we were at first skeptical of others’ findings, as a research firm we always like to keep an open mind to any and all arguments and diligence performed on the very markets in which we were invested. Slowly, we began to verify incriminating circumstances and misrepresentations perpetrated by a handful of Chinese companies, eventually going full bore into the on-the-ground due diligence arena where we began to uncover some of the most egregious forms of fraud, seemingly executed by these companies as if it were business as usual. In July of 2010 we told our followers to get out of the U.S. Listed Chinese Company arena as we performed more due diligence.

Making this fraud so compelling was the ease in which the ChinaHybrids could fool irrational investors into believing their stories, regardless of the mounds of evidence presented to them.

Fraud in emerging markets

Over the next several years we published exposes that we so hard-hitting and successful in “bringing down” the frauds in emerging markets that we garnered attention from many of the major news outlets such as Barron’s and The Wall Street Journal. We also routinely are asked to speak on panels to discuss the evolution of the ChinaHybrid space. So it was safe to say that while we were almost entirely bullish on the ChinaHybrid universe in 2009, beginning in 2010 a lot of the promise in these companies vanished in light of what seemed to be a constant flow of fraud.

But today, there is a silver lining. We are proud that we have led the way to clean up the space. We have become so good at what we do that we can identify the bad, AS WELL AS THE GOOD, ChinaHybrid companies that are awaiting your investments, either on a bearish or bullish basis, respectively. Yes, contrary to public opinion, we are still bullish on China and never lost sight in the fact that although a few bad apples can try to spoil the bunch, the bunch can prevail if given a chance. And that is exactly what we are here to do, give you a chance to go long in China names that are trustworthy, and short in names that we have found so much dirt on that it will make your head spin.

Quality Chinese companies DO exist. Our goal is to find them cheap, on a valuation basis. We realize that is it a bit harder to value these companies based on their fundamentals, but given our personnel and combined decades of experience, the task is not as daunting for us, especially since we have a recipe for clearing or flagging a company. If the company passes our multitude of litmus tests that cannot as easily be performed by the average investor, then we can take our research and analysis to the next level. Our recipe includes but is not limited to:

  • Determination of tangible business operations through site visits.
  • Assessment of land ownership.
  • Confirmation of company licenses to operate.
  • Complete log of relevant pictures.
  • Video surveillance of company operations.
  • Verification of work force claims.
  • Verification of production line claims.
  • Verification with customers, dealers, distributors and acquisition targets.
  • Conversations with locals and other credible individuals who have knowledge of a company’s standing in the community.
  • Conversations with local legal authorities.
  • Physical acquisition of SAIC Filings of the company and its subsidiaries.
  • Background checks of company executives and past dealings.

After sifting through all of the results based on our rigorous methodologies, you can bet that our attestations of the facts hold so much merit so as to warrant a solid bullish or bearish thesis. That is why when we find a fully legitimate company that we are earnest to communicate this with our GeoInvesting network. Legitimate companies whose operations are in line with their claims can offer extraordinary returns since many are still priced as frauds. Of course, on the other token, on some occasions you can find success in a bearish investments substantiated by findings of fraud. In the end, we are reducing risk and identifying potentially great returns on investments.

We can proudly exclaim that we helped to clean the ChinaHybrid space and still continue to make it a little safer for the average investor. As we forge ahead in the emerging markets arena, we are confident that stellar returns are in the cards for many years to come, and as we can reduce the inherent risks associated with these investments, your success rate will flourish alongside ours. The next step will be to guide investors who want to invest directly in companies that trade on the exchanges of emerging markets.