No. of Recommendations: 13
Thanks, Saul, for getting the conversation back on track. A few random observations from an infrequent poster here who did stop checking this board for a while despite owning a small position in YONG, which this board was originally intended to follow.

1. I agree with Saul that the best way to take advantage of the macro China story is to find promising small companies that have not yet been bid up by the market. That's generally true, in any market, and is why TMF launched Hidden Gems, its small cap letter, in the first place. If you want to invest in the "proven" Chinese independents (EDU, BIDU, CTRP, etc.) you'll pay upwards of 50 times earnings. If you buy state-owned enterprises or indexes, which consist mostly of SOEs, you buy bureaucracy and much slower growth.

2. I agree with Bears that undiscovered companies in emerging markets carry a much greater risk of outright fraud than similar investments in developed markets, even though fraud exists in some proportion everywhere. In addition, there is an even greater risk of failure to execute. In other words, the theoretical opportunity that lies before YONG or SKBI or CMFO has value to shareholders only if the companies successfully execute the complex growth curve required to take advantage of that opportunity. The odds are against them succeeding on a big scale. A small minority of companies this size become the much bigger companies we envision. This is why we get them cheap.

3. So what's a good batting average? My experience with U.S. small and microcap companies suggests baseball is a pretty good proxy, meaning I expect to bat considerably less than .500. And that's with all the information available on a small or microcap company listed on a U.S. exchange. So I would expect a somewhat lower average in China, but I would expect the hits to be bigger than in a slower-growing, mature economy. The number of things that can go wrong for any small company is almost infinite. They range from macro factors taking out vulnerable capital structures to the many, many possible internal execution errors, not to mention the marginal risks of outright criminality, etc. As in baseball, I think .300 is a batting average to strive for. If three out of ten play out more or less according to my thesis, I'm going to be in good shape. Like most infielders, I can still do OK batting .250, or hitting one out of four. Fall below the Mendoza line (.200), and I'm better off just buying the market and spending my research time on rotisserie baseball.

4. All of this makes the basket approach the way to invest in Chinese microcaps if you're going to invest in them at all, as GG recommends with its rural boom basket. For small and newbie investors, this approach puts a premium on reducing frictional costs. Even a $10 commission can be harmful to returns if you're buying just a few shares of each company in your basket. For those who can muster a 25k total balance, Zecco offers ten free trades a month, which can make it an efficient place to build baskets like this. There might be other places to do this cheaply, too. Reducing commission costs can make it much easier psychologically to make the modest investments the basket approach requires.

5. One final point about the tenor of the conversation here. "The internet" represents a very wide range of conversational tones. There are many, many message boards and discussion boards that degenerate into personal sniping and insults, where whatever the subject was has long ago been buried by the one-upmanship of conflicting egos trying to prove themselves "right." The TMF boards were designed as an island of civility in this ocean of animus. Simple politeness matters here. Humor and humility go a long way here. Boasting, a staple of many stock message boards, doesn't get you much respect here. There is so much intelligence in the Motley Fool community that modesty becomes the prudent way to go. Everyone gets off track occasionally -- a bad day, a long night, posting while hammered, etc. -- but the peer pressure here is for courtesy and civility. Along the way, it has developed a pretty effective self-correcting mechanism. Threads that degenerate are abandoned and permitted to die of natural causes. New threads get us back on track, and off we go.
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