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No. of Recommendations: 20
Deej, I respect your opinion. In fact, one of the lessons I wrote down after my failed investment in Irwin Financial was, "Listen to Deej!" However, in this case, I come to a different conclusion. I hope I don't come to regret it the same way I did differing with you on IFC.

I would make a couple of points. First, CFSG has been the subject of an unusual and intensive research campaign by a noted short seller. There seems to be an assumption that the warts discovered in this process do not exist in most other companies. But without similarly exhaustive examinations of those other companies, that seems to me a fallacious argument. In fact, it's my opinion that if a rich guy like Mark Cuban hired an experienced business journalist like Chris Carey and gave him carte blanche in time and money to do an expose on virtually any company, the muckraker would deliver a view of the sausage-making process that would make potential investors queasy.

Maybe I'm just more cynical about human nature in general, but we have seen example after example of supposedly upright American executives running ostensibly transparent businesses who are ultimately revealed, in fact, to be greedy and corrupt. I'm sure I don't have to run down the roster for you. I don't say criminal behavior is the norm, but it is my view that most executives are in the game to get rich and not out of a passion to sell widgets. Just this week, for example, Seth Jayson's research revealed the eye-opening compensation package being taken home by Middleby CEO Selim Bassoul, often cited as the model executive over at Hidden Gems.

Morality aside, I don't necessarily see this executive greed as a bad thing for the businesses they run. Greed or ego or some other personal motivation has created a lot of value for shareholders. I think CFSG CEO Brian Lin is simply not well enough versed in the semantic games we play about that here in the U.S. Executives are not supposed to talk about their stock prices, for example. Does that mean executives do not manage their stock prices? Not at all. They just know better than to talk about it publicly. Every time a company decides to buy back shares it is managing the stock price. Every time a company splits its shares it is managing the stock price. Every time a company puts out an earnings release emphasizing the good news and burying the bad, it is attempting to manage the stock price. If anything, Lin was too honest in his comments about this. As a shareholder, I am glad he wants the stock price to go up. I don't want him making shortsighted business decisions to do it, but I also don't want him taking home hefty executive compensation while the stock price languishes and the business fails to perform, which I've seen many American executives do. The fact, obscured or overlooked by Sharesleuth, is Lin's business is performing spectacularly by every measure we have.

As for the byzantine ownership structure and messy reverse merger detailed by Sharesleuth, again, perhaps it is my natural cynicism coming through, but I take for granted many unsavory business practices. When you suggest that Telkom Indonesia is a cleaner place for your money, I wonder how you know. Certainly, under Sukarno and Suharto, Indonesia was an authoritarian state that required a variety of corrupt practices from businesses if they were to survive. Perhaps the recent reforms have produced a fully transparent, ethical business climate, but I wouldn't bet on it.

China, like India, is in a nascent stage of capitalism. I have no doubt that what Bill euphemistically refers to as "work-arounds" are prevelant throughout both countries. Not long ago, former HG Faro Technologies self-reported its own bribery in Asia. I also have no doubt that if Chris Carey was able to spend the time and money researching any particular business in either country that he spent researching CFSG, he would find warts that would make the idealistic investor run for cover. Frankly, I find some comfort in knowing this was the best he could come up with. Developing the best rationale he could for shorting the stock -- in essence, for why this business will fail -- he came up with nothing about the business itself. He found shady characters associated with the shell company CFSG used in the reverse merger to get itself listed on an American exchange, a complex, partially opaque ownership structure, and, shockingly, inflated claims on a resume. I believe Notre Dame encountered this problem with a football coach it hired briefly not long ago.

Would I prefer the Good Housekeeping Seal of Approval? I suppose, although I fear if CFSG had one, it would be trading at CTRP's multiple and would not represent the value it does today. All investments are about risk and reward. The reason CFSG represents the potential reward that it does, the reason it is available at this price, is because of the discount applied for the management risk you cite. So the question for each of us is whether that risk is worth that potential reward.

Again, I respect your view and I do not discount the possiblity that you will end up being right. I guess my bottom line is I prefer the devil I know to the devil I don't. If a model executive like Selim Bassoul is taking home $12 million a year from a small cap, I feel like there are precious few businesses out there that would not be revealed to have serious warts if subjected to Sharesleuth-like scrutiny. Given the country in which it operates, what Sharesleuth came up with on CFSG is not enough to scare me away.
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