Tiger Woman on Wall Stree (12 page)

Later that year, Garmin marked the entrance of a competitor that would prove even tougher than TomTom or Sony. Google launched the second version of its mobile maps application in November, a technology that quickly made even the sleekest and cheapest GPS clunky and obsolete. People began pulling out their smartphones to look for directions, and demand for stand-alone GPS devices sank.

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For four years at Aurarian, as I said, I worked like a maniac without realizing it. I became a CrackBerry addict—slang for someone attached to his or her BlackBerry at all times. I had to be ready to answer e-mails at any time of the day or night. Jason would message me with random questions on everything ranging from the newest laws on Internet gambling to changes in the tax credit status for geothermal companies. These requests disrupted many dinners and workout sessions, not to mention my sleep. But I loved the constant intellectual stimulation of covering so many industries and the challenge of zipping through these requests. I got into the habit of typing out my thoughts (fearful that I might forget them) as they came to me. More than once, a truck almost hit me when I was crossing a street and typing notes to myself or to Jason.

My typical day started at 5:30 a.m., when I would head to the gym. I would get in four miles on the treadmill while simultaneously watching CNBC and reading that day’s
Wall Street Journal
. By 7:30 a.m., I was in front of my four computer screens, glancing through the news headlines for the companies in our portfolio. I would then spend most of my day talking to companies—ones we were invested in, ones we were interested in investing in, and everything else in between, including competitors, customers, and suppliers. I never really ate lunch, but rather snacked on nuts and fruit throughout the day to ensure my energy level remained high and steady at work. My brain usually crashed around 6:30 p.m., so I’d go back to the gym for a short workout to recharge.

If I didn’t have a business dinner, I would do more work from home. I would either work on my financial models on my laptop (it was hard to model during the day in a busy office), comparing the assumptions and earnings estimates in my own model with those of the Street analysts, or speak with contacts in China before calling it a day.

I also spent countless hours on the road. When it comes to researching companies, seeing is believing, and I traveled extensively to company headquarters to meet investment targets on their own turf. Unlike broker-sponsored investor conferences, which usually take place at posh locations, some of the industrial companies our fund was interested in were based in places in the United States so remote that many Americans had never been to them.

These memorable trips included a visit to North Dakota to see a company that claimed to have a technology to convert animal waste into ethanol. I remember standing in an animal waste processing facility in February, half of the building open to the air despite the subzero temperatures. I toured the facility and chatted with the company’s site engineers for a few hours to understand the technology and its commercial applications. I was underdressed
in my New York fur coat, freezing my butt off. Many of the workers—clearly entertained to see my fur coat among their usual sea of Carhartt overalls and work boots—asked to take a picture with me.

Another time I traveled to a frigid Duluth, Minnesota, to check out an iron ore company’s on-site exploration firsthand. I spent several days on various sites hanging out with the construction workers. At the end of the trip, I developed a nasty skin rash. I’m still not sure whether it was from the hard hat, the rubbery turkey sandwiches I ate for lunch and dinner a few days in a row, or the sheets from my aging motel.

My obsession with work came at a sacrifice: I wasn’t exactly living the lifestyle of an average young professional woman in Manhattan. That didn’t bother me, though. At Aurarian, I was obsessed with learning about stocks and the market, and I put in insane hours, with my signature intensity. As a result, I had established a reputation as a winner—a stock picker with good eyes for home runs. I was run down physically but very satisfied with my career.

I was beginning to understand why this business belongs to the young and hungry. To succeed in this business, one has to operate at peak condition 24 hours a day, 7 days a week, for a simple reason: globalization means that the investment universe is in action 24/7. Asian markets open just a few hours after the U.S. stock market closes at 4 p.m., and in between investors can trade the European markets. There was never any time for boredom or idle reflection, as the work never ended. There was always another stock to nail, another company to visit, another analyst to call. The intellectual stimulation never stopped, and neither did I.

By 2006, it was hard for anyone on Wall Street to dismiss the surge that was going on in Chinese IPOs. Being a prudent investor who
had never been to China, Jason initially avoided Chinese stocks. “It’s still a Communist country, after all,” he would say. “I don’t want to wake up one morning and find the company I invested in being nationalized.” He knew there were good momentum plays among Chinese companies, but he didn’t have the stomach for the risks that went with investing in an emerging market. This view was not uncommon among more conservative investors at the time.

At a certain point, however, dealing with China became unavoidable. Aurarian was a small-cap fund focused on innovation of all sorts—high technology, medical devices, and green technology were our specialties. China was becoming well known as the world’s factory, making everything from MP3 portable music players to solar panels and wind turbines. Production of all kinds of critical goods was shifting to China, especially in the two sectors I followed closely, semiconductors and green technology. With cheap labor and low costs, Chinese companies seemed destined to put their American competitors out of business.

At the time, the third wave of Chinese companies was invading U.S. capital markets. The first wave of Chinese IPOs began coming to U.S. markets in the 1990s. These companies were state-built empires in strategic industries such as insurance, energy, and telecommunications, monopolies constructed with generous government funding and protection. They had gone public not of their own volition but as part of Beijing’s “go-out” initiative to list state-run businesses overseas. The idea was that the IPOs would bring improved business practices to the companies while also building China’s image abroad as an economic superpower.

The second wave of Chinese companies hit U.S. exchanges in the early to mid-2000s. These firms were sexier than their predecessors because they operated in hot industries such as technology, consumer products, and media. These companies sought out American markets to raise capital and obtain the prestige of a
U.S. stock ticker symbol. Many went to the United States because they were as-yet-unprofitable high-tech start-ups and therefore couldn’t satisfy the listing criteria of the Chinese exchanges, such as having three years’ minimum profitable operating history. For those companies, Nasdaq was a suitable listing destination, as it brought together high-risk, high-growth companies and offered an investor base that was experienced and willing to bet on innovative business models for a potentially big upside.

Names like Baidu, Ctrip.com, and New Oriental Education & Technology quickly became Wall Street darlings due to their industry-leading positions and the familiarity of their business models. During their IPO road shows, these companies were pitched as “the Chinese Google” or “the Chinese Expedia”—except, given the size of the Chinese market, they were expected to soon dwarf their U.S. equivalents. These were terms every U.S. investor could understand and was all too willing to pay a premium for. Most of these Chinese IPOs debuted successfully, and their managers returned home as heroes armed with handsome market capitalizations.

Many companies in this second wave of IPOs were in certain restricted sectors, such as technology, media, education, and healthcare, in which Beijing limited or prohibited direct investments from foreigners. The Chinese companies used something called the variable interest entity (VIE) structure to circumvent that rule and gain access to international capital markets.

The structure is essentially a series of contract agreements that give foreign investors control but not technical ownership over companies operating in China. Since equity holders do not actually have a claim on the company’s underlying assets, the structure is inherently risky. The risk is often compounded by worries of China’s opaque legal system and weak law enforcement.

One incident in early 2011 shook investor confidence in these structures, which some estimate apply to nearly half the Chinese
companies now listed in the United States. Alibaba, the largest e-commerce company in China, transferred ownership of its online payment system Alipay to a Chinese domestic company held by Jack Ma, the founder and CEO of Alibaba. Yahoo, which owned more than 40 percent of Alibaba shares via a VIE structure, claimed that it was blindsided by Ma’s move, which was done without the approval of
Alibaba’s board
. The incident alarmed foreign investors because it set a high-profile example of the inherent risks in investing a company while its underlying assets are at the discretion of management and the Chinese state. Prominent investors such as David Einhorn at Greenlight Capital sold their shares in Yahoo immediately after the dispute broke out.

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The third wave of Chinese IPOs, which rushed to join the party on the American exchanges around 2006, presented problems of its own for investors. At the time, China’s private sector was gathering momentum, and a slew of some 400 smaller companies, so-called piggybackers, rode in on the high tide of U.S. investor optimism toward China. Among this group were many small Chinese companies that snuck into U.S. exchanges through backdoor listings, in which a company injected its assets into a listed but defunct shell company, thereby getting listed with less regulatory scrutiny from the SEC than it would have experienced in a standard IPO. This group was dominated by mom-and-pop businesses that often dealt in commodities, such as agriculture or resources. Many were located in rural areas, making it hard for investors to do due diligence. Today, many of these companies have been delisted—some voluntarily, after being taken private by management or private equity funds, and some involuntarily, after failing to comply with SEC requirements.

Getting listed in the United States is a pricey undertaking, and the application process requires jumping through a lot of hoops.
But for many Chinese companies, it was worth the effort. Smaller Chinese firms typically sought out an American exchange listing, and especially a coveted Nasdaq ticker symbol, for the prestige. Getting listed on an American exchange was glorious, to modify Deng’s phrase—it was a sign these companies had made it. Once listed, they could also use their stock as a currency to compensate their employees and to acquire other assets and businesses.

By the mid-2000s, cautious attitudes like Jason’s were rare. Most investors were climbing over each other to get a piece of the next Chinese offering—“market tested, SEC approved.” It didn’t matter that most of them didn’t know the first thing about China. They simply recited the mantra that China was the world’s fastest-growing economy and consumer market and that it was finally open for business. It seemed like a once-in-a-lifetime opportunity to buy in at the bottom of a huge economic wave, and most people I knew on Wall Street jumped in headfirst. But few suspected that their enthusiasm for these get-rich-quick plays was helping to inflate an investment bubble similar to the dot-com boom and bust America had seen only a few years prior.

I took my first trip to mainland China as an investor in the summer of 2006. Despite Jason’s strong resistance to investing in China, I managed to convince him that the firm wouldn’t be able to avoid analyzing Chinese businesses, even if we didn’t invest in Chinese stocks. Many U.S. businesses had exposure in China or competed with Chinese firms, and knowledge of the market was growing increasingly vital. Plus I suggested that Jason should make use of me as a resource, being a China native. He saw my logic, but he insisted we stick to companies with market capitalizations of more than $500 million, leaders in their respective businesses in private sectors. He also warned me to thoroughly investigate management
backgrounds to mitigate the chance of us later discovering that we had invested in firms run by crooks or gangsters.

One company I wanted to research was called Active Chip, a Chinese company that made chips for MP3 music players. Active Chip completed an IPO in 2005, and within less than eight months, the stock shot up from $8 to $12, a handsome 50 percent return that seemed to validate American investors’ love for the China factory story. By tapping into China’s wealth of cheap and competent engineers, Active Chip undercut its major U.S. competitors, Sigmatel and PortalPlayer, and drove them to the verge of bankruptcy. At its peak, the stock exemplified a popular belief—later proved to be naive—that the rise of Chinese manufacturers would bankrupt American companies and steal millions of American jobs.

Something caught my eye on its financial statement: Active Chip spent almost nothing on R&D—only 2 percent of its sales, which is unusually low for an emerging tech company. That told me that its chip had little to no real value in terms of intellectual property, and the company was not investing in new product development.

I went to see the company’s brand-new office building, one of those fortresses of steel and concrete that had sprung up in the sci-fi-inspired skyline of Shanghai’s new Pudong District. The floor-to-ceiling windows in the CFO’s office looked west, out over Pudong, the river, and the colonial buildings where Shanghai’s opium traders had once been housed. The CFO told me that the company’s low R&D budget was commonplace in China. The main reason was the loose enforcement of China’s intellectual property laws. “It doesn’t pay off to spend money on intellectual property,” he explained. “It can be reverse-engineered overnight. In the United States, you could take a violator to court. But in China, the judge will simply rule in favor of whoever gives a higher kickback.”