Tiger Woman on Wall Stree (14 page)

Our reasoning went like this: Between the early 2000s and 2006, homeowners saw the value of their property expand significantly compared with the amount of their mortgages. The environment of rising home prices and low interest rates encouraged people to refinance their homes and draw down on the equity, which they spent in turn on consumer discretionary items they otherwise couldn’t have afforded. So the housing bubble had effectively fed a broader bubble in the consumer economy. If the real estate bubble popped, stocks of high-end retailers and makers of consumer electronics were certain to suffer from volatility. We decided to ready a list of short targets and be prepared when the market took a dive.

Our thesis proved to be entirely correct. But while our short positions worked out well for us, our longs suffered as banks clamped down on their lending to corporate America. In 2008, we were heavily invested in early-stage green-tech companies in the United States that relied on debt financing. Once banks tightened access to credit and eventually cut it off for small companies, some of our largest holdings—many of them apparently great technology plays—went belly up.

A good number of these companies produced the latest technology in the green energy space. But just like most green-tech companies, they were in the exploratory phase and needed incremental financing in order to commercialize the technology for mass adoption. We call this kind of a company a bull-market story, since its potential for success is tightly linked to the overall strength of the financial market. When the credit markets completely shut down in late 2008, these promising young companies were cut off from the funds they needed to operate, and many soon ran out of cash and declared bankruptcy.

Aurarian made money from our short positions, but we lost even more from our green-tech holdings. Like many others on Wall Street, we anticipated the housing crisis but underestimated its scale. While our performance was still in line with the market, those losses took their toll. We could have survived the storm if we were bigger—but we weren’t.

The financial market meltdown triggered a crisis of confidence among investors. Redemption—where investors pull back their capital—accelerated, especially for small funds like ours. A group of conservative Swiss gentlemen were our main investors. Despite having earned a 60 percent return with us in 2007, they decided to withdraw their funds due to the uncertainty of the market. That spelled the end of Aurarian. It didn’t take long for us to decide to return the money to our investors and close down the firm.

The entire city of New York was affected by the collapse of Wall Street. New Yorkers felt the shock waves in all aspects of our daily lives, from a plummet in prices in the high-end condo market to the closing of restaurants, fashion boutiques, and nail salons in the banking district. In the months and years that followed, many of my professional colleagues and personal friends saw their Wall Street careers interrupted, in many cases for good. Some friends took pay cuts as large as 90 percent. One good friend went from a $12 million guaranteed package at a major investment bank as a lead healthcare analyst to a $200,000 base salary at a private brokerage firm.

The banks all entered austerity mode. Banks slashed paychecks, benefits, even office amenities. When I worked at Credit Suisse, they would offer us free Starbucks coffee; after the financial crisis, my analyst friend at Goldman Sachs said the only things the firm’s cafeteria gave away for free were plastic utensils. Research analysts worked for a fraction of what they used to make and felt lucky to have a job. Research budgets shrank, due partly to skyrocketing compliance and legal expenses for banks after the Dodd-Frank banking regulations were signed into law in 2010. Analysts had less money to visit companies and attend industry events, giving them fewer resources to acquire good data on given industries or companies. As a result, the quality of sell-side research suffered.

By comparison, China weathered the financial crisis well. In 2009, the Chinese economy was still heavily dependent on exports, and China almost immediately began to feel the negative effects from plunging demand in the West. So the Chinese government acted quickly: to stave off the impact of the global financial crisis, China pulled its stimulus trigger and released a $4 trillion package for large fiscal projects.

Almost immediately, railroads, bridges, and airports began expanding from the country’s busy coast to the less populated
center. Cities threw up infrastructure projects both useful and frivolous, from new highway systems to Olympic-sized gymnasiums destined to stand empty. Industries such as steel, cement, heavy machinery, and infrastructure construction led China’s recovery. After dipping to 6.1 percent in the
first quarter of 2009
, real GDP growth rebounded to 11.9 percent one year later.

The world was impressed, and China envy was in full swing. Commentators everywhere forecast the decline of America, and some even went as far as to make the case that state capitalism should be the new model for the modern era.

After Aurarian closed down, Jason quickly launched a green-tech company developing something called the organic rankine cycle, which converts the heat from biomass, industrial waste, and geothermal sources into electricity. He was determined to make back the money that he lost from investing in green tech by going into the industry himself.

I was not going to leave Wall Street. I was too interested in stocks and the financial markets to go anywhere. By that time, I had developed a strong reputation and a Rolodex of contacts. Being an Asian woman in a white male-dominated world also helped me to stand out. People noticed me and my questions at various conferences, field trips, and industry events. I wasn’t sure what my next move would be, so I took some time off to travel, learn to surf, and get some much-needed rest, after having worked so intensely for five years.

Both my dad and my husband encouraged me to start my own China-focused business. They thought the timing could not be better. I had both a highly desirable China background and Wall Street training and could therefore run between the world’s two hottest markets with ease. Dad said that if he could start and run
a business successfully without a Columbia degree, I could definitely do it with my cutting-edge Wall Street training. Two of the most important people in my life were assuring me that I had the perseverance, drive, and intelligence to do it. So I decided to give it a shot.

I could do two things: I could raise money and start a hedge fund on my own. Or I could utilize the investigative approach that I had mastered from Aurarian and set up an independent research firm to advise the investment community. After weighing both options, I decided to launch an independent research firm. I named it JL Warren—
JL
for my initials and
Warren
for the name of the street where I lived at that time.

Initially, JL Warren provided premium fundamental analysis to investors on a project-by-project basis. Over time, I expanded the platform to offer real-time data and knowledge-based research on Chinese businesses and multinationals doing business in China, mostly to sophisticated institutional investors. My research is not meant to compete with traditional sell-side reports but to supplement their qualitative reports with much more detailed raw data and and unbiased, variant views on stocks.

My career entered into a new and exciting chapter. However, my personal life didn’t weather the crisis. It turned out that neither my dad’s tiger parenting nor my Wall Street education in stock picking had equipped me with the skills necessary to deal with marriage.

As my engagement with my work deepened, my relationship with Andrew went from good to bad to irreparable. The day I signed my divorce papers in the fall of 2010 was the worst day of my life and marked the hardest lesson I have had to learn yet. I still pray every day that I, as well as the people around me, never again repeat my ignorant and painful mistake.

New York, 2010

I
’M NOT SURE WHETHER IT WAS A
N
EW
Y
ORK THING, BUT OFTEN
when I told people about my recent divorce, they would respond with “congratulations” or “let’s go out and celebrate a new chapter.” I would laugh in response, but inside I still felt a clawing and persistent pain. I deeply felt that my divorce was a personal failure—a big one.

Once again, work provided me with a psychological escape. Having China back on my radar was a welcome and much-needed distraction. Crunching numbers, scrutinizing charts on Bloomberg terminals, and attending long conference calls with company management teams dulled the pain. That was partially the reason I found myself at an IPO road show in the New York St. Regis Hotel in September 2010.

It was a wet and blustery day, one of those storms that turn the city streets into rivers and ruin a banker’s Ferragamos. I had expected a low turnout at the road show, but the private dining
room of the plush hotel was packed with eager investors. Everyone was excited to hear what the executives of Global Education and Technology (GET), the latest buzzworthy China play, had to dish up.

“I hope you enjoy the meal,” a Chinese man in a stiff suit said in stilted English, gesturing toward our roast chicken and fall root vegetables. He then smiled and switched to Mandarin.

The purpose of the meeting was to persuade New York’s banking elite to invest in the IPO of a small business that was booking $50 million in revenue that year and growing at a rate of 30 percent. GET had chosen to float its shares on the New York Stock Exchange for its prestige, although Manhattan was thousands of miles away from Beijing, where the firm conducted its business. The company claimed it deserved a spot among several other Chinese companies that had become Wall Street darlings. The suits in the room were duly and easily impressed. This was the midst of what we called the Red Party, a time when just about every Chinese asset seemed as if it would go up in value forever. What a party it was!

The company’s presentation was so well rehearsed, it felt like a recital. The CEO started with a brief introduction of his business in Mandarin. His bankers simultaneously translated the speech into imperfect English laced with heavy Cantonese accents. I’m not sure who was harder to understand. After the CEO finished, he deferred to the CFO, who was also his wife, for the rest of the presentation. Her Canadian college degree paid off as she whipped through the PowerPoint, gliding through the predictable questions and deftly anticipating curve balls. There were at least two bankers stepping in to help her provide the right answers. Not that it mattered—everyone in the room was clearly desperate to buy stock in this Chinese growth play, the latest investing sensation that seemed destined to print money for years to come.

Luckily I had an advantage over the other bankers in the crowd. My old friend Peter Winn had gone to China years ago
with nothing but a Wharton MBA—and no Chinese. But through pluck and intelligence, he had become the founder of one of the largest private education companies in the country. In a nation where the upkeep and enforcement of contracts depends more on one’s personal network than the law, he became an absolute expert in doing business and became extremely well connected. Peter built the China operation for English First, one of the largest and most influential language training brands in China.

With as little subtlety as I could get away with, I contacted Peter on my BlackBerry as I leafed through the voluminous IPO documents and listened to GET’s presentation. Even though it was the middle of the night in China, his e-mail quickly set me straight.

“Do they have business outside of China since they call themselves global? And what technology do they have?” I wrote.

Peter e-mailed back immediately. “It is a mom-and-pop shop, a husband and wife team. They don’t have much presence outside of Beijing. They get a tax break by including the word ‘technology’ in the company name.”

Good old Peter. After 15 years in the China trenches, his business sense was better than that of most natives. And from his description, GET’s business was pretty lame.

Five seconds later, another e-mail from Peter came in. “Mom-and-pop operations can make money in the Chinese education sector, but GET is not a scalable business.” He clearly had a lot to say about his industry of expertise. “Their bankers told them to raise money to grow, but they don’t have any clout outside of Beijing. You need to apply for a new license each time you enter a different city. That takes relationships and seamless execution, which I know all too well they don’t have.”

After the lunch, as I was passing through the lobby, I spotted Brian, a portfolio manager friend at a $5 billion multistrategy
hedge fund. “Hey Brian, are you crashing the Red Party as well?” I asked jokingly.

He was familiar with the term we used for all of the fabled opportunities of still-Communist China. “It’s a party you can’t miss,” Brian replied in a serious tone. “Everyone and his mother are looking at and buying China. Don’t miss the boat.”

“I thought you were a stock picker, not a chaser of hype,” I said, prodding him further.

His face lit up at my challenge. “There’s nowhere else in the world where you can find growth right now, and the money we manage needs to be invested somewhere,” he countered. “If not, investors will think we’re not smart enough to be their money managers.”

Brian went on to tell me about two other education companies that were expected to list the following week. When I asked him which ones he liked and why, his answer was telling: “I can’t really tell one from the other, but I’ll put an order in for all three of them. Education’s got to be hot, right? The one-child policy in China and all.”

“Uh, right,” I said. It seemed I had done more due diligence on which American college to apply to than he had done on these supposedly hot education companies in China.

This presentation, like so many before it, had told me all I needed to know at that moment:
caveat emptor,
buyer beware. I thought of how the dot-com bubble had built up investor hopes to such dizzying heights, only to crush them in the spring of 2000. Peter had spent a decade and a half building his company into an empire. It took him years and many mishaps to learn to navigate the legal and cultural intricacies of doing business in China. How could so many bankers, living on the other side of the world and knowing so little of China, be so greedy, lazy, and careless as to take an unfamiliar Chinese company at its word?