Tiger Woman on Wall Stree (2 page)

China makes or breaks the state of our global economic recovery and what comes afterward. As China goes, so goes the global economy. If China sneezes, the rest of the world catches a cold. For global institutional investors, the stakes of getting China right are high. So is the need for fact-based, meticulous, and accurate research.

I am fascinated by China, not just because it is my home country and I am emotionally and practically vested in it, but also because it is vastly complex. Complexity always intrigues me. Because of its unique structure—it is still a command-based economy, but it is bolstered by market instruments—China offers the chance for endless decoding, learning, risks, and challenges. And consequent opportunities.

Most of the public domain commentaries on China’s economy, companies, and businesses are simplistic, characteristic of the American media, in which sensational sound bites are far more important than nuances. These attitudes have left the United States with black-and-white opinions about China. With this book, I want to share my work and to plug the gap between what I see as the reality and the perception on Wall Street about China.

My conviction that the market is not efficient—the underlying premise of this book—contradicts one of the great canons of modern finance theory: the efficient market hypothesis of Eugene Fama. Inefficiency exists because accurate information takes time to travel and surface; analysis and human intelligence are subject to errors and biases by investors and fraud by management.

In the case of China, inefficiency prevails. This book aims to show you how mindful investors can profit from market inefficiency.

  *  *  *  

America is the strongest nation in the world in terms of its economy, military might, and influence in global affairs. Yet it is also among the youngest. This combination of its number one ranking and youth makes America consistently cocky but also insecure about falling behind. Washington’s deep political divisions over fundamental and philosophical beliefs have been stagnating its political system and stirring doubts about whether America will continue to lead the world in the twenty-first century.

At the same time, China has emerged and appears to be a formidable competitor. Energized by the return to capitalism, its 1.3 billion people are demonstrating great manufacturing prowess and are modernizing at an astounding rate. But if you look beyond the surface of its impressive achievement, you will see what China has yet to develop: the rule of law, a functional and effective
business and financial infrastructure, an imaginative and innovative workforce, free independent media, and social mobility driven by merit, not by class, ethnicity, and family background. Until the software—the quality of its citizenry and society—matches the government-led hardware of infrastructure buildup, China is far from constituting a credible threat to America.

At the same time, China is essentially caught in a prison of its own success: the staggering and unprecedented achievement of lifting 500 million people out of poverty in a bit more than 30 years. This achievement is based on a single economic mode—that of mass production of low-value manufacturing products, along with plenty of government-led investment in massive infrastructure projects. In the process, China has singularly focused on GDP growth at the expense of profitability, innovation, R&D, and productivity.

Today, that growth model has stalled. Excess capacity has been built in many sectors. Low pricing power has put pressure on corporate profitability, while the lack of R&D and innovation hinders Chinese companies from moving up the value chain and increasing, or even maintaining, global competitiveness. China is kept afloat by taking on more corporate and government debt.

The Chinese economy has become increasingly inefficient, driven by weak corporate governance, a historic misallocation of resources, and a political process hamstrung between an itch to westernize and a desire to remain a Communist regime. Those deficiencies will become more pronounced and damaging as China’s economic growth slows.

  *  *  *  

Although it’s a cliché,
do your homework
means there is no shortcut to sustainable wins in the market, in business, and in life. For investors, doing your homework means reading the company’s filings and understanding the products, services, and people
(including their families and mistresses) you invest in. Keep in mind that losing money is worse than not making money. Dare to be a contrarian, and if your view is the market view, move on to find an idea with which you can find an edge. There is never a shortage of ideas for a curious and able mind.

To participate and catch up in the global competition, China’s policy makers must drastically improve corporate governance and transparency; continue market reform by allowing more foreign ownership and competition; and make banks lend on commercial criteria only, not for and on behalf of the government. To be a global player, one must respect established global standards, compliance, and regulations.

Just as there is no shortcut to sustainable profit in the market, there is no shortcut to corporate growth and to building a structurally sound economy. Today, China is at the tipping point, where the lagging quality of its institutions and people poses serious threats to its further economic growth.

  *  *  *  

For the 16 years I have lived away from China, I have been consumed by work—first academics, then a demanding career. While my family back in Shanghai has always been unconditionally supportive of my work and any pursuit in my life, I have spared little time for my parents. For that, I live with guilt every day.

Tiger Woman on Wall Street
is a way for me to describe and explain my life and work since I left Shanghai in 1996. I want my parents to know that I have inherited their courage, discipline, and perseverance—and that I thank them for what and where I am today. With a tremendous amount of hard work and infinite curiosity, I am now an independent thinker, savvy investment professional, and humble student of learning.

My parents’ parenting—although tough by any standard, Western or Asian—was an expression of selfless love and anxiety,
the outcome of China’s cultural traditions and its modern historical tragedies.

While I now live out my American dream in New York City, I will never forget who and what made me.

S
LIVERS OF WOOD BORE INTO MY SKIN, MY BACK ACHED, AND
my shins throbbed with pain. I had been forced to kneel on a washer board in front of my father for more than an hour while he drilled me on the multiplication tables, and the wooden ridges were digging so deeply into my legs that I could barely think.

“Eight times six!” he barked.

“Uh . . .”

I must have taken a beat too long to answer, so he slapped me hard across the face.

“EIGHT TIMES SIX!” he repeated.

“Forty?” I ventured.

“Stupid, useless girl!” he yelled, and slapped me again, even harder this time.

“Baba, I know it! Forty-eight!”

On and on it went, until well past dusk. I was beginning to bleed, but there would be no respite until I completed the entire multiplication table without hesitation. I was expected to spit out the correct answers like a machine. Dad was determined that I get
these basic mathematic lessons down cold, and as far as he was concerned, the best way of teaching was through a brutal system of punishment and reward.

It was not unusual for my father to take this zealous tutoring too far. He believed it was the only way his daughter would gain an edge in China’s highly competitive education system and get ahead in the world. Others might call it torture; he called it tough love. Later in life, he figured, I would understand and even thank him. But right then, there was to be no sparing of the rod.

I was just three years old.

When Dad decided the drilling had sunk in, he lifted me off the washer board and brought me to a nearby park where I could run around and play. At the park, I felt so liberated that I dropped my father’s hand and took off, sprinting across the grass. By then, it was so dark that I couldn’t see in front of me—the public park authorities turned off the lights after 8 p.m. to save electricity. The groundskeepers had just mowed the lawn and erected barbed wire to protect the grass. I ran straight into it.

The barbs pierced my stomach’s tender flesh and blood started to blossom, staining my blue dress. Dad scooped me up, took me home, and cleaned my wound, the pain flaring as he dabbed rubbing alcohol on my punctures. When I screamed, his face flinched. Then he said something I have never forgotten: “Pain is just weakness leaving the body.”

Dad tucked me in, then sat next to my bed until I fell asleep, touching my forehead from time to time and checking my injuries. In that bittersweet moment, I knew he cared for me. If anything, that fierce love was why he always demanded nothing less than perfection. His high standards for me were just part of his language of love that got lost in translation.

  *  *  *  

Throughout my childhood, his militaristic drills and beatings were almost a daily routine. If I displeased him for any reason, whether
it was for coming home late after playing games with the neighborhood boys or stumbling as I played a tune on my accordion, I would suffer a whipping from his leather belt.

As brutal as he could be, I never once doubted that my father loved my younger sister, Jasmine, and me more than anything in the world. He would do little things for us, small love tokens like leaving toothpaste on my toothbrush for me before heading to work in the morning or preparing special breakfast foods. He always rose early to make breakfast for Jasmine and me; he was a stickler for proper nutrition, especially when it came to his children. When the monthly budget was strained, he would eat less so we could have more. If I were facing an important day at school, such as a big test or an accordion recital, he would prepare two eggs poached in hot milk. But I never liked the taste of egg no matter how good it was supposed to be for me. Once, Dad spotted me spitting it out the moment I left the apartment. After that, I wasn’t allowed to leave until I finished chewing and swallowing right in front of him.

If I did something that pleased him, like scoring at the top of my class or winning a speech contest, he would wake even earlier than usual and bike 20 minutes to his favorite dumpling joint to bring home my favorite pan-seared pork buns and curried beef soup. Every time I saw pork buns for breakfast, I knew that I had made him happy. Poached eggs and takeout pork buns were luxury breakfast items at that time—a real splurge. And they were all for my sister and me. Dad would sit in the corner of the living room and eat his rice porridge separately, a contented look on his face.

Dad never spoke the words, “I am proud of you.” He didn’t have to. It was obvious. “One day you will understand why I’m so hard on you right now,” he told me once. “All I do is to prepare you while you are young and moldable, so that you will have a bit more control of your destiny when you grow up.”

New York, Spring 2005

W
HEN
I
FIRST SAW
J
ASON
G
OLD, HE WAS CARRYING HIS DRY
cleaning into the office, a gleaming glass and steel money fortress on Fifth Avenue, right next door to Harry Winston’s New York flagship store. He made a good first impression: he seemed energetic, sharp, and youthful, with a ready smile. His dark eyes were alert and penetrating.

Jason was the founder of Aurarian Capital, a start-up hedge fund where I was trying to land a job. I was there for my first interview. After working for several years on Wall Street, I was ready for a new challenge. The ad for the position said the fund was focused on under-the-radar small-cap technology companies. I knew very little about technology—in fact, I didn’t even understand what a computer motherboard was at the time—but I knew I could learn anything if I set my mind to it. I could not wait to learn the ropes of a start-up hedge fund by working my heart out.

Before my interview, I asked around on the Street about Jason’s reputation. He had an impressive résumé graced with some of the most prestigious multibillion dollar fund names in the business. Before launching Aurarian Capital, he was a research director at SAC Capital, one of the world’s largest multistrategy funds, run by Steve Cohen. He had also been a lieutenant to Dan Benton at Andor Capital Management. Both funds were known for their cutthroat cultures.

The people I spoke with described Jason as everything from a bulldog to ultimately a good guy. He was a devoted family man, but he also worked like a maniac and suffered no fools. I didn’t mind working for a tough boss, as long as he would be fair and even-keeled: a balance I would soon learn that Jason personified.

During the interview, Jason pointed me to a seat by his office desk while he sat on the couch across the room. Only much later did I realize that the seating arrangement was a part of his signature interview technique. By lulling interviewees into an informal dialogue, he later explained to me, he tried to open them up to reveal their true selves.

“Tell me about yourself,” Jason began, looking directly into my eyes, “How do you describe yourself?”

“Two words—curious and tenacious,” I replied, without even thinking.

I went on to tell him that I inherited an insatiably curious mind from my dad—nothing turned me on more than learning. I also inherited his legendary tenacity, which meant I would never back down in front of challenges, ever.

“I also possess common sense, and I am resourceful,” I added, listing the qualities I inherited from my mother. I explained how my mother shrewdly ran a household with limited financial resources. She would make the rounds at the farmer’s market and would speak to dozens of vendors to ferret out the best deals. My mom was also a great listener, someone whom other people
trusted with their stories and insights. She’d listen, digest, and then dispense sage advice with all that information. In my mind, that kind of instinct and pragmatism were much harder to teach than the ability to analyze a company’s income statement.