Monday, June 20, 2011

The Buck Stops With You


The case of Sino-Forest, the Chinese Forestry company and its sudden collapse of share price following the maligned analysis by short seller Carson Block of Muddy Waters LLC illustrates the problems stock investors face. This is not the first scandal with overseas operating companies that are listed here in North America. Just think of Bre-X and many companies that operate in emerging countries and have their 'head quarters' here.

It is all about transparency. The dealings of Sino-Forest are so muddled that even Globe and Mail Reporter Mark MacKinnon could not verify the existence of some of Sino's subsidiaries, offices and partners when send out on a two week fact finding mission. If 'facts' are so difficult to verify do why Canadian regulators allow the listing of such a company on one of our premier stock markets? Nor does it seem that many of the 'Analysts' at Canada's major brokerages and investment establishments, who have over the past promoted and recommended this company to its clients taken any responsibility for their recommendations.

It seems that the Canadian investment industry is fine with collecting underwriter fees and trading commissions from an unsuspecting, trusting clientele but that it wrings its hands in feigned concern about the losses its duped clientele suffer but no more. That is as far as their accountability seems to go. The next day you hear the same talking heads on BNN telling you with the greatest confidence what other investment gems their 'exhaustive' research has uncovered. It is all about making money, yeah their money, at the expense of a trusting public.

Whether a sham or legit, the Sino-Forest affair reduces the credibility of Canada's investment institutions to virtually zero! How is it that an army of 'experts' often with little real investment experience other than a few equations and algorithms learned in business school or, heaven forbid, during the Canadian Securities Course, are allowed to advice investors whose life savings and net worth many times exceed that of those 'experts'. "Mr. Expert, if you know all this so well, why are you not a millionaire rather than trying to sell paper certificates to me from a small cubicle?" is a question that definitely comes to mind.

It also illustrates once again, that stock market investing is not much different than investing in corporate debt. The investor has no real control and he/she has to believe the board of directors and the officers of the companies he/she invests in on their word. After all, those expensive third party accounting audits turn out to be worth less than the paper it's written on. If you invest in stocks, you basically get a share of the profits and often those profits are reinvested in the company (without you seeing a penny) until the day 'your' company goes broke. Or, when lucky, you make a profit by selling your shares to the next sucker. Sometimes this business seems to be a gigantic Ponzi scheme rather than a legit investment. That is why it is so important that investors get dividends, because then, at least, you do get a 'real return' on your money.

There are many good managers and employees that run many legitimate, profitable, companies. You, the shareholder can make money of that in return for providing equity. However, when all is said, your investment is not much more than a loan without an expiry date and you have absolutely no guarantee that you will ever see your money back!

Investing is not for the faint of heart. Corporations, management, banks, stock brokers, Realtors, lawyers, analysts, accountants, they are not in this business for you. They sell you their services so they can make a living. When all is said and done, the buck stops with you! Never, ever forget that!

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