The short story is that Zack Buckley, CIO of Buckley Capital Partners, went to China long a bunch of Chinese companies, and came home to the U.S. shorting the whole lot.The long story, of course, is a bit more complicated than that.
Buckley started investing in November of 2007. He’d been reading about the art since the age of 16, and launched his fund in 2011 with “the goal to lead the life that Buffett lead.”
Naturally, that requires some innovative thinking.
When he started, cheap Chinese companies seemed like a great buy. After research into SEC filings and discussions with management Buckley started picking them up.
And that was fine, until he heard Lei Zhang from Hillhouse Capital speak at the Value Investing Congress later that year. Zhang said that probably 200 out of the 300-some Chinese companies traded in the U.S. are frauds.
“I thought to myself, why should I be long when he’s saying these companies are great shorts,” Buckley told Business Insider.
So he did what any enterprising hedge fund manager would do. Three months after he heard Zhang speak, Buckley went to China to see the companies he’d invested in for himself.
Photo: Courtesy of Zack Buckley
“Once I got there, Buckley said, “I found there was no reason to own anything.”Now he has stories on stories about Chinese companies not being what they say they are.
One company Buckley invested in supposedly built transformers. Management claimed that their new factory was completed, and it sounded like it was fully running. When Buckley got to the factory, however, it was basically an empty warehouse with one tiny 4×4 machine and 3 or 4 employees. There was also an empty office, an empty dorm, and a basketball court… a few of which were under construction.
“I did make a few close relationships when I was there (in China),” said Buckley, “but once I realised it was a house of cards… I got out of it very quickly. I would go visit a company and drop the stock immediately.”
That’s what he did with a cactus company.
“They basically sold cactus wine, cactus beer, cactus face cream….” Buckley explained.
He toured the office building, basically empty on a Saturday, and even got to see a room where the company’s staff brainstormed ideas for other cactus products. When Buckley wanted to see the factory, though, his hosts said no.
“They had something to hide and it was obviously in the production line,” he said.
The things that some companies were hiding became apparent in time. The infamous China Media Express, a bus advertising company, is a perfect example.
Since the Chinese take a lot of long bus rides around the country, selling ads that play on those rides, or that are mounted on the sides of buses can be good business — and that’s what China Media Express said that it did.
However, in March of last year the company’s CEO and auditor (Deloitte) resigned after several research firms, including Carson Block’s Muddy Waters, accused the company of fraud.
Specifically, analysts claimed the company was lying to investors about their profits, and it didn’t help that China Media Express was delinquent in filing U.S. regulatory disclosure documents.
All that said, back in 2010, Buckley was one of those investors, and attended an elaborate investor day in which the company paid for attendees to stay at 5-star hotel. That was fine. The company put on a good show and there wasn’t anything immediately strange about their business.
The problem that Buckley eventually discovered, was that the company had no real market share.
He found that out after leaving the investor conference and visiting with the company’s competitors. Some told Buckley that they had never even heard of or competed with China Media Express. In his 2 month travels through China, Buckley never saw any China Media Express ads.
He sold his stock only to watch it double and then head to zero in 7 to 8 months.
It was “just another case where it was an unbelievable business model that made no sense,” Buckley said.
He ultimately visited around 50 companies. After that, Buckley went back to the United States and shorted everything he was once long.
And he didn’t stop there. Buckley made contacts with other investors, and together they hired private investigators to look into more companies. The investigators kept in touch via e-mail and phone, and with their help the investors discovered more shorts.
But those were the golden days of low hanging fruit. As Muddy Waters’ head Carson Block has pointed out, The companies that survived the onslaught of foreign short-sellers are less obvious frauds — they’re more sophisticated, they lie better.
Plus, they likely have ties to the government, and they can make private investigators disappear into thin air, or into a Chinese jail.
Now Buckley is totally out of China.
“You can’t be emotional or you can make excuses and make yourself think you understand a company when you actually do not. I did that before I went to China and that was a mistake.”
Fair, we’ve heard about the dangers of emotional investing before.
So what is Buckley investing in now?
“Any company that I can understand very well… and the more undervalued the better, obviously.”