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Lillian Zhu
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  • Shorts: It's Misleading to Compare Apples And Oranges
    I still reiterate my opinion that shorts allegation "Puda no longer owned Shanxi Coal" is simply wrong because they are comparing apples and oranges. You must be very careful whey you are trying to deal with different entities: Shanxi Puda Coal, an operating sub in China, and PUDA itself, a public company in the US. Shanxi Coal is a private company, and according to Chinese law its ownership is dictated by the registered capital contributed by its own shareholders (not PUDA’s shareholders). The key fact ignored by shorts is that all those “Transactions”: transfer of ownership, sale of company or loan pledge were treated in China AS IF Shanxi Coal had never gone public in the US or the entity PUDA had never existed.  Keep this mind, and we can only get a right picture of what chairman MZ has done and what implications those transactions may hold for PUDA shareholders.
    Now let’s look at some simple numbers. According to 2010 10k, Shanxi Putai Resources (“Putai”) acquired 90% of total registered capital of Shanxi Coal and therefore became the 90% owner. MZ and YZ own 8% and 2% respectively. (Of course, this may not be true again after those “Transactions”, but I only wanted to show how numbers should work.) However, at the same time, under the whole PUDA ownership structure, the ownership percentages of Shanxi Coal is “Mr. Ming Zhao (10%) held directly, Mr. Ming Zhao (approximately 23%) held indirectly through Puda, BVI and Putai.  Mr. Yao Zhao (approximately 5%) held indirectly through Puda, BVI and Putai.”  So given the complicated PUDA corporate structure which was purposely set up during its RTO in 2005, there is no simple math to make those numbers add up. Therefore, simple math won’t make sense when you try to translate things between the two different entities: Shanxi Coal and PUDA without the help of lawyers and accountants.
    So now how should we correctly understand those “Transactions”?
    “Putai” transferred 90% ownership to MZ. It’s legal under Chinese law in the sense that MZ had paid off the registered capital contributed by “Putai” and filed the registration with SAIC. But is it true as Mr. Little claimed that “The transfers resulted in Ming Zhao owning 99% of Shanxi Coal, leaving U.S. investors with nothing”? MZ did get to own 99% under Chinese law, but like I said before, by saying US investors now have nothing Mr. Little was comparing apples and oranges. Little did complex and eyepoping math in his article, but unfortunately he came from a wrong place. Trying to simply translate ownership between Shanxi Coal and PUDA made his math and allegations included in his article invalid.  The transfer should NOT have changed the fact PUDA owns 90% of Shanxi Coal because the transfer happened within the entity Shanxi Coal. After this transfer, what’s the MZ’s ownership of Shanxi Coal under PUDA’s structure is another question, but he didn’t steal from PUDA shareholders. What MZ has done wrong is this transfer hasn’t been disclosed.
    Use the same approach and we can get a correct picture of other transactions: MZ’s sale of his 49% stake to CITIC, Puda Mining’s 51% ownership pledge for the loan, etc., which will be addressed in another article.  
    Tags: PUDA
    Apr 10 6:58 PM | Link | 4 Comments
  • You Cannot Call Coin Flips, but You Can Beat the Market

    Nassim Taleb, the author of Black Swan and Fooled by Randomness, recently claimed that “George Soros has two million times more statistical evidence that his results are not chance than Warren Buffett does” , and that “we don’t have enough evidence to say Buffett isn’t doing it by chance.”  Still, Taleb didn’t disclose what statistical aspects he looked at of the results by the two investment gurus led him to say so. I was wondering, from statistical evidence perspective as argued by Taleb, how Soros as a speculator is comparable to Buffett as a long-term investor. You certainly can annualize Soros’s result in decades to see how it stacks up against Buffett’s, but Soros has made a majority of his fortune by making highly successful speculative moves – his fund netted $1.1 billion in the famous British pound bet in 1992, rather than by making long-term oriented investments like Buffett has been doing, which amounts to two essentially different investment styles.


    What interested me more is the same old argument that Buffett’s success is by chance – William Sharpe, the 1990 Nobel laureate of Economics, called him a “three sigma event”. The outperformance of value investing followers is a rebuttal to efficient market theory that stock prices reflect all accessible information so there are no undervalued stocks. But efficient market theory proponents have never addressed such a contradiction other than reduce Buffett’s success to probability theory. On the other hand, in his own response to EMT allegation, Buffett wrote an article “The Superinvestors of Graham-and-Doddsville” in which he used “a national coin-flipping contest” as a metaphor. He made a robust argument that the concentration of winners that came from the same value investing group simply cannot be explained by chance. Nevertheless, I would like to examine one aspect of “coin-flipping” metaphor that fails to mirror the nature of investment performance of Buffett, which may suggest the metaphor be revised in some ways, to say the least.


    In the “coin-flipping” example, to stay in the game and win at last, winners need to consistently successfully call the flips of a coin “ten times in a row”, or “twenty times in a row” etc., which happens only once among roughly a million people. In reality, however, investors do not need to beat the S&P 500 index “year-in-and-year-out” – as described in Buffett’s article – to be called outperforming the market. They can have good years and bad years, but results will be “annualized”. Taking Berkshire Hathaway as an example, its investment return was above the S&P 500 index return 38 times while below it 7 times in the last 45 years, leading to 20.3 per cent compounded annual gain based on book value compared to 9.3 per cent market gain.


    Finally, I want to examine how the “annualized” return makes sense for both sides of the argument that Buffett has done it by pure chance. From the statistical point of view, it is more likely to beat the market on annualized basis than on annual basis, but the difference may not be significant enough to push Berkshire Hathaway’s exceptional investment performance within “three sigma” zone. The probability for Berkshire Hathaway to beat the market 38 times in 45 years is about 120 times higher than if it beat 45 straight times, without regard to the magnitude of each gain. But the performance remains a “three sigma” event, meaning having probability less than 0.3 per cent. For Buffett, the notion of annualized return makes his success look more practical and achievable in a real investment world. This reminds me why Bernie Madoff, who claimed his fund consistently beat the market on a yearly, and even on a monthly basis, raised red flag for some sensible people long before the scandal was uncovered.

    Disclosure: No positions
    Mar 08 9:04 PM | Link | Comment!
  • A Voting Down Bernanke Sell-Off
    Warren Buffett in his interview with CNBC commented that the stock market would have a big sell-off should Ben Bernanke not get confirmed for the second term. His reasons included that Bernanke did an excellent job of taking “extraordinary measures” to save the financial system from collapsing in the fall of 2008, and that he would be very worried about the Congress if the Congress thought it could have done a better job than Bernanke. Buffett also expressed his strong support for Bernanke by saying that “if I could vote, I would vote twice.”
    I think Buffett’s endorsement for Bernanke is well grounded. Buffett has derived his view on U.S. economy and stock market from his extremely long and successful investing career which I found unusually insightful, wise, and thought-provoking. According to Buffett, at the time of crisis, people need to see a government there able to take all “appropriate” and “decisive” actions to revive the market. Bernanke, who claimed himself a student of the Great Depression, knows by heart that investor confidence is the lifeline to market during a crisis. Without market confidence, liquidity will not flow and asset prices will keep falling, which in turn will destroy confidence again. The Great Depression experience shows that to pull the economy out of this positive feedback loop resolute solutions must be put in place. So the Fed acted very boldly this time: it consistently cut interest rate to as low as zero, bought mortgage-backed securities, and offered emergency lending programs to not only commercial banks but investment banks and companies, etc., with the Fed chairman Bernanke potentially putting his career at stake. One can always disagree as to what might have been the best steps that the Fed should has taken, but probably few can argue that the Fed was not moving quickly, steadily and boldly enough. Though the unemployment rate is still historically high, suggesting a long and bumpy recovery, market confidence has been restored, asset prices have stabilized and economic growth has ended its four straight quarters slumping. Bernanke and the Fed should be at least credited for successfully thwarting a potentially second Great Depression in the U.S. history given all that have been done.
    People are watching closely if Bernanke will win his confirmation vote next week. Over the weekend, things have seemed to evolve in Bernanke’s favor: According to WSJ, more senators have expressed their support for Bernanke. However, politicians may veto his nomination to take advantage of all the public anger which is now mounting around the role banks played in the financial crisis and banks’ compensation, which will greatly add to uncertainties in the U.S. economy. Should that be the case, be prepared for a continued brutal sell-off from last week. Like Buffett pointed out in his interview with CNBC, he would be worried about the Congress – I think he meant to say that Bernanke’s failure to get confirmation will make him raise questions about the Congress’s ability to guide the country’s economic policies at this specific point of time.
    Jan 24 10:09 AM | Link | Comment!
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