A toxic class to avoid at any cost

I feel really sad to write this but it has become so devastating to the point that I want to say something. 

When a society is run based on honoring dishonesty and cheating & lying have become something to be proud of for bragging, not shamed of, I'm not sure this kind of governing system can last for long. It pains me to say this but it has unfortunately become a norm in China for many years and per my judgment, is becoming worsening in the recent years. This kind of social immorality is nothing worse than a pandemic in my opinion, although it may not physically kill people but it dose kill people spiritually. The sad thing is that this is not confined within China anymore but is also spreading out to other countries as well. Let me share with you a short story. A couple of years ago, we went to visit the Manhattan China Town. My wife took the opportunity to do her hairdressing which was much more economic than other areas. For the whole hour during the process, the hairdresser, a retired professional from China, was bragging how he was abusing the US government system to get both his retirement pension from China without reporting here and also enjoy low income benefits here. Of course his cash income from the current hairdressing business was largely under-reported so that he could also get a government-subsidized  apartment at the heart of Manhattan. He said it was extremely difficult to get it as usually it would take many years in the waiting list. So he encouraged us to do the same to cut down our income reporting and started to apply for the apartment as soon as possible. He thought we were from local. I must say it was just like swallowing a fly and I almost vomited after hearing this kind of disgusting bragging for abusing the honest-based system. But I heard from many friends directly or indirectly that this is actually a widespread phenomenon in the US. No, I'm not saying this is only prevalent in the Chinese communities and I'm sure it has happened in other communities as well but the severity and density of such abusing among the Chinese communities should not be underestimated. For sure proportionally, this is only a small number of bad apples but they are destroying the image of the vast majority of the honest Chinese people like you and me living here. 

So why I suddenly bring this up in this investment blog? Well, if you still haven't heard yet, there is something happening big time these days that is very much relevant to the dishonesty that I'm talking about for the Chinese companies. Heard about Luckin Coffee (LK), the used-to-be rising star and deemed as a strong competitor for Starbucks? It has been decimated last week when it was reported for its massive accounting fraud for faked sales numbers. About 80% of its market cap was wiped out within hours and it is fighting for live now. I hope it won't survive and disappear soon. But problem is this may not be just a single incident for Chinese companies. Just ask yourself how much you can believe the accounting reports from China? While I'm certainly not saying that 100% of Chinese companies are involving some accounting fraud, I'm not sure I can say it is a small number or uncommon events. As I said, when the whole system is virtually "promoting and rewarding" cheating one way or the other, it is very hard to survive well to behavior honestly ironically. Now we start to hear more financial fraud for many Chinese companies, including but definitely not limited to TAL Education Group (TAL),  iQIYI (IQ),  eHealth (EHTH), and Ruixing.........The question is: have we seen the end of it or this is just the tip of the iceberg that may blow up eventually? I'm not smart enough to know for sure what the magnitude of this very severe issue and I cannot distinguish which are the good ones from the bad ones with any confidence. In this kind of highly invisible and uncertain time, the wise thing to do is to add Chinese stocks to the list of stocks that are currently toxic and better to be avoided. This is my advice more relevant for long term investors. For nimble traders, some short term trading either directions may still be considered but need to be very cautious in terms of size, duration and downside risk management. I think trading options will be much better in this situation as the downside risk can be predefined. A general stop loss for stocks cannot really help when a stock is imploding like LK for a sudden 80% crash. Better not to take such kind of unmanageable risk for long term investment at all!!