At one time I was a stock broker and a principal of a NASD broker dealer. During that time I learned many things that convinced me that Wall Street is for gamblers.
Every year I had to take continuing education classes. Each year there was a new investment theory that was be promoted by many stock brokers, financial planners, and insurance salespeople. When I asked why we had a new investment theory, I was shocked by the answer. Last year’s theory did not work out as expected.
The next year I discovered that the investment theory was being promoted by the wholesalers promoting product. Since everyone wanted some new idea to sell, the advisors went along.
Last week the Shanghai Stock Exchange plunged another 5% after dropping 30% since November. The Dow Jones Industrial Average dropped 1,000 points at the lowest trading. What does the Chinese problem have to do with the U.S.? We’re supposed to have a strong economy. China buys very few products from us.
The problem is that many of the emerging market index funds have to buy those shares. When there is a drop in value, those index funds have to sell off to met redemptions. In tern dragging the U.S. markets down.
Many of those funds invested in Alibaba Group which reportedly controls 80% of China’s online shopping. Sounds interesting. Problem is you don’t actually own Alibaba shares which is prohibited by Chinese law. Basically, the Alibaba stock will own a stake in a Cayman Islands-registered entity which is under contract to receive a profit from Alibaba’ lucrative Chinese assets but will not actually own them.
Does this sound risky to you? Would you bet your family’s financial future on such a scheme? Does investing in a Cayman Islands-registed entity sould safe?
Stay tuned as we discuss more U.S. based assets that grows revenue in up and down markets.