Back in 2006-2007, many private investors had it easy. The markets were on a tear and UK investors were benefiting from a boom in new flotations on AIM. Amongst them were a ream of Chinese listings which were attracted to AIM in order to raise growth capital. These included the glamour stock Renesola (LON:SOLA) , a solar wafer company which proceeded to sextuple over about 18 months amongst much decadent howling from private investors on the bulletin boards. Of course it couldn't last, and Renesola, as well as most of the other Chinese stocks, crashed during the credit crunch.
Picking up the pieces today, there are a few Chinese AIM stocks that have recovered somewhat, with some such as Asian Citrus (LON:ACHL) posting very strong gains and moving to new highs, but there are also many that have remained bombed out predominantly on size, accounting and cashflow concerns. The worry that many investors have is that they just don't trust these companies, and don't trust the companies' accounting practices. As a result these companies now trade on completely derisory ratings - to such an extent that they are now appearing on our screens as selling for less than their liquidation value.
Ben Graham, the famous value investor and tutor of Warren Buffett, was the ultimate contrarian investor and loved derisory ratings. He was the investment world's first ever 'quant', running his investment fund for many years almost purely based on a statistical strategy that looked to buy bombed out stocks for less than their liquidation value. Graham wasn't shy of investing where others feared to tread as he believed that in a well spread portfolio any individual bankruptcy risks could be diversified away. Holding anywhere from 30 to 100 stocks, he found the investment returns that resulted to be 'more than satisfactory', with his Graham-Newman partnership returning 17% per year.
If you take a Graham approach to the market, you look for companies that are selling for less than what investors would receive in the worst possible scenario; a liquidation. In this scenario, there's really little point the companies remaining on the market as investors could just liquidate and make a profit. Knowing that in a firesale companies might not get full value for their assets he used an extremely cautious calculation to value them. In his 'Net Net…