How a 25-Year-Old Investor Spurred Lumber Liquidators’ Plunge
bloomberg.com
bloomberg.com
My whole family has been struggling with health issues that coincide with when I put these floors down. I have a Chihuahua that has developed terrible sinus problems, my 6 year old son is having sinus and cough issues and my wife has breathing problem in our home.
I'm not 100% sure it's from these floors and/or the glue I bought from them, but it's a fact our health tanked a few months after the floors went down. We've been struggling to find a cause that makes sense and this seem to be the only plausible thing.
I guess in a couple months I'll know for sure assuming our health improves. If it turns out to be the case, I will be extremely grateful to this blogger. I don't care if he made money, this information could be helping my family's health.
I assumed we had a mold problem, but those test recently came up negative.
I should note I have the least issues, but I spend the least amount of time at home.
Here's a pic: http://i.imgur.com/vF4zo56.jpg
Sorry you had to deal with that. I worked with some formaldehyde containing (out gassing) material once. It was not fun. After I started developing nose bleeds we got that crap out of our lab and started using masks around it.
I have sold short stocks in the past that I have believed were fraudulent (and they always eventually went to zero, although riding them there can be a challenge).
But I think your story represents the best example I've ever seen of how short sellers have an incentive to add information to a market, and how this can make participants better off.
For home items, my strategy is to try to purchase products containing as much natural content as possible. Solid woods as opposed to particle board or MDF, natural fiber rugs if possible, avoid scented products and harsh cleaners. However, even this isn't fool proof. During a recent carpentry project I discovered that some softwoods outgas these compounds as well.
In my case, VOC sensitivity seems to be the result of cumulative exposure: On a large architectural project I spent many weeks inside a buttoned up building that was being painted. Came down with severe respiratory symptoms that resembled a bad flu. Eventually I recovered but ten years on I'm sensitive as a canary to the stuff.
I recommend that folks work in a well ventilated area or use a charcoal filter respirator when using anything having significant fumes. Even small doses of these chemicals are probably worth avoiding.
I became quite sick by the end of the week. In retrospect, the outgassing from that chip board did quite a number on me.
I have no difficulty at all believing people who put in manufactured materials and end up sick. E.g. also the Chinese drywall scandal that became prominent a few years ago.
I regret that "cheap" has so permeated our culture that avoiding it has become a marginal market with correspondingly elevated prices.
And even when you pay more, today it's not a guarantee that the basic materials involved will be higher quality. Lots of McMansions stuffed full of such stuff. I watched one go up a few years ago across from my parent's place, and despite the tony location and price, they didn't do the exterior correctly. We're waiting for the water issues to manifest.
On the other hand, we have plenty of evidence that people are really bad at being suspicious of the often unreliable stuff they read on the internet. For example, measles has made a roaring comeback in the USA, so even when their own children's health is involved, it seems people aren't willing to actually read farther than a couple of emotionally-charged blog posts before making decisions.
http://www.vox.com/2015/1/29/7929791/measles-outbreak-2014
tl;dr Measles was imported to a group of unvaccinated Amish by a resident returning from a missionary trip. The Amish accounted for a large portion of those infected in the US. The good news is that many Amish opted to take the vaccine after seeing the effect of measles in their community.
Here is an older article (2024)
http://www.nytimes.com/2014/05/30/health/measles-cases-in-us...
A few snippets from the article.
* There were fewer than 200 cases last year (2013); the record low was 37 cases in 2004.
* Eighty-five percent of this year’s cases were in people not vaccinated because of religious, philosophical or personal objections, Dr. Schuchat said.
* Almost half the cases were part of a continuing outbreak in Amish communities in Ohio
* In an unusual twist, over half were ages 20 or older. They may have included adults whose parents refused to vaccinate them years ago, she said.
* Forty-three of the 288 who contracted the virus were hospitalized, most with pneumonia. None died.
* There were 60 cases in California, mostly in the San Francisco Bay Area and in Orange County, where large numbers of wealthy parents refuse to vaccinate their children.
* France, the world’s most popular tourist destination, had an outbreak of 20,000 cases from 2008 to 2011.
The 2014 CDC MMWR report if you want
http://www.cdc.gov/mmwr/preview/mmwrhtml/mm6322a4.htm?s_cid=...
http://www.washingtonpost.com/wp-apps/imrs.php?src=http://im...
"When Zhou began looking into the Toano, Virginia-based company back in 2013, he says he found online complaints about its Chinese-made flooring. So he bought products from Lumber Liquidators and paid to have them analyzed. The results led him to publish a post on investing website Seeking Alpha on June 20, 2013, that advocated shorting the stock because the tests showed levels of formaldehyde above California requirements."
So while others might indeed lie, we seem to have enough confirmation from the subsequent investigations that Zhou did not. And there was no reason to believe he lied, this is a target rich environment after all.
And while 60 Minutes is entirely untrustworthy (I've watched them lying on the air for decades, since the '70s), likely would have started with "guilt in mind", in this case they chose a worthy target.
Wait, what? Any proof for that statement? How come they are still on air? Why wasn't their parent broadcaster sued out of existence, if what you claim is true?
http://en.wikipedia.org/wiki/Audi_100#Reported_sudden_uninte...
There was plenty of less overt stuff in the '70s. Then you might mosey through this list, which only has the worst of the worst: https://en.wikipedia.org/wiki/60_Minutes#Controversies
Per that, it took 15 years for Audi sales to recover.
Kid used message boards to pump and dump stocks until the SEC intervened.
Perhaps though if somehow you could get companies to pay for investigations into their competitors? Like an anti-advertising model? I presume this would end up a zero-sum game though, and companies would opt to not play at all.
That's the whole point: No one. I care enough about some subjects that I would work on it for an entire year if it meant enough people would read it.
Fortunately since international companies want to sell all over the US and Europe, it has meant that this is the new baseline most of them shoot for. "Legal in California" means legal in the US (and likely EU).
It is better for everyone. It really is.
Off the top of my head, I've witnessed this label at parking garages and Starbucks drink counters. For public locations, if the label's concern were legitimate wouldn't it be appropriate to fix the situation instead of just fostering an environment of ignored signage and faux consent?
It also has the secondary effect of making REAL cancer warnings seem trivial. "Oh cigarettes are bad? So are electric cords and pepsi according to California!"
Absurd regulations (like putting worthless "product may cause cancer" labels on everything) have resource costs. These resources could be put to better use.
A lot of CA regulation is like the TSA. The cost per life saved (or harm avoided / prevented) is astronomical. There are far better uses for the resources squandered.
Except of course when they get it wrong and have to reverse course, as seen in the news over the last several years in the case of flame retardants for furniture.
So, my sense of the current "wisdom" is that the cancer and toxicity issues are significant, especially for firefighters, and the retardants offer relatively little protection against fires. A big factor in the turnaround is that the California standards were primarily concerned about protecting against dropped lit cigarettes, and so many fewer people smoke, particularly indoors.
http://newscenter.berkeley.edu/2012/11/15/pbdes-and-neurodev...
edit I didn't notice but zerocrates had already pointed this out.
Oh wait there wouldn't be one.
I think the engineering part comes in from the testing for a battery of things.
Basically, the guy discovered a Chinese test prep company (think College Board) that had recently started to be listed on American stock exchanges, and discovered that their payment system returned an error. He emailed their support address, and it bounced. He hired a guy on Craigslist to go look at their business address in China, and it was discovered to be empty. He shorted the ever living crap out of the stock, broke the news, and won big.
http://www.npr.org/blogs/money/2015/01/21/378851598/episode-...
Wait, I thought shorting meant he effectively sold shares to some other, unfortunate, investor.
It sounds like he participated in a pump and dump scheme/scam.
The Chinese company (or some affiliate) was the one who had pumped the stock up. The short seller was just a regular market participant who was rewarded for his hard work and diligence.
He knowingly created more victims of the scam.
The short position provided incentive for him to expose the fraud publicly. It would have been nice if he'd done this research and told everyone about his findings out of the goodness of his heart, but that's a lot of work for little personal reward. The ability to short provided an additional incentive to make the information as public as possible.
Why should we give a pass to investors willing to expose themselves to excessive risk from being uninformed about their investments?
Let's look further at this short selling behavior as it scales. What happens if investigative short-sellers become muckrakers noveau: sufficiently pervasive and influential that they collectively become the market "conscience" that so often seems missing?
I'm not talking about general short selling. I'm talking about this specific case.
He discovered the company was a fraud, shorted the stock, and then exposed it. That stock had to be sold, to someone else, for the short to be profitable. This means he knowingly participated in the scam.
Every single stock transaction involves 2 people who think the opposite thing is going to happen. The vast majority of the time 1 of those participants knows more than the other.
Also, why does it matter that he shorted the stock? What if he had previously purchased it off of a hot tip then, upon further due diligence, had decided the company wasn't as valuable as he had previously thought? There still has to be a counterparty to that trade.
At the end of the day, this guy probably saved more investors from being taken by this scam because he exposed it early. Without the incentive to make money, he would not have hired someone to investigate their offices in China. Without that investigation, he would not have shorted the stock, sending the market a clear signal that the stock was over-priced, and written up his research. Without his signaling and research, more people would have bought the stock, creating a bigger scam, and destroying more wealth.
"Pump and dump" means touting a stock using false information, and then dumping the shares before others realize that the information is false. On the other hand, information advantages (as long as they did not come from company insiders) are completely legal. This guy had an information advantage over those who bought the shares because he invested the time to investigate the company and others didn't. You are saying that outworking others is a "scheme/scam".
Observing the lack of any activity at your claimed corporate headquarters is pretty public too.
1. It's bad because it's not objective. Reporting organizations tout themselves as objective. Very often in financial reporting, you see a disclaimer: "Author does not have an interest in Company." Having a financial stake in the news biases the author towards findings that support his position, rather than seeking the truth.
2. It's good because it encourages accuracy. In the era of clickbait headlines and mantras of "publish first, verify later", the idea that the author could have something riding on the accuracy of his investigation is appealing. It rewards writers in more than reputation.
Never underestimate the power of the pen and some quality research.
[1] https://blog.priceplow.com/protein-scam-amino-acid-spiking
But that doesn't mean you can't lie, or get screwed by your raw material supplier. That's why the companies that actually follow the existing laws and test their incoming and outgoing product have been way on top of this and those crappy suppliers.
FYI - About to post a blog article in an hour or two that you'll enjoy. It's about the ongoing NY Attorney General supplement testing fiasco.
http://seekingalpha.com/article/1513142-illegal-products-cou...
The lab report of the analysis carried out:
"The new CARB rule sets thresholds for emissions of formaldehyde from various panel products that take effect in two phases between 2009 and 2012 (see chart). It is difficult to compare these limits with their counterparts in Europe and Japan due to the differences in testing protocols. The phase-one targets are designed to establish a reasonable baseline based on today’s common practice, while curtailing low-cost, high-emitting, imported products. Phase two, on the other hand, is intended to force manufacturers to shift to advanced and emerging technologies. CARB officials tout the fact that, once fully implemented, its formaldehyde emission limits will be the tightest in the world. Products sold for use in manufactured homes are exempted from these new requirements because state law cannot supersede federal rules in this area."
This is a much bigger deal if you live in a "energy efficient" home that has very little heat/cold leakage. Modern insulation, fancy windows, HVACs that recycle indoor air contribute to this problem. Some of these products like floors will be off gassing for years while you live in the hermetic bubble of your home.
Source: my wife worked for a niche material company that was a big importer of bamboo wood. They sold everything from bamboo floors to plywood.
They generally tried to not use formaldehyde glues and bonding agents but it's hard to to police it. Their suppliers from China would cut corners or try to boost their profits. When caught they would stop for a while and then resume later on.
It feels... OK to me. For some reason this strikes me as a surprising way to make money. Never heard of this before now.
It's also good investment work. You can get by with a prospectus and a Morningstar rating and call it a day, but if you're going to invest in anything in the immediate term you damn well better be ready to do your homework. One day its a blue chip. The next, its on 60 Minutes and your future is in jeopardy.
We even import some food from China.
Your car tires are probably made in China.
Think all those things meet US regulations? Who is going to inspect them, the handful of people that are responsible for tens of thousands of freight containers per day?
Yeah, really hidden relationships.