The Worst Stock Index in the World: The HK GEM Index
Where Bad Decisions Go Public
Today I was about to write about China’s coffee landscape—finally. I took a closer look at the ongoing price war and how Starbucks is holding up in all of it. The piece is done. But then something triggered me. So instead, we’re taking a quick detour—because some things just can’t wait until tomorrow.
But I promise: the coffee/Starbucks story drops tomorrow. Subscribe so you don’t miss it.
Don’t Touch GEM Stocks
Recently, I’ve come across a couple of stock pitches featuring companies listed on Hong Kong’s GEM board. Some of these pitches were halfway decent. Others? Even more fishy than the GEM market itself.
So here’s your friendly reminder: don’t buy GEM stocks.
The Walking Dead of Stock Indices:
Yes, I know what you’re thinking. But what if I find a gem in the GEM market?
Sure. And you might also wake up one day to find Warren Buffett has left you his entire estate because he liked your TikTok about value investing. But the odds aren’t in your favor.
The GEM index is down 99% since its peak. It peaked 1,823.74 (July 2007) and is currently at 17.63. That’s not a typo. Ninety-nine percent. This index is completely broken. The GEM index even beat the OMX Iceland 15 which was down −97.1% and discontinued in 2009 after financial crisis. HK 1 Iceland 0!
GEM is where you list the stuff that isn’t quite fit (to put it mildly) for the Main Board. Companies that are too small, too shady, or too speculative to make it past a more rigorous vetting process. It’s Hong Kong’s financial garbage bin.
Yes, a few stocks graduate from the GEM to the Main Board, and those might turn into big winners. But again: odds.
I Once Bought a GEM Stock Run by an Alcoholic Who Treated the Company Like a Family ATM
And since we’re being honest here, I’ll admit I’ve made this mistake 10 years ago myself. Once.
I bought into a GEM stock. I thought I’d found a hidden treasure. I thought I was looking where no one else was looking—only to realize later there was a good reason no one else was looking there. I thought I was a genius. Honestly, I sounded just like those guys with their GEM stock pitches.
At first, everything looked great: High insider ownership. The real estate assets alone were conservatively worth ten times the market cap. Additionally, they had just built a new factory, and the construction cost itself was multiple times the market cap. Still no debt, plenty of cash on the balance sheet. (No dividends - I should have known) Seemed like a no-brainer.
Spoiler: In that context, no-brainer refers to a person (in this case, me) without a brain—brain-dead, someone whose EEG readout looks even more flatlined than the GEM index chart.
Later I met the CEO. She clearly had an alcohol problem. (The Barney Gumbel to my Homer Simpson brain) I immediately sold. Okay, that’s a lie. I tried to sell immediately, but it took time because of the very very low liquidity. Eventually, someone even more of a genius than me picked up the shares. If you are this person - thank you so much!
Some time after I sold, I stumbled upon filings showing suspicious related party transactions. Big ones. Somehow, the CEO’s brother ended up owning the newly built factory. Let’s just say, at a pretty generous discount.
Why did I buy it? Because it looked too good.
So here’s my advice: don’t confuse deep value with deep trouble. And if you think you’ve spotted a GEM gem—just remember, I thought so too.
What saved my ass? The liquidity was so low, I could only make it a sub 0.5% position without pushing the price up too much. I’m a no-brainer.
You’re a gem of a person for highlighting this 👻
Thanks for warning!