The importance of common sense

This year, I've shared the importance of respecting common sense in investing in several articles.

Such cases are frequently seen in various business sectors, and many of these cases are ones that our generation has personally experienced and can relate to—however, at least for me, when they occurred, I was still quite naive and had no awareness or understanding of these contemporary cases.

For example, in a previous article, I shared a case study of investing in Evergrande Real Estate as a negative example.

These past few days, I've seen three past interviews with Pan Shiyi. Several points he mentioned in the interviews once again highlight the importance of common sense in business investing.

Respecting common sense is not only key to ensuring investment success, but sometimes it can even be key to preserving one's life and fortune. The first video is from an early interview he gave to CBN (China Business Network). In the interview, he stated (paraphrased): As a businessman, the biggest risk comes from politics. He can calculate economic risks, but once caught in political risk, there's no escaping it. Therefore, he initially chose commercial real estate because it's the most market-driven sector, least affected by political factors, and doesn't experience the huge uncertainty caused by annual policy changes. Furthermore, to mitigate the risks of economic uncertainty, he chose to hold onto commercial real estate in the central business districts of Beijing and Shanghai. This way, even if the national economy declines, Beijing and Shanghai will be least affected; and even if the economies of Beijing and Shanghai decline, the central business districts will be least affected. The second video is from his 2018 interview with Wu Xiaobo. In this interview, he mentioned a disagreement with "Old Ren": Regarding the price trend of Chinese real estate after 2018, "Old Ren," based on the data he had, believed that real estate prices would continue to rise. He, however, was less certain and began to worry about the risks. There were two reasons: First, a vice minister of the Ministry of Housing and Urban-Rural Development at the time mentioned that China's per capita living space had reached 35 square meters, reaching/exceeding the level of developed countries. Second, at that time, the bank loan interest rate was 4.9%, while the rental yield of his own commercial real estate was only 2%. Regarding commercial real estate alone, if developers borrow money from banks to build commercial properties, the rental returns they receive are simply insufficient to repay the loans. Some people said at the time that rental yields in Chinese real estate have always been low, a view he directly refuted in the video—since he started holding and renting out commercial real estate, he personally witnessed the returns on his properties decline from an initial 20%-30% to a mere 2%. It wasn't that the returns were always this low from the beginning. The reason there was still a large amount of commercial real estate under construction at that time was because developers anticipated continued price increases. Therefore, he felt the situation was wrong and dared not gamble on future price increases. The third video is from an interview he gave to Changsheng in 2018. In this video, he specifically mentioned that he had been continuously selling off his commercial real estate holdings over a period of time. During the interview, he mentioned holding half in cash and the other half in commercial real estate. He also stated that he was in no hurry to sell the remaining half of his commercial real estate holdings. After watching these three videos, Pan Shiyi gave me three impressions: conservative, cautious, and exceptionally swift in his actions. Regarding his conservatism, the contrast between his views and those of Lao Ren is a typical example. Lao Ren's views now seem undoubtedly correct, as the peak of Chinese real estate prices was around 2021-2022, and prices did indeed continue to rise after 2018. Even so, few can truly exit unscathed at the peak. Pan Shiyi's decision not to exit at the peak but to proactively mitigate risks within his capabilities is already quite successful. His choice to focus solely on commercial real estate and operate it himself is another example of conservatism. This contrasts sharply with the vast majority of residential real estate developers who have effectively gone bankrupt. His prudence is reflected in his choice of investment areas and financial decisions. He chooses to focus only on commercial real estate, minimizing political risks, and confining himself to Beijing and Shanghai. This reminds me of Wanda, whose business model is very similar to SOHO, but Wanda's reach is far too vast, with Wanda Plazas even in second- and third-tier cities. Looking at it now, in the current economic climate and for the next few years, it seems unlikely that Wanda Plazas in so many second- and third-tier cities could ever repay the loans they took out to build, relying solely on rental income. In interviews, he frequently mentions various financial, revenue, and return figures, unlike many "big shots" who only talk about grand schemes and long-term visions. In fact, Pan Shiyi has simply adhered to common sense and returned to the essence of business. More importantly, he had already converted half of his assets into cash in 2018. In that environment, he would probably have been ridiculed by many of his peers. However, Pan Shiyi seems unconcerned about this in interviews, always accepting the criticism and mockery with a smile. This is probably the kind of person described by the idiom "great wisdom appears as foolishness." What I admire most about him is that, in all the interviews I've seen with various "big shots," he's the first, and still the first, to discuss "political" risks so early on. I suspect that in our unique environment, many "big shots" wouldn't see this as a risk, but rather as a "shortcut" to business success. However, we all saw the final outcome: he took his half of the cash and quickly left for another country, never to appear in any interviews again. In the past 30 years of China's real estate industry, he's probably the only businessman who frequently appeared in the media but ultimately managed to leave the country safely. Actually, I'd seen two of these three videos before, but I never had the patience to watch them all the way through back then, let alone remember any of the viewpoints that have left a deep impression on me today. Pan Shiyi's early moves were all open secrets, spread to countless households through interviews back then, but how many people paid attention when these open moves were played? We are all witnesses to this era. But as fellow travelers, how many of us can see through the hype and adhere to common sense in these events we've personally experienced and witnessed?