The importance of common sense

Since the beginning of this year, I have shared the importance of respecting common sense in investing in several articles.

Such cases can often be seen in various business fields, and many of these cases are personally experienced and felt by our generation—however, at least for myself, when they occurred, I was still inexperienced and had no perception or awareness of these cases happening in the same era.

For example, I shared a case of a counterexample investment in Evergrande Real Estate in the previous article.

In the past few days, I have seen three interviews with Pan Shiyi. In these interviews, several points he mentioned highlighted the importance of common sense in business investment.

Respecting common sense is not only the key to ensuring investment success, but sometimes it may also be the key to safeguarding one's life and property.

The first video is from his early years when he was interviewed by Yicai.

In the interview, he stated (the gist is):

As a businessman, the greatest risk comes from political risk. The risks from the economy can be calculated, but once caught in political risk, there is no escape.

Therefore, he initially chose the real estate industry, specifically commercial real estate, because this sector is the most market-oriented and is least affected by political factors, avoiding significant uncertainties in commercial real estate caused by a new policy every year.

In addition, in order to avoid the risks associated with the uncertainty of economic operations, he chose to firmly hold on to the commercial real estate in the central business districts of Beijing and Shanghai. This way, even if the national economy declines, the least affected areas will be Beijing and Shanghai; and even if the economies of Beijing and Shanghai decline, the least affected area will still be the central business district.

The second video is from his interview with Wu Xiaobo in 2018.

In this interview, he mentioned a disagreement with “Old Ren”:

Regarding the price trend of China's real estate after 2018, “Old Ren” believes, based on the data in hand, that real estate will continue to rise in the future.

He is not very sure and begins to worry about the risks involved. There are two reasons:

First, a vice minister from the Ministry of Housing and Urban-Rural Development mentioned that China's per capita housing area has reached 35 square meters, which has already reached/exceeded the level of developed countries.

Secondly, the bank's loan interest rate at that time was 4.9%, while the rental yield of the commercial real estate he owned was only 2%.

In terms of commercial real estate, if real estate developers take out loans from banks to build commercial properties, the rental returns they receive are simply not enough to repay the loans. At that time, some said that the rental return rate of Chinese real estate has always been low, but he directly refuted this view in the video—since he started holding commercial real estate for rental income, he has witnessed the return rate of the properties in his hands decline from the initial 20%~30% all the way down to 2% at that time. It was definitely not that the return rate was so low at the beginning.

The reason why there were still a large number of commercial properties under construction at that time was that developers were hopeful for continued price increases.

Therefore, he felt that something was wrong, so he didn't dare to bet on the future rise of housing prices.

The third video is of him during an interview with Changsheng in 2018.

In this video, he specifically mentioned that he has been continuously selling off his commercial real estate holdings over the past period. During the interview, he stated that he has managed to hold onto half in cash, while the other half is still in commercial real estate. He also mentioned that he is not in a hurry to sell the remaining half of the commercial real estate.

After watching these three videos, Pan Shiyi gave me three feelings: conservative, cautious, and exceptionally quick in action.

For conservatism, his viewpoint compared to Lao Ren's is a typical example.

It is now undoubtedly true that Lao Ren's viewpoint is correct, as the peak of China's real estate prices was around 2021-2022, and they indeed continued to rise after 2018.

But even so, there are probably very few people who can come out unscathed at the peak.

Pan Shiyi has been quite successful in choosing to avoid risks in advance within the range of his capabilities rather than seeking to exit at peak values.

He chooses to focus solely on commercial real estate and opts for a self-operated model, which is another typical conservative approach. This stands in stark contrast to the vast majority of residential developers who have essentially gone bankrupt.

His caution is reflected in the investment fields and financial aspects he chooses.

He chooses to focus only on commercial real estate with minimal political risk interference, and only stays in Beijing and Shanghai.

This reminds me of Wanda, whose business model is very similar to SOHO, but Wanda has spread its presence too widely, even second- and third-tier cities have Wanda Plaza.

It seems that in the current economic environment, many second- and third-tier cities' Wanda Plazas will probably take a long time to be able to pay off the loans taken out for construction through rental income.

He often mentions various financial data, various revenue data, and various return data in interviews, unlike many “big shots” who only talk about grand visions and future prospects.

In fact, Pan Shiyi has merely held on 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 that year, he was probably laughed at quite a bit by many industry “big shots”. However, Pan Shiyi seemed completely unbothered by this during interviews; whenever he mentioned others' “arrangements” or mockery towards him, he always did so with a smile, appearing to accept it gladly.

I’m afraid this is what the idiom “Great wisdom appears foolish” refers to.

Actually, the person I admire the most is the first one to talk about “political” risks so early and up to now among all the interviews with various “big shots” that I have seen.

I estimate that in our unique environment, many “big shots” probably won't see this as a risk, but rather as a “shortcut” to commercial success.

However, in the end, we all saw the outcome: he swiftly left for another place with his half of the cash and never appeared in any interviews again.

In the past 30 years of the real estate industry in mainland China, he is probably the only businessman who has frequently appeared in the spotlight but was ultimately able to leave safely.

Actually, I have seen two of these three videos before, but I didn't have the patience to watch them to the end at that time, nor did I remember any of the points that left a deep impression on me today.

In his early years, Pan Shiyi played these cards openly, and they spread through countless households at the time through interviews. But how many people actually paid attention to these open cards when they were played?

We are all witnesses of this era. But among us, fellow travelers, how many can see through the bubbles and adhere to common sense in these firsthand experiences and witnessed events?