Investment projects focus on these two points: stay within your means and respect common sense

I am now increasingly inclined to track a project or a company for the long term and hold onto it.

The long-term holding here does not mean holding onto it without selling, but rather that as long as I recognize its development direction and construction progress, as long as its price is not excessively high, and as long as there are no significant hidden dangers in its fundamentals, I will not pay too much attention to short-term price fluctuations and will continue to hold its tokens or stocks.

Among the three "as long as" statements above, the first and second are subjective views of investors, which are often open to interpretation and difficult to judge as right or wrong.

However, I increasingly feel that the third one follows objective laws that can be learned, especially from a large number of classic cases, and valuable lessons can be drawn from them. Once I discover that a project's fundamentals have significant hidden dangers, regardless of its current price or trend, or how outstanding its other factors may appear, I will not hesitate to dispose of the project's tokens or stocks.

In the past two weeks, a friend in an investment group strongly recommended a book titled "Classic Cases of Value Investment: China Evergrande." The author is Zheng He Qisheng, published by Tsinghua University Press in 2019—three years before Evergrande officially collapsed in 2022.

This friend recommended the book at this time hoping everyone could review the problems in Evergrande's growth process as a counterexample and learn investment lessons from it.

Regarding Evergrande, I mentioned it in a previous article and wrote about a short-selling report released by Citron Research at that time. This event is detailed in the book, which lists several points from the Citron report and Evergrande's rebuttal.

After Citron published that famous report, several investment banks closely related to Evergrande's interests (including JPMorgan Chase, Deutsche Bank, and UBS) came out in support of Evergrande.

Only Lyon Securities expressed a perspective that now seems quite insightful, stating: the market should not focus on "what aspects Evergrande is being questioned," but rather "why Evergrande is being questioned." Lyon Securities believed: Evergrande's business strategy was overly aggressive, pushing both operations and finances to the limit, making it an easy target for short-sellers.

At that time, Evergrande was still at its peak, but Lyon Securities was not blinded by its superficial glamour; instead, it pointed out Evergrande's key issue directly: being overly aggressive and pushing to the limit. In simple terms, Evergrande had very obvious problems with its debt.

When I read this paragraph, I recalled what Duan Yongping said in that investment Q&A book about "common sense," emphasizing that businesses should operate "within their means," and how he would exclude those companies that do not conform to common sense and are not operating within their means.

He particularly emphasized the debt risk of companies, even estimating the "purchase" price of a company more cautiously than ordinary investors, incorporating the company's debt into the cost.

Among all the listed real estate companies domestically and internationally, to my knowledge, apart from his early investment in Vanke, he seems to have avoided other real estate companies. Moreover, his investment in Vanke was also a brief hold before he sold it. He believed he could only see the value of Vanke at the time he sold it.

Using this method to look at the Evergrande case becomes very clear.

Objectively speaking, in many ways, Evergrande is quite excellent, but its fundamental problem is that in pursuit of rapid expansion, it recklessly leveraged itself and fell into a debt trap.

This is a form of operating outside of one's means.

In fact, this problem is visible to everyone. But the key is, when everyone can see that a company has fallen into a deep pit, how many people will peel away the shiny exterior and still firmly believe in common sense and operating within their means?

In this book, the author's viewpoint is: for real estate companies, a debt ratio like Evergrande's is normal, which does not affect the investment value of real estate companies. He even cites examples saying that the best XX company has a debt of XX.

In other words, in the author's view, the entire industry is like this, so it is not a problem. The entire industry operates outside of its means and violates common sense, so it is not the industry that has a problem, but common sense that is problematic, and operating within one's means has become outdated.

(The real estate industry discussed here does not include state-owned real estate enterprises with a relatively special status.)

The debt issue is one aspect of common sense and operating within one's means; in fact, there are many other factors that companies must respect as common sense and operating within their means—such as treating consumers with integrity and sincerity.

Among the new car-making forces, there is a company I once admired very much. That company has created miracles in many fields, but recently, when I saw more and more expressions from the founder of that company in promotional contexts, I did not see an attitude of integrity and sincerity towards consumers, but rather opportunism.

I wonder why it has changed like this?

If I compare it to the journey Evergrande went through in the book mentioned above, the possible reason I can think of is:

Could it be that in pursuit of rapid expansion, to seize the so-called opportunities, and to bet on their later life, they have taken the path of operating outside of their means and disrespecting common sense?

If a company continues to develop in this manner, its outcome is likely to be bleak.

If an industry continues to develop in this manner, the outcome for that industry is also likely to be bleak.

Disrespecting common sense and not operating within one's means, no matter how brilliant or dazzling it may seem at the moment, is merely temporary; the final outcome will inevitably follow the laws of common sense development.