Amar Pandit , CFA , CFP

I think by the time you read this post; you would have heard this word “Evergrande”. If you have not that is absolutely fine too. You have not missed much. I will get to that word, but first let me share the P.S. of my last week’s Nano “Simple = Difficult”.

P.S. I have written this before but thought of writing it again. Stock Market corrections are normal, and they happen all the time. In any year, it is reasonable to expect a 10-15% correction, a 30% correction in 3-5 years and a more than 50% in 7-10 years. However, the declines are temporary, and the markets resume their upward movement before anyone can even realize. As I have written, the best days in the markets are during the worst times and many miss the best days (as well as a certain part of the up move after the market returns to its previous levels) simply because they could not fasten their seat belts and stay invested.

Enough of this Vitamin C all the time you might wonder. Well, it’s not good enough to just have Vitamin C once and feel its impact for a year. You need to consume it regularly (By the way this is not any form of advice – medical or personal or even financial. As always, kindly consult your medical professional). Likewise, taking the Stock Market Correction Pill (also called as Vitamin – C or Vitamin -Correction) regularly reminds you of the realities of the stock market and more importantly gives you the ability to not interrupt compounding.

So, let us get back to the one-word Headline “Evergrande”.

The Evergrande Group (previously known as the Hengda Group) is supposedly China’s 2nd largest property developer by revenue Wikipedia also says that it is the 122nd largest group in the world by revenue according to the 2021 Fortune Global 500 List. The Wikipedia note also adds further “In 2018, it became the world’s most valuable real estate company.

Look at these words used closely.

2nd Largest by Revenue
122nd Largest group in the world by revenue (according to 2021 Fortune Global 500 List)
Most Valuable

Fortune published them in their Global 500 list this year, not some 10 years ago.

When you think of the above words in the context of what is happening today, don’t they seem like crap. Pardon me. I used the wrong word. The right one is BULLSHIT.

So, what is happening today?

Some of the headlines:

Why are stock markets plummeting across the world?
Embattled China property giant sparks economic fears.

A click bait one is “Could Evergrande collapse topple China’s Economy”.

Too Big to Fail” and so on.

It is said that Evergrande has around $ 300 billion in debt including debt obligations due this week September 20th, that it can’t pay.

Really $ 300 billion and no one was seriously talking about this till last week.

There is a lot to write but I will not bore you with the details. Let me simplify this in as few words as possible.

  1. The reality is that Evergrande was like a skyscraper built on a very shaky foundation (and not a solid business). It was a giant business built on loads of borrowed money. That is fine too but a business that cannot meet its debt obligations can never be a solid business.
  2. A vanity metric such as Revenue might be good enough for you to be glorified in the media or even get a bank loan, but on its own (revenue without cash flow), it is the stupidest metric of all. While banks are intelligent to not lend to small businesses (I am being sarcastic here), they are super smart to never miss an opportunity to lend to such groups (Remember DHFL and the Yes Bank Saga). It is useful to create a valuation and a mirage of a big business, but the reality is that such businesses are hollow. The people who were glorifying them as valuable or putting them on lists and some who were even lending them money seemed to have forgotten this simple principle “Revenue is Vanity, Profit is Sanity and Cash Flow is King.
  3. There is a cool word called “Restructuring” that you will hear soon about Evergrande. Restructuring means putting the firm on life support by giving them more money, selling off their assets and so on.

While there is a lot of news that you are likely to read and some will even get a PhD in Evergrande, the reality is that 1 year down the line, this will be forgotten and there will be something else. There is always a reason for the market to correct. And at that time the reason always seems catastrophic. This is the reason why I started the post with the P.S. of last Friday’s Nano.

Any market that has gone up more than 100% in the last 16+ months can correct and sometimes it just needs a reason to correct. No one knows whether this correction will be 10% or 20% or even 30%+. However, like always, Corrections and even Crashes are temporary in nature.

Let us put Evergrande in the context of the worst human crisis the world has seen in the last century. 4.7 million Lives have been lost worldwide. We have seen shutdowns and lockdowns at a global level. What could have been worse than this? Evergrande certainly is not the answer.

Despite of COVID-19, the human race has not become extinct. The world will not come to an end.

Neither will the world because of Evergrande.

You could spend days and nights pouring through this (not to mention getting your PhD), losing your sleep and acting hastily OR recognize that you might be given an opportunity to invest for the long term thanks to Evergrande.

As always, the choice is yours.