With Sam Zell’s passing earlier this week, we decided to pull some key insights from his classic autobiography, Am I Being Too Subtle?: Straight Talk From a Business Rebel.
Given that Mr. Zell was a self-made billionaire, primarily through real estate investing, and has seen many market cycles, we thought the following excerpts would be of interest to our investors as well:
“I realized development was more complex and risky than I had thought. In addition to problems with the blueprints, city regulators can change the game midstream with new fees and costs; the economy can shift, causing tenant demand to evaporate during the time it takes to get the building up; banks can come down on you; and on and on.”
“The basics of business are straightforward. It’s largely about risk. If you’ve got a big downside and a small upside, run the other way. If you’ve got a big upside and a small downside, do the deal. Always make sure you’re getting paid for the risk you take, and never risk what you cannot afford to lose. Keep it simple. A scenario that takes four steps instead of one means there are three additional opportunities to fail.”
“Opportunity is very often embedded in the imbalance between supply and demand. It could be rising demand against flat or diminishing supply, or flat demand against shrinking supply. When there’s an imbalance, I look at where the two lines will intersect and then determine whether it is cheaper to buy or to build. Usually the answer is in acquisition, which eliminates a lot of the risk inherent in development. I like to invest below replacement cost, thereby creating a competitive advantage.”
“A lot of Wall Street’s headaches—the executive compensation issues, the accounting scandals, the options backdating, the subprime mortgage mess—can be chalked up to misaligned interests created when there’s too much reliance on outsiders who don’t have a stake. Similarly, a lot of people who get burned by depending on Wall Street analysts, or hedge fund managers, or their local stock picker discover quickly that the advice they’re getting isn’t coming from a committed owner—it’s coming from a professional who is collecting a fee. After all, it ain’t their money.”
“I’m always looking for unlocked potential, for strong fundamentals in a business that suggest a high probability of success. But everybody wants to look at how good a deal can get. People love focusing on the upside. That’s where the fun is. What amazes me is how superficially they consider the downside. For me, the calculation in making a deal starts with the downside. If I can identify that, then I understand the risk I’m taking. What’s the outcome if everything goes wrong? What actions would we take? Can I bear the cost? Can I survive it?”
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