This is a book about the life and career of Sam Zell, an American real estate operator and investor. One talent that Zell obviously possesses is the ability to time the market. His entry into a deal usually comes in distressed circumstances when fear outweighs greed as the dominant market sentiment. This aspect of his character earned him the moniker, ‘The Grave Dancer,’ and it’s one he revels in. Conversely, he also seems to be very good at detecting when competition has become too intense, valuations too high or credit conditions unsustainably easy. He seems to have embodied the principle of ‘be greedy when others are fearful, be fearful when others are greedy’ during his career.
RISK
Zell also has an excellent understanding of risk. He is always focused on reducing risk and understands it simply and wonderfully well. Zell’s father, a Polish grain trader who successfully fled before the Nazi’s occupied his country and killed most of his friends in the Jewish community, is obviously a constant reminder to Zell that things can go badly wrong while one waits. He writes that his father tried to convince many of his friends and family to flee with him but that they preferred to wait and see. Risk, to Zell, is losing money and not some convoluted rubbish like volatility of returns or performance versus some arbitrary benchmark. He is laser focused on the risk presented by uncertainty and how delays in the timing of a deal can increase this. A good example of his understanding of time as a risk is the choice he makes between a deal he can sell for a higher price, but with competition hurdles that will take 6 months to overcome, vs. a lower priced, quicker deal. He chooses the lower priced, quicker deal because no one knows what’s going to happen in those intervening 6 months.
By the same token, he gives an example of 2 investment choices (p198): 7% for 5 years or 7.5% for 10 years and says most people choose the shorter term one because future inflation won’t erode their returns as much over 5 years plus the optionality of a shorter term. He disagrees because of the reinvestment risk. If rates rise the 5 year choice would look clever, but of course rates can fall as well as rise. He calls this risk by omission rather than commission. Another phrase he uses, ‘liquidity equals value’ (p104), pithily encapsulates a similar principle and demonstrates how nothing is more important than liquidity in chaotic market conditions when the best opportunities typically present themselves.
Unlike a lot of investors and businessmen who write books like this, Zell does talk about some of his failures. He also doesn’t try to pretend that he’s always known everything and writes, ‘nothing refines your understanding and assessment of risk better than experience.’ (p160) As someone who started doing property deals while still at university, it’s obvious that Zell is constantly doing deals and has learned to view failure as an opportunity to learn - which can be hard psychologically! Zell is a consummate do-er and, as he rightly points out, “trying to be right 100% of the time leads to paralysis.” (p187)
Zell has excellent discipline in selling, which isn’t easy. Often there’s a type of inertia associated with things you’ve owned for a while and Zell advises an attitude of constant reassessment, ‘I have always believed that every day you choose to hold an asset, you are also choosing to buy it.’ (p136). Provided the asset is in any sense liquid, I totally agree with this, as it could be sold and the money used for something else. However, I think it’s difficult not to slip into some form of the inertia mentioned earlier as it often saves the tricky business of really having to think about all of your holdings, all the time. It’s easier just to think about exciting new buys or about selling horrendous performers and forgetting about them or selling good performers and congratulating yourself on a job well done, which it ultimately may prove not to be! The important thing is to think about the valuation. Zell gives a good example of how he goes about this when describing having dinner with his big shot mates. ‘I looked round the table and asked them a simple question: “Yahoo’s market cap today is $100bn. If I gave you $25bn in cash, is there any of you who doesn’t think you could reproduce what Yahoo has done to date?” The conversation validated that market valuations had completely disconnected from reality.’ (p127) This reminded me of Charlie Munger’s same question about Coca-Cola, although Munger obviously gives the opposite answer!
Zell has the ability to understand the crux of a deal or a situation. I totally agree with his assertion that this central assumption cannot be figured out using modeling or numbers. In this sense, risk management is far more akin to an art than to the pseudo-scientific which it’s presented as in concepts like VaR (Value at Risk) Zell recalls an example:
“I remember walking into the office one night around 8.00pm to find a guy working on a ten-year projection for a real estate project we were considering buying. I looked at what he was doing and I realized how many hours he’d spent laboring over his calculations. His approach was ass-backwards. I said, ‘You’ve got to be able to look at the deal and know what it hinges on to know whether it works or not. If you realize that the key component works, then you use the numbers to test it. You don’t do the numbers to find out eight hours later whether it was worth starting.’ I’m sure his IQ was higher than mine.” (p182)
For me, this addresses something fundamental about the future. The world is too non-linear to model and the numbers models and forecasts contain are mere guesses about a future that Keynes tells us is not just unknown but unknowable! Modern finance likes to focus a lot on statistics and probability but, as Keynes tells us, and surprisingly few people are prepared to admit:
“By ‘uncertain knowledge’....I do not mean merely to distinguish what is known for certain from what is only probable...The sense in which I am using the term is that in which the prospect of a European War is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth holders in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever’” - my italics, ‘The General Theory of Employment’ (1937)
CULTURE
Another area where Zell is extremely strong is his understanding of the importance of culture. In Zell’s own words, ‘Culture is king’ (p180). A lot of what I’ve covered so far in this summary has very obvious links to culture, but it’s so important it certainly deserves a section of its own. First, the culture of ownership. Zell is an owner, acts like an owner and wants everyone working for him to be an owner too:
‘From the very first deals we did at EGI, I have spread the opportunity - both the risks and rewards. We co-invest, side-by-side, and I often provide a “promote” to my people, allowing them to share in the profits on a portion of my invested capital. That means I put my money behind theirs (say $150,000 of my money to $30,000 of their money), and if our investments or funds achieve their minimum target metrics, my people get returns based on the aggregate ($180,000). In effect, we’re all invested in each other’s success. It’s not only about motivation; it’s a mandate to collaborate. Deals and opportunities are discussed, questioned and probed by the team at large because everybody has a piece of everybody else’s deal.’ (p183/4)
He also extends this understanding to his philanthropy. I think the point is just as important in that context where there’s no profit motive, ‘to make meaningful impact, a philanthropic program - just like an investment - needs an owner. Someone who has a vision, is paying attention, asking tough questions, challenging, and pushing for results. That’s why I’ve always hesitated to provide endowments.’ (p198)
Secondly, Zell seems to foster a culture that is driven and energetic almost to the point of hyperactivity. In his college days, Zell couldn’t be bothered with academic work because he was too busy doing deals and making money and he seems to have retained this youthful enthusiasm, undimmed, in later life. He nevers makes himself out to be a genius and doesn’t value academic intelligence in and of itself:
‘There’s a baseline IQ level needed to work at my firm, but I don’t need rocket scientists. After that, what best predicts your success in my world is drive, energy, attitude, judgment, conviction and passion. And an ability to cut to the center of an issue. I’d trade another twenty IQ points for those qualities any day.’ (p182)
Thirdly, Zell wants a culture that is more or less ‘flat’, which is to say having minimal hierarchy. In his typically indelicate way, Zell calls this the ‘“open kimono” policy. No secrets, no whispers, no closed doors.’ (p180) The point is absolutely crucial. So many organisations operate via politics. Zell seems to be doing his utmost to reduce this tendency to a minimum. He also says, ‘I constantly challenge my people to “take me on”’ (p183), indicating that no one is above scrutiny, although I did wonder how many people had taken him on and won!
This leads on to the fourth observation about Zell culture: it is extremely Zell-centric. It could never be replicated without him and everything depends on him to a certain extent. I suppose this could be seen as a weakness but I was more inclined to see it as a strength. Zell knows himself well and knows what he needs around him to succeed. Just because that can’t be repeated without him doesn’t necessarily make it a bad thing. He seems to have been able to strike the balance between control and delegation well enough to achieve enormous scale in his operations. On this subject, he writes:
‘I believe in the radius theory of business, where your ability to succeed is ultimately limited by the number of people between you and the decision. That’s because the farther from you the decision is made, the less you control the risk. History shows that businesses get buried when they don’t delegate enough - but also when they delegate too much.’ (p179)
Zell also seems to be a mercurial hirer and firer depending on how new recruits take to the singular environment he’s created. ‘I don’t write a job description and then look for someone to fit it. I find talented people who fit my organization and then look for ways to use them.’ (p181) This kind of approach seems to only work when there’s a conductor at the centre of the orchestra who knows exactly what they’re looking for. As he says, ‘I’m chairman of everything and CEO of nothing.’ (p179) It also seems that Zell is capable of inspiring incredible levels of personal loyalty amongst his staff and, especially, his chief lieutenants. Some of the most emotional parts of the book, of which there are very few, relate to losing his closest business mentors and, more often, underlyings. I’m sure Zell would prefer to have them called partners but I got the distinct impression that there’s only ever one boss in a Sam Zell show and no one is ever in any doubt who that is! The man is a born leader and barely seems capable of collaboration if it isn’t on his terms. As he writes himself, quoting Robert Benchley, ‘If you ain’t the lead dog, the scenery never changes.’ (p215).
A fifth aspect of Zell culture is an emphasis on personal connections and environments. A great example of this is his preference for visiting people for meetings rather than relying on ‘roadshows’. ‘I love meeting people on their own turf…you tend to spend more time together when you’re a guest. And the conversations range broader and go deeper…people share their thoughts in a remarkably candid way.’ (p173) My old boss used to say exactly the same thing and I think both of them are totally right about this. On a roadshow, the script is set and rehearsed and one meeting is exactly the same as another 8 meetings a day for 8 cities in a row for the poor person regurgitating the same thing to investors who haven’t done any homework. Far better to meet someone in their own environment, during a normal working day and to turn up prepared so they know you’re respectful of their time!
This section of the review is going to focus on the hypocritical aspects of Zell, as he presents himself. To be clear, I don’t view this as anything particularly negative - especially when it comes to fund managers and investors. I’m yet to come across a successful fund manager who isn’t in some way hypocritical or doesn’t somehow break their own rules! Perhaps it’s a necessary constituent of a mindset that has to deal with constant flux. It’s also my belief that we’re all hypocrites in our lives, but very few people can deal with that truth psychologically so prefer not to examine it.
In any case, Zell makes a point about not talking about his personal life. Except for the fact he does, when it suits him! He barely mentions his four wives except to say he is getting divorced from them and that one of them is a former Miss USA, which gives some indication what Zell thinks is important in a wife! The current model gets a glowing review on how knowledgeable she is about art and how great a collector she is. For me, Zell should either leave his family out of the book entirely or include far more information about them. As it stands, he says he won’t talk about them, and then does every now and then in a way that makes it seem like he’s cherry picking the stuff that shows him in a good light - getting married to Miss USA, adopting one of his ex-wife’s children from a previous relationship, how great his current wife is etc. We certainly never hear anything negative about Zell or any kind of explanation for the multiple divorces. For such a shrewd operator in business, I thought it showed a remarkable lack of awareness.
By the same token, Zell makes a big song and dance about loyalty - even going so far as trotting out phrases like ‘loyalty defines your character’ and ‘I am who I say I am.’ (p221) Maybe this is true when it comes to business, although obviously you’re not going to find any dissenting voices in this book! However, I wondered what his ex-wives would make of these kinds of statements?
Even regarding business, I thought there were some sections that smelled strongly of hypocrisy. ‘Everything I do is predicated on the assumption that there’s another deal.’ (p218) is probably an accurate reflection of how Zell likes to see himself. However, a blow by blow account of how he sold one of his large listed businesses shows him mercilessly playing one side against the other in order to get the best price. Obviously, he can claim he’s under obligation to his shareholders to do so but I still thought that the statement, ‘I don’t squeeze out the last nickel’ (p220) smelled a bit fishy in this context. Equally, Zell writes about how there are some businesses he won’t invest in on ethical grounds:
‘I finally said, “It’s a fine business model, and probably very profitable, but I can't put my name on this. I can’t be in the payday lending business. I can’t charge a laborer 300 percent to borrow money for two weeks and live with myself. It doesn’t matter if it’s a good deal. It’s not the business I’m in.” p218
This much is admirable, lending to working class people at exorbitant rates feels like a shitty business for a billionaire to be involved with. But there is a huge grey area between payday lending and a business that, for example, provides homes with drinking water at a fair and regulated price. Real estate definitely falls into this grey area. For example, Zell is certainly not afraid of aggressive tax structures, which some would say are essential to success in real estate investment, and even recounts a tale of how his tax lawyer, who is also his brother-in-law, and him got indicted by the IRS over the structure of one of his deals. Although Zell ends up getting dismissed, his brother-in-law ends up getting convicted (p68-69)! Again, Zell justifies himself by saying he was only taking tax advice from a professional but I found this hard to swallow from a man who clearly knows every part of every deal intimately. I’m sure Zell is right when it comes to the letter of the law, but I couldn’t buy the deeply ethical version of himself he seems to be selling at some points. Zell cares primarily about money and success, not ethics, or else he would have chosen a different career! To quote the man himself, ‘When people show you who they are, believe them’ (p218)!
The depiction of himself as whiter than white both in life and in business, which seem to be almost synonymous for him, extends into a slightly unsettling mixture of the two. ‘My business and I are like a brand, and I’m always thinking about protecting the brand’ (p220). He enthuses about Sam Zell - the man, the business, the lifestyle! I thought this was probably true, but I asked myself, what are the core values of the Zell brand? As with any well run brand, there’s a good deal of marketing spiel, talk about ethics and the literary equivalent of photos of smiling children. But when push comes to shove, Zell is about success and getting things done successfully in a world where success means MONEY. I’m not trying to judge Zell or look down on him - it’s probable he’s done more for the world than thousands of worthy types, but I think he’s getting a bit carried away with himself when he tries to portray himself as a billionaire AND a saint!
Another passage I found hard to swallow was his motherhood and apple-pie patriotism:
‘America is the great equalizer. You can come from nothing, you can come with no pedigree, you can be the son or daughter of immigrants, and you have the opportunity to be successful. There’s no other country that doesn’t require some kind of birth heritage, or inheritance, or ingrown advantage. Here everybody has a shot at being the lead dog.’ (p217)
It’s understandable why Zell has such a positive perspective on America with the success he and his family have enjoyed since his father’s brave and prescient emigration. However, I found myself wondering how an African-American with antecedents who were brought to America as slaves would feel being told this coming from a white, European, man from a well educated and cosmopolitan background. Obviously he faces all the challenges of an immigrant but culturally, racially and genetically he seems to enjoy a lot of privileges.
When it comes to successful businessmen writing about how successful they’ve been, a certain amount of self-congratulation is to be expected. Zell is no exception and is insufferably pleased with himself. He is obsessively driven, loves to do deals and knows his own strengths and weaknesses intimately. His gifts seem to be for leadership, timing and structuring deals, and for setting the cultural tone of an organisation. He also loves to tell you about how amazing his parties, friends, holidays and corporate gifts are, which is a bit grating, and a lot of his jokes and ‘Sam-isms’ are hackneyed, to put it mildly. However, this book is also full of wisdom.
At the end of the day, I’m probably complaining too much about a book which more or less does what it says it’s going to do. As Zell says, ‘with today’s access to an overwhelming amount of information, most of it drivel, you have to focus on what’s meaningful.’ (p215) This is a book about being successful and making money and contains a lot of good advice to that end. He doesn’t gold plate the crowbar and is pithy and straight forward when it comes to business: ‘I stay true to the fundamental truths: the laws of supply and demand; liquidity equals value; limited competition; long-term relationships….they offer a framework through which I view potential opportunity.’ (p211)
I could have done with a bit less of the ‘Brand Zell’ PR schmooze towards the end of the book, some of which felt a bit hypocritical. Nonetheless, I ended up liking Zell for his irreverent attitude, his drive and his honest and sensible investment advice. Of course he’s pleased with himself and self-possessed to the point of egotism, but that’s almost a prerequisite for the kind of success he’s had. I would certainly recommend it to those interested in the subject of investment.
