Quite a lot of business insight in here! Useful for general investors as well as real estate investors, with particular value for thinking about investing at different points in an industry cycle or at different points in a general economic cycle.
In fact, I'd suggest this book is almost deceivingly full of insight because it's so cleanly written that an inattentive reader can just breeze through it and miss everything. In this way it's like Mohnish Pabrai's excellent book The Dhandho Investor. Don't let the fact that you can burn through the book distract you from the trove of useful horse sense here.
Notes:
* "No one has ever left a meeting with me wondering what I meant."
* Zell's parents escaped from Sosnowiec, Poland mere hours before Germany invaded, they traveled east to Lithuania, found a Japanese civil servant who wrote them a transit pass via Japan and Russia to get out of Europe. They were among the "Sugihara survivors" who made it out of Europe thanks to a courageous embassy worker in Vilnius.
* As a young teenager he resells Playboy magazines to his friends at a significant markup, learning the business lesson "where there is scarcity, price is no object."
* Dude got a D in accounting in college! He hated all the stupid, arbitrary rules.
* He goes to law school, hates it, but then later finds out how invaluable it was for his later business career.
* He does some real estate deals in Ann Arbor while at law school in Michigan, put these deals on his resume thinking it would entice law firms to hire him, but it did the opposite: it indicated that he wasn't going to stay in the traces and try to make partner.
* His investment thesis was to target small, high-growth cities (typically university towns) where there was no competing capital. And profit margins were higher than in major cities since the costs (taxes, capex, etc.) were much lower.
* The Pritzkers try to hire him, Jay Pritzker offers in 5% of any deal he does as an employee. Zell says, "Oh so that's a Pritzker deal!" Pritzker didn't laugh. They end up striking a long-term friendship and mentor relationship.
* He's cured of doing real estate development: builder fuckups; regulators changing the game with new fees and costs midstream in a build; the economy shifts, causing tenant demand to change during the time it takes to build the building, etc. Too many steps and too many chances for something to go wrong.
* Zell has a very unusual partnership with Bob Lurie, no documents, 50/50, high trust, etc.
* Interesting compensation structure in Zell's firm, people had comfortable salaries but the real money was made in deal residuals where people had a piece of everyone else's deals. Thus everyone went out of their way to make sure other people's deals were successful. "That basic principle has never changed over the decades." Really creative idea to align everybody.
* "We invented business casual. Our thinking was that if you dress funny and you're great at what you do, you're eccentric. But if you dress funny and you're just okay at what you do, you're a schmuck." I love this guy!
* Interesting to see the pressure the IRS tries to put on him for one deal until he brings in his own lawyers. They even used indictment pressure on him, affecting his life afterwards.
* "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." This is a great example of tremendously helpful advice that a reader can easily breeze through. On one level this is very simple advice, but the longer I do investing the more incredible nuance and texture I can see in what at first may appear to be a basic, borderline obvious statement of supply/demand dynamics.
* "This has always been a fatal flaw in us real estate: the volume of development has been related to the availability of funds, not to demand. The industry has a long history of overbuilding when there's easy money, without regard for who will occupy those spaces once they're built." Again, a borderline obvious statement with a tremendous amount of nuance.
* Zelle sees the peak of the 1973 housing boom and starts getting ready to buy on the downslope: he thought he would be able to make a fortune on distressed assets, and everyone said he was nuts because occupancy and absorption were still high. Heh, things always "still look good" in the late stages of a boom/upcycle.
* "Less than 1 year later, in 1974, the market crashed. Hard. Overnight, we were buying assets at 50 cents on the dollar." He would take over a property and renegotiate the loan for some period of time, such that the owner wouldn't have to write it down or mark it to market (back then companies didn't have to mark to market the way they do today). And the lender didn't have to write off or write down the loan either, this looks a lot like the "extend and pretend" technique used in residential housing in the 2008 crisis: extend until the recovery happened (which came just three years later in 1977) and then the properties returned to normal occupancy and equilibrium. Really, really interesting.
* "Second, they had to be good-quality, well-located properties, which usually perform better than market throughout economic cycles. Tenants tend to stick in the upcycle, and upgrade to nicer space in the down cycle as rental rates fall. So better assets provided more stable cash flow, and that gave us downside protection."
* The 1970s was a very difficult era for many in real estate for many, but Zell's firm ended up with an enormous diverse portfolio.
* "Years later, people would ask me, 'how did you know when and what to buy?' But all I basically did was create a massive arbitrage--a fixed rate instrument in an inflationary environment... When we started, my estimate was that we could make $50 million (equivalent to about $250 million today) in 5 years. What I didn't envision was that the country would elect Jimmy Carter. As a result, everything he did raised inflation. So we made a lot more."
* "We suffer from knowing the numbers" a saying that Zell put into a lucite block to give away as thank you gifts.
* The mid-1980s brought an even larger real estate cycle (compared the early 70s boom and downcycle) with overbuilding and euphoria. Zell's firm decides to diversify 50% of its portfolio away from real estate, targeting asset-intensive companies with bad balance sheets. ("We like asset intensive investments because if the world ended, there would be something to liquidate.") This is interesting: I much prefer investing in "asset light" industries, but he's correct in the sense that when an asset light company gets liquidated in a BK this usually isn't much left over for creditors. At least with an asset heavy company there are physical things to sell off/take over as a creditor, etc.
* He was early in understanding the value of NOLs, once the rules were expanded in the mid-1980s, and would combine a company with a large NOL with another company with profits, automatically increasing the value of those profits because the taxes on them would be offset by the other business's NOLs.
* See also his insight on lenders and what they need, what are their motivations and methodologies: this helped him better manage situations when he had a large need for capital. "As a huge consumer of capital, I have always made it a mission to understand lenders' motivations and the methodologies behind their credit structures."
* See also his thoughts on "synergies": with the exception of totally eliminateable redundancies, he thinks synergies are largely bullshit. Yep.
* Zell played an interesting cycle in the rail car industry, which looks quite a lot like the current cycle in the shipping/oil tanker industry. It has many of the same dynamics: low utilization, increase in scrapping, etc. If you are opportunistic and can acquire rail cars at a significant discount to replacement cost, and you can afford to wait, you'll eventually make a lot of money. "Everybody thought we were nuts. But it worked. I don't know why no one else saw the opportunity."
* He shapes his philosophy on corporate boards after his experience being on the dysfunctional board of the Santa Fe Railroad. Boards need to have true owners (who actually are long a lot of stock), they need to be engaged, they need to be able to do the work, and board meetings need to be lively and with robust discussion.
* "So what do you do?" "I'm a professional opportunist."
* His partner Bob Lurie dies in 1990 right before the S&L crisis, and his company was starved for cash at the time. He learns a new mantra: liquidity equals value.
* Building Jacor, the radio conglomerate, then selling it to ClearChannel. This was part of the Zell/Chilmark fund, a distressed equity fund that he ran from 1990 to 2000.
* Zell has a gift for seeing cycles, but he also has a gift for distinguishing structural differences from cycle to cycle, particularly in real estate. For example, see the late 80s/90s real estate downturn: too much Japanese money, along with the obliteration of dedicated real estate lending through the S&L crisis, and change of the Tax Reform Act of 1986 (which eliminated many tax benefits for passive investors), also the changes in accounting rules requiring writedowns, etc. Thus there was no way to use the techniques of the 70s downturn, which largely depended on seller financing. Opportunistic property buyers in the early 1990s would need more cash, much more.
* By 1995 he had built another portfolio of office properties after the early 90s real estate crisis had played out and stabilized. He couldn't land Rockefeller Center, however: that asset was "hometowned" by a New York buying group which included David Rockefeller.
* The 2008 crisis was much different: the aftermath featured really low interest rates, so lenders and owners could keep assets on their books, and extend and pretend. "A rolling loan carries no loss" as Zell puts it (hilarious quote right there!!). Plus, there was no flood of bargains in commercial properties like in prior cycles, mainly because the commercial real estate market had much less leverage heading into the 2008 crisis, so CRE weathered things a lot better than residential housing or residential lenders.
* 1997 IPO of Equity Office Properties [EOP]: this was the Zell/Merrill office building portfolio bundled into a REIT. Ten years later, in 2007, EOP was sold, in a stroke of tremendous timing and luck [I owned this ticker, and remember being really pissed it was getting taken out: I was going to have a taxable gain, plus get cash, plus lose out on the company's 5% dividend stream. How wrong I was!!].
* Bidding war between Vornado and Blackstone for EOP. Nice to see Zell do so much discussing of his fiduciary duty to shareholders. I wish more CEOs were like this.
* On understanding your downside risk in an investment or deal, on "fire sale analysis": estimating what you'd get in a liquidation if it had to happen, also understanding the difficulty of execution and number of steps required, because each of these can be a failure point or a fragility.
* "I don't like auctions, unless of course I'm running them." You almost always risk overpaying--this is the so-called "winner's curse" of auctions.
* Blindsided by the GFC after closing a deal to buy the Tribune Company, using in part the company's ESOP; this deal closed in December 2007, and then everything went sideways, a year later Tribune had to file chapter 11.
* Equity International: Zell goes into international real estate markets and emerging markets. See also this useful and bluntly-phrased quote: "When you invest in emerging markets, you're trading the rule of law for growth."
* "... We don't spend much time looking at Western Europe. It's Disneyland. It's great for wine and castles and cheese, but there's no growth there."
* "In emerging markets, a big clue to national stability is whether a country is on the verge of investment-grade rating. Early on, I came to the conclusion that there's no other time in the life of any country when it's more disciplined and more transparent than when it's a year or two away from reaching investment-grade status. The ranking translates into an immediate benefit for a country, so it's on its best behavior."
* On countries without scale: Chile with only 17 million people for example.
* See also the creation of MILA in 2011, Mercado Integrado Latinoamericano, which combined the stock exchanges of Colombia, Peru, Chile (and later, Mexico). I didn't know about this at all.
* 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."
* He fired a "brilliant woman" who used information as currency, as leverage, in his organization.
* On how there's so many alums who would love to come back working for Zell, that when they had to quickly establish a full management team for a $6 billion office company, they were able to staff it with 30 employees, 26 of which came from their family of companies. This is an underappreciated advantage of running team of loyal people at a fun company.
* "I'll leave you with a few of my key philosophies."
Be ready to pivot: be industry agnostic and optimistic, be able to be a buyer or a seller, an equity investor or debt investor, or both.
Keep it simple: supply and demand, liquidity equals value, limited competition, etc. "Simplify risk"
Keep your eyes (and mind) wide open
Be the lead dog
Do the right thing: predicate everything on the fact that there will be another deal in the future, either with you or with the other person, "My definition of 'win' is not binary. It is not a zero-sum game. Negotiation that leads to a winner and a loser rarely leads to a successful transaction, or another one down the road."
Shem Tov: your good name, protect your name and reputation.
Prize loyalty:
Obey the eleventh commandment: don't take yourself too seriously: Ego and pride have their places but not when they're unregulated. Be the first person to laugh at yourself.
Go all in: he doesn't mean financially here, he means going all in mentally, with optimism and tenacity in whatever you decide to do
* The book loses some of its mojo in the last 30 pages.
Tickers to look into: ELS (manufactured home and RV REIT)
To Read:
William Zeckendorf: Zeckendorf: The Autobiography of the Man Who Played a Real Life Game of Monopoly and Won the Largest Real Estate Empire in History