Am I Being Too Subtle? Straight Talk from a Business Rebel, by Sam Zell
This is a book for investors. The billionaire author, Sam Zell, found success as an investor in, among other ventures, real estate, emerging markets, telecommunications, media and even railcars. Incredible. His book helps make that high-level of achievement replicable.
How can someone hit homeruns in so many different industries? In his words, “I realized the basics of business are pretty straightforward. It is basically about risk. If you´ve got a big downside and small upside, run the other way. If you have a big upside and a small downside, do the deal.”
Is it really that simple? I believe, after reading this book several times as well as through my own investing experience across many industries, that the answer really is yes if you can accurately do that risk calculation. In other words, industries and products differ, but the core considerations as to whether there is an opportunity worthy of your investment come down to analyzing diligently each potential investment through the same basic rubric.
The book is a great read that, for us investors, is littered with stories of spotting opportunity where nobody else sees it, company turnaround stories that resulted in huge and successful exits and the incredible recounts of ground-up company-building. Read this book if you want to become, as the author likes to be known, a “professional opportunist.” Get your copy.
Simplicity is King
Investing successfully means being able to manage risk and, ultimately, deciding whether the risk of that investment justifies your potential reward. Always know what your greatest risk in any deal is. Each critical factor or step added to a deal process before execution is an opportunity for failure and thus adds to the risk of the investment. Deciding whether to invest requires you to be able to identify those critical factors. Human risk? Supply and demand? Development risk? Legal and governmental risk? Financing risk? And then you must be able to quantify and mitigate those risks. If you can´t calculate your downside on a deal, you shouldn’t do the deal.
A good example here is real estate development. Though the upside can be higher, a full-scale, ground-up development certainly bears more risk than a renovation of an existing asset because it involves more steps to completion. Does the return that you expect from that full development versus if you were to instead pursue a less complex renovation of an existing asset justify the added risk?
You may be the only one who is able to answer that last question for your portfolio. The answer will turn on your risk tolerance and what you ultimately believe your compensation should be for enduring such risk. There is no scientific formula for making the final decision whether to invest, but to call yourself an investor you have to have done the calculation.
Your Investment Rubric
People and Partnerships
“Observe people in their environments.” Investing is a people business. As much as you are investing in an idea, you are more so investing in the people who will breathe life into that idea. Seeing how they work, and judging their character is absolutely critical. If you are going to partner with someone or make an investment in a company that they are going to lead, go visit them in their environment versus inviting them into yours. How do they treat their people? What is the environment like? Your gut is likely to tell you whether this is an investment that you want to make simply from the energy you get from this experience. Steer away from the mediocre and short-sighted.
Remember also, that you cannot have a true partnership unless you both share the same risk. Make people owners, not managers, to get the best out of them. The other person must also have skin in the game.
Supply and demand
Opportunity exists where there is an imbalance between supply and demand. You should not invest until you are comfortable about how the two relate as to a given opportunity. Read the story about how Sam Zell made the bold move to buy railcars when nobody else was touching them. His justification, not to ruin the story for you, was a simple calculation of this most basic economic principle of supply and demand that led to an incredible business win. What is stopping you from having this same level of success? This book teaches us the importance of going back to the fundamentals of investing and spotting opportunity.
There is a great story in the book about how Sam Zell and his company spotted an overbuilding in real estate coming. Their response was to move to a primarily cash position and wait for that overbuilding to lead to excess inventory in comparison to demand. They had to wait five years for that macroeconomic circumstance to happen! But they followed the principles of supply and demand and allowed for this inevitable truth to work itself in. They went on to soon thereafter buy $4 billion of real estate at prices close to $0.50 on the dollar! This is an incredible example of allowing sound principles to guide your decision-making, even if those principles require a little bit of waiting.
Listen to the numbers
“Listen, even if they tell you something you do not want to hear.” Keep your biases out of your investment portfolio.
“There is no substitute for limited competition.You can be a genius, but if there is a lot of competition it won´t matter.” If you cannot be a leader in the space, there is probably a better place to direct your capital.
Liquidity equals value
Never invest in an asset if you do not know how it will be monetized. There is nothing worse for a portfolio than having to dump assets to create liquidity at an inopportune time.
Spot opportunities through macro-events
Successfully spotting opportunities early enough to seize them before prices rise and profits fade means that you have to have the ability to focus on the big picture influencing events and anomalies that will drive the direction of companies and industries. When you spot these anomalies, for example, legislative or other grand shifts in government policy, first mover advantage requires conviction. Listen and always keep your eyes wide open. Educate yourself to what is going on in the world, be that professional opportunist I mentioned earlier and take action.
Do what energizes you
I pulled this one from my own list, not from the book. Only invest in products, businesses and ventures that energize you. Rarely ever does investing only mean a contribution of capital. With almost any investment there will come a demand on your time, your most important asset. Are you willing to commit your energy to make this investment work? Are you willing to devote the work necessary to determine whether you are appropriately conducting the risk management and evaluation of investment criteria we listed above prudently? Often, if the investment opportunity is only about money, you are not going to. Find opportunity within the parameters set by those things that fuel your energy and motivation.
I have made this mistake myself. More recently than I´d like to admit, I invested six-figures into a CBD oil venture. The prospects for big returns made me greedy as the industry was really booming, but my heart was never in it. I was not a user of the product. I also always bore my own suspicions about the utility of the product. Lacking that motivation and drive, I quickly realized that regardless of its potential I would have been better off dedicating my efforts to another venture. I won’t spoil the ending for you, but taking big losses on investments can be tough to swallow.
Additional Words of Wisdom from the Book
“Those who cannot remember the past are condemned to repeat it.” Classic advice that applies aptly to the world of investing.
“Every day that you hold an asset is a day that you are choosing to buy it.”
For us Entrepreneurs
Entrepreneurs will love Chapter 11 of the book. “Entrepreneurship is about critical thinking. It is not a scientific formula but rather the ability to think autonomously. It is about understanding and managing risk within the construct of decision-making. Problem-solving needs to be a passion.” You will be a better entrepreneur after you read this book.
Summing it Up
I’ve done my best to do justice to the wisdom in this book. Sam Zell has thrived in an environment of sustained success for over 50 years doing something we all love. Don’t miss out on your chance to learn from one of the best to ever do it!