Sam Zell, billionaire investor and chairman and co-founder of Equity Group Investments, spoke with Bloomberg Television’s Betty Liu today about the real estate and financial markets as well as Microsoft Corporation (NASDAQ:MSFT)’s new CEO, Satya Nadella and Obama’s new policies.
When asked about Tom Perkins’s letter and comments, Zell said: “I guess my feeling is that he’s right. The 1 percent are being pummeled because it’s politically convenient to do so.”
Seth Klarman’s Collective Wisdom: Risk Analysis Is The Key To Investment Success
Please note this article is based on publicly available information, however ValueWalk just received Baupost's 2018 letter moments ago and will have exclusive coverage shortly. Seth Klarman is widely regarded as one of the best value investors the world has ever seen. Over the past few decades, his hedge fund, the Boston-based Baupost, has achieved Read More
*MARKETS WERE OVERPRICED GOING INTO 2014
*RESIDENTIAL REAL ESTATE OUTLOOK `BENIGN,’
*TOO MANY REITS IN THE U.S. MARKET
*EXPECTS REIT CONSOLIDATION OVER NEXT 20 YEARS
*TOM PERKINS RIGHT THAT TOP 1% UNFAIRLY TARGETED
*TOP 1% `PUMMELED’ BECAUSE IT’S POLITCALLY CONVENIENT
*ZELL LIKELY TO GIVE AWAY MORE THAN HALF OF NET WORTH
BETTY LIU: Joining us for the hour is none other than billionaire investor Sam Zell, whose holdings criss-cross the globe and many industries from real estate to energy to telecom. He’s also a substantial contributor to the worlds of education and politics. So much to talk about with Sam that we’re keeping him hostage for the rest of the hour. Sam, great to see you this morning.
SAM ZELL: Good morning, Betty.
LIU: You have been, as well as all of us, watching from the sidelines what’s been going on here with Microsoft Corporation (NASDAQ:MSFT). How do you think they’ve carried out this CEO search?
ZELL: I think that the challenge of trying to identify a CEO for a company as iconic as Microsoft is almost an impossible task.
ZELL: Well, you’re leaking they talked to this guy, they talked to that guy. It’s almost like a baseball player in free agency. And the answer is —
LIU: Well there’s no way to keep is secret. That’s for sure.
ZELL: And the real answer is how do you define and identify someone who’s capable of leading this company going forward?
LIU: What do you think of Microsoft Corporation (NASDAQ:MSFT) choosing – after – after all those names being bandied about finally choosing a relative unknown insider?
ZELL: I think it probably is a reflection of the risk appetite of the board. We’ve had a number of examples, whether it be Hewlett-Packard Company (NYSE:HPQ) or some of the others, where they brought in superstars to take over companies that really didn’t know the companies that well and made a lot of mistakes. I think this was a safe decision. I don’t know the gentleman, but somebody who’s been part of the culture – ultimately culture prevails. And I think it’s probably going to prove to be a good decision.
LIU: Well speaking about the culture, Sam, there’s a – there’s a culture – it didn’t play a role directly in this decision, but there’s a culture of the activist investor these days in corporate America. And while an activist investor did not push for – for change here at Microsoft, certainly there’s this aura, right, or atmosphere that if a board and a CEO doesn’t do this right, these people, whether it’s Bill Ackman or Carl Icahn, someone you’ve dealt very closely with, is going to be there at your doorstep, How does that change a CEO’s role, particularly someone like who’s running a public company? How does that change your role?
ZELL: First of all, I’m very benefited by the fact that I’m the chairman of everything and the CEO of nothing.
LIU: That’s true. That’s (inaudible).
ZELL: That’s really critical, okay?
LIU: Because you —
ZELL: Just because that means I can be a strategist. That means I can sit and think about what we’ve got to do tomorrow and I’m not confronted by an HR problem or a hacking problem or whatever somebody who’s running the company on an ongoing basis is (ph). I really think the activist thing could be summed up in the most simplistic fashion. The activist in effect raises money by saying, I’m going to create superior returns by addressing inefficiencies and opportunities for companies to do better. Those activists are under enormous pressure from their sources.
LIU: Right, from their own clients, yeah.
ZELL: And so to some extent they say why shouldn’t the CEO be under the same pressure? If I’m getting hit from behind, I’ve got to hit from behind and make him perform.
LIU: So you think it’s right?
ZELL: Well, the answer is I think activism is very right and very important in a capitalistic system.
LIU: Just quickly though, Sam, do we have that photo up of Carl Icahn – Carl Icahn on the cover of Time magazine? You and I talked about your relationship. You’ve dealt – you’ve been on opposite sides with Carl before. Master of the universe now. He’s made this comeback at this age, Sam. What do you think about this?
ZELL: Well I don’t think the word comeback is an accurate description. Carl is a force. Carl has been right. Carl has been right and committed to being right. If I had a hat, I would take it off to him. And I think America is dramatically better off for people like Carl.
LIU: All right. Sam, just stay with me because we’re going to talk with you about a lot more than activist investors. We’ll talk to Sam about the jobs market, Washington, Chris Christie and much more.
LIU: In Washington, the Congressional Budget Office released some startling new numbers about the president’s healthcare plan that’s sure to fuel more of this partisan wrangling in Washington, including this nugget, that in two years Obamacare is going to affect workers by prompting them to put in less hours in order to keep their federally subsidized healthcare benefits, costing an equivalent of about 2 million jobs according to the CBO.
Well Sam Zell stays with us throughout the hour, someone who is very involved in both local and national politics. And Sam, what do you make of this number, 2 million jobs?
ZELL: Well, I think the issue is not 2 million jobs. I think the issue is what is the contribution to the GDP of – or lack of contribution of 2 million people not working. We both know lots of people who have kept their jobs because they couldn’t afford to lose their healthcare. Now they can access healthcare from exchanges, and all of a sudden keeping a job isn’t as relevant as it was before.
LIU: But Sam, is that a small price to pay as a country for giving everybody healthcare?
ZELL: I think the best comment of all goes to Nancy Pelosi. We have to pass this bill to find out what’s in it. This is only the latest example of hundreds and hundreds of mistakes that were made in the preparation of this bill.
LIU: But do you think it should be repealed?
ZELL: I think that the current form of Obamacare I think is deleterious to our country and needs to be radically changed. The word repeal, I don’t know what that word means. I think healthcare is an important issue. I think the question is how do you go about it. We went about this half-assed.
LIU: But it – well, but however, the cat’s out of the bag and we have to figure out what to do now with the consequences. One of the things though that – that – that seems to be observed now in Washington as we’re – as we’re working through healthcare is that maybe, according to someone like Walter Isaacson who we had on this program, maybe the fever is breaking in Washington Maybe this may be a year where the two sides come together. Do you feel that way at all, Sam?
ZELL: I don’t know what he’s been smoking because nothing I read suggests that. They made a couple of deals on a couple of simple things, but talk to me about immigration. Talk to me about healthcare. Talk to me about foreign policy. There’s so many issues where there’s just this extraordinary disparity between the parties and very little interest in compromise.
LIU: I want to bring back Sam Zell, who’s been standing by. Sam, you think the – you thought the markets were overpriced, right, going into 2014.
ZELL: I did.
LIU: Why’d you think that?
ZELL: Well I think the economic activity did not correlate to the price of the stock market. Stock market was up 25 or – I don’t remember how much it was up last year.
LIU: Like 30 percent.
ZELL: Thirty percent. I (inaudible) companies. We didn’t see any – any Kumbaya happening. So from our perspective it’s a function of too much liquidity.
LIU: So do you feel that this is pretty healthy then to see this – to see this kind of decline?
ZELL: I don’t think declines are ever healthy, but balance is what keeps us in place. And when we get out of balance like subprime loans or whatever, it’s pretty disastrous. So the market has to keep balancing back and forth as consecutive (ph) currents are relevant. And I think the market in 2014 is a lot more likely to reflect what happened in 2014 than whether or not it was up or down in January.
LIU: But does it make you nervous at all, Sam? I know not much makes you nervous at all, but – but seeing how volatile these markets have been over the last few weeks, does it make you more nervous that Americans are going to look at this and pull back and perhaps they may not be buying as much anymore? They may not be selling as – as many houses or buying as many houses.
ZELL: The market went up 30 percent last year. Did the American people buy everything in sight? No. So what’s the relevance now? I don’t think the market has a dramatic impact on buying and selling decisions unless it’s such a prolonged period like we had in ‘08 and ‘09 that it really dampens everything.
LIU: It was so overwhelmingly essential. Where – where – where do you stand now on real estate? What’s your outlook on real estate now?
ZELL: I think you have to distinguish between commercial real estate and residential real estate.
LIU: Okay, residential? I know you were big on —
ZELL: Residential single family I think is going to be benign. I don’t see any massive recovery. I don’t see any massive rise in prices. I also don’t see any significant downturn. The demand for single family houses is to my judgment relatively muted. We’re producing about 700,000 or 800,000 new units a year, down from about 1.2 million in what was considered to be a normal year.
LIU: But Sam, I thought there was going to be this huge trend – and didn’t you and I speak about this before, these – the generation Xers who were sick and tired of living in their parent’s basement and they were going to start to buy these starter homes. Where’s that trend? Why hasn’t that gotten bigger?
ZELL: Because those people don’t want to live where their parents used to live. They want to live in a city. They want to be in a 24/7 place. They want to be where all the action is. That’s not in bumble something (ph) out there where they used to build all these ticky-tacky homes. So part of the demand issue is the shift from – to more urbanization in the United States, therefore changing housing patterns. And 15 years ago somebody would graduate with an MBA and the first thing they wanted to do was buy a house, get in on the track. Now they defer marriage, they defer buying a house, they defer everything to basically maximize their lifestyle.
LIU: Right. And that’s why you’re going to urban markets, right?
ZELL: Well we’ve over the last 20 years taken Equity Residential from basically a suburban garden apartment owner to a barrier to entry 24/7 city highrise provider of housing.
LIU: Higher interest rates. Do you believe that’s going to – that’s going to scare off any buyers or are we prepared for that?
ZELL: Again, depending on whether you’re talking about commercial or —
ZELL: On the residential side, I think affordability is still tight. I think interest rates going up will have a slight negative effect, not a catastrophic effect. On commercial real estate, I think unlikely to have too much of an effect.
LIU: Sam, why do you say that – that there are too many REITs out there? You said something before I believe in a speech that there – that there – we’ve got actually a saturation of REITs. What do you mean by that?
ZELL: What I mean by that is at the last count there are 203 REITs. I think that there are probably 30 of them that have size, scale, market impact, et cetera, and will be leaders and growing in the future.
LIU: Yours included.
ZELL: Hopefully, hopefully. Equity Residential is $34 billion. Equity Lifestyle is $5 billion, $6 billion. So they’re very big companies, but there are also a lot of $800 million, $700 million REITs that have no scale, have no liquidity, and I think only obfuscate the clarity of the picture. And I would expect over the next 20 years we will have more and more consolidation as the REIT industry continues to grow.
LIU: Well then why do you think that they’ve been allowed – why do you think there’s been a proliferation of these then, of these smaller REITs?
ZELL: For lots of different reasons. First of all, real estate is a very attractive asset class. Everybody thinks that their deal is special, their deal is better, their opportunity is better. The problem we have is that if you go public – we went public with a REIT in 1993 for $800 million and we did another one that year for $200 million. And at that time those were reasonable sized REITs. Today anything under a couple billion dollars is not relevant and doesn’t have liquidity. And in the recent, the reason REITs exist is to provide capital to the real estate market. And you can’t provide capital if you don’t have liquidity.
LIU: With me this past hour is billionaire investor Sam Zell, the chairman of Equity Group Investments, a company he founded over 40 years ago. As part of our ongoing series around my new book Work Smarts: What CEOs Say You Need to Know to Get Ahead, I wanted to get Sam’s tips on – on – on the keys to success. And Sam was good enough to sit down with me for about an hour or so earlier – earlier last year to talk about how he gets to where he is. Well he says, “Guts and instinct are all simplicity. I went to Harvard Business School in 1988 and I spoke to 300 of them and I just beat the crap out of them. It’s all about what’s simple. What’s the shortest distance between two points? A straight line.”
Sam, that really struck me when you said that to me during our interview for the book because you said people just tend to overthink, right?
ZELL: Well come on, we have – when I was talking about that 1988 speech at Harvard, what I basically talked about was that the business schools, and I think they’re beginning to change, but particularly in the ‘80s the business schools focused on if you could just turn the page there’s the formula that tells you how to do it. And the answer is there are no formulas and – and success and failure are – are a combination of judgment and an external event. But it starts and ends with a simple idea.
LIU: And your gut. But your gut has played a very key role though in your business – in your success.
ZELL: I think that I have been willing to have an opinion and then execute accordingly.
LIU: Speaking about leadership, I want to talk about a couple of – couple of people in the news who are – one considered a leader is New Jersey governor Chris Christie, who’s now been under pressure given this whole Bridgegate scandal. Do you think he’s going to survive this?
ZELL: I think he will. I think this Bridgegate scandal is another example of journalistic hypocrisy. I just wonder whether the president lying to everybody about healthcare was more – more or less important than Bridgegate. Because I think Bridgegate has gotten more press and more focus than who knew what and when when the president was telling us —
LIU: So you think the press has given – you think the press has given the White House a pass on – on Obamacare.
ZELL: Do you have any doubt about that?
LIU: I – I have no comment on that. I think that to me it’s been pretty – there’s been pretty harsh criticism –
ZELL: The president (inaudible) for three years told the American people the same thing. Not one reporter challenged that in three years. Not one reporter said that’s false. Where did that occur?
LIU: Well afterward when – afterward when the results – when the actual implementation of it started coming out, that’s when people started asking questions.
ZELL: It was written. It was written and it was there and any member of the press could have challenged it but didn’t.
LIU: Let me ask you about Tom Perkins because you are part of the 1 percent. You are clearly part of the 1 percent. Tom Perkins came out with this – with this letter where he defended the 1 percent and he said, look, we are being persecuted the same as the – as the Nazis were persecuting the Jews. And he was just lambasted and he came on our network and defended it. How did you feel when you read that letter and when you heard his comments?
ZELL: I guess my feeling is that he’s right. The 1 percent are being pummeled because it’s politically convenient to do so. The problem is that the world and this country should not talk about envy of the 1 percent. It should talk about emulating the 1 percent. The 1 percent work harder. The 1 percent are much bigger factors in all forms of our society.
LIU: But Sam, tell that – tell that to the person who’s on minimum wage who’s living below the poverty line that they should try to emulate the 1 percent. How are they going to get there?
ZELL: The stories are rampant of people who started with a candy store and took it from there. There are lots of people who have the ambition and have the motivation and have succeed. Lots of people have come from nowhere and become part of the 1 percent.
LIU: But do you feel because you’re rich that you’re being persecuted?
ZELL: The word persecution is not the right word.
LIU: Okay. You’re being picked on.
ZELL: I think that the politics of envy, the politics of class warfare are what has separated America from many parts of the rest of the world. And we have benefited dramatically from not having class warfare, from not having envy. William Jennings Bryan in 1896 was the first person to run publicly in the United States on a platform of class warfare. He lost. And wisdom at the time said this is not America, and I think it still is not America.
LIU: Do you think though that there needs to be some help though or that – that there needs to be policy changes or something needs to be done about the growing income – income inequality, the growing gap? Do you think there needs to be something done with that?
ZELL: I think that that is a function of policies and I think that overall the policies that we passed for the last 50 years, whether it be unfunded Social Security or other issues, have all contributed to this disparity. And we need to fix our government. We don’t need 17,000 new pages of federal regulations in the last five years. So I think all of those things contribute to this disparity. And the more complicated our government makes our world, the more the 1 percent can afford to hire somebody to figure it out and the other guy can’t. But if you simplify government, neither one of them require (ph). And therefore the disparity slows down.
LIU: It’s time now for our global outlook segment, and international property investor Sam Zell is still with me. Now Sam, I want to play for you one comment that Bill Gates, who was here in our studio a few – a few weeks ago talking about his work – his work overseas and through the foundation. He talked a little bit about the cynicism he sees around the world when it comes to helping poorer countries.
BILL GATES, CHAIRMAN, MICROSOFT: The facts are on the side of the optimists, and I think it’s actually dangerous that people are focusing on the bad news and not seeing the progress we’ve made. It means they don’t look at the best practices. They – it makes them less generous. We are raising poor countries up. Most people live in middle-income countries now. There’s more to be done on health and agriculture, but the track record of success, if you don’t see that, you’re – you’re not going to participate in what we need to do.
LIU: Is he right the world is a better place, getting to be a better place?
ZELL: I hope so. I hope so. Certainly the world is – is getting to be a better place because of what Bill and Melinda Gates are doing. So I have nothing but accolades for what they’re doing. How effective it is we’ll find out 30 or 40 years from now.
LIU: Exactly, in a generation from now. Did he ever – did he or Warren Buffett ever call you to join their giving pledge?
ZELL: No. I just – I can’t speak for anybody else. I’m more than likely to give away well over – significantly more than half of my net worth. And that’s what I’m going to do. I don’t need anybody to call me and suggest it, or in effect put me in a position where – use social pressure. I built my fortune and I’m going to dispose of it as I see fit.
LIU: The way you want to do it. And you – and you – the most effective way you’re going to donate your money is going to be how, Sam?
ZELL: Well I’m – I’m different than some people. I very much want to use philanthropy to create change. There are lots of people who can put their name on a building. I don’t need my name on a building. I want my name on programs. I want to both contribute capital and contribute my own efforts to make a difference. And whether it be the entrepreneurship at the University of Michigan or various other creating writing programs and creative (ph), these are all parts of making a difference.
LIU: Right. Creating job creators in many ways. Sam, thank you so much for staying with me through the hour. Sam Zell, Equity Group Investment founder and chairman.