Value Investing

Sam Zell – 9 Lessons From Survival Of Fittest

Sam Zell, the legendary real estate investor and business rebel is known for his bold market moves and creative antics. While most investors send out an annual letter, Zell is known for his ever so witty moving music boxes that sing his message. Take a look at his 2009 “Survival of Fittest” music box.

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For those of us who haven’t been as lucky to receive a Sam Zell music box, we can still learn from his wisdom by reading about his life. In this post we will go over nine lessons that Sam Zell iterated in his book Am I Being Too Subtle?

Lesson 1: Do what makes sense to you

Like many highly successful investors, Zell has had to make bold calls that go against herd mentality. Finding that comfortable zone of listening to others but sticking to your own conviction is a challenge. In Zell's words:

“I make a point of shutting out the noise - doing what makes sense to me. I want everyones’s opinion, because there is tremendous value in being a good listener. But then I determine my own path.” - Sam Zell

Knowing when to listen but also when to stick to your conviction is a trait that separates good from legendary.

Lesson 2: It’s all about relationships

Relationships are a key component to Zell’s success. Growing up Sam Zell was always reminded by his parents the importance of “Shem Tov,” the Jewish meaning for "a good name." Having a good reputation was something Zell took pride in and continued to build throughout his career.

A good name got him introductions but Zell discovered early on it was communication and talking with people that made things happen. One of his early real estate plays required Zell to go door to door and pitch the idea of purchasing homes from the current landowners. His strategy was a genuine interest in solving the problems of others. The way he saw it if you could strike up a conversation you had a chance to move towards a mutually beneficial solution to any problem.

“If you can start and keep a dialogue going you have a chance.” - Sam Zell

Lesson 3: Pay attention to basic economics

Over his lifetime, Zell has taken on what many would consider complex investments. Acquiring the Chicago Tribune that incorporated an ESOP transaction, using NOLs to build up a portfolio of businesses, are just a few examples where an outsider could argue Sam Zell loves the complex deal. However, most of Zell's investments are driven by simple principles of supply and demand. Early in his career, he realized the value of just paying attention to the basic economics at play. To this day he uses that outlook as a driving thesis for his investments. The complex structures and moving parts have arrived as a means to execute on larger deals, but at his core, Zell fixates on the simple and basic supply and demand principles at play.

Lesson 4: Take massive action

Sam Zell is great at taking action. His first business venture in real estate was property management of a college student housing building. To land the deal he and his business partner cranked out a simple brochure, went and pitched management and walked out the office with the contract. They had an idea, and they took action.

Zell’s bias towards action continued to pay off early in his career. When he came across what he thought as a good opportunity to buy an apartment building, he took the deal to his father and his fathers associate to vet as an investment opportunity. They liked it. They invested. The deal did well, and before long Zell found another one. This time he had a larger group of investors who wanted in on the opportunity. The deal got done, and Zell continued towards the next investment opportunity. As Zell tells it, by taking massive action and the success of those early two deals, the third deal opportunity presented him with more investors lined up then he could take on. This action taking and demand from investors served as the foundation for his real estate empire.

Lesson 5: Pick your spots

Like a good poker player choosing the table to play, Zell realized early on where he chose to compete would be a big factor in his success. He decided to focus on smaller cities where construction cost was cheaper, and there was less overall competition from big syndicates. He built on that thesis scaling his operations to focus primarily on small high growth cities where there was no competing capital. His ability to avoid competing against bigger, better and more experienced investors allowed him to stack early wins in his career.

Later in his career, as he developed more of a reputation, Zell saw how overcrowded the market was and started a new company in a less populated area of the market specifically in distressed asset management. Due to the timing of where things were in the business cycle, most investors were not interested in distressed asset management. Not only was Sam ahead of the trend but by building the company before major competition, he got a jump start on opportunities once the market turned.

Lesson 6: Look for environmental change

Similar to figuring out the fundamental economics, Zell places a large emphasis on understanding shifting changes on a macro level. He was ahead of the curve with distressed assets due to studying the fundamentals and shifts in mark to market accounting principles. He spotted the shift in demographics among young individuals getting married later in life and decided to aggressively invest in city living that targeted young professionals. When tax reform stipulated that Net Operating Losses could be utilized in a new way, Zell bought majority control of several businesses that offered NOLs he could carry forward for years to come. While all these strategies are different, what is consistent is Zell’s emphasis on figuring out what is changing and getting ahead of it.

Lesson 7: Organize your thinking

Zell had an amazing mentor in legendary investor Jay Pritzker. One of the key lessons Zell learned from Pritzker was the importance of organized thinking. As Zell put it; “I could cut right to the heart of something complex if I broke the problem into pieces. It was a matter of organizing my thinking.” Jay Pritzker taught him that if a deal required 12 parts, really only one part mattered and that was where the entire deal could fall apart. To this day Zell emphasizes the importance of dissecting a deal to separate components into smaller pieces in order to learn the vulnerabilities and potential downfalls of the deal in its entirety.

Lesson 8: Don’t take yourself too seriously

One of the most admirable traits of Sam Zell is his disposition towards not taking himself too seriously. If you don’t believe his words, you can certainly turn towards his actions to see he truly lives up to it. How many billionaires do you know who have written into large merger agreements “this issue will be resolved by whoever is taller.” How many investment offices can you call where the transfer waiting music consist of classic hits from The Beatles? Zell even has a private patio off his office where he takes meetings and keeps his pet ducks.

Lesson 9: The fun is in the journey

So often we forget it is the journey where we spend the most of our efforts, not the destination. It’s clear that Zell has had a blast enjoying the journey towards what he has built. Through his book, he talks about the genuine enthusiasm he has for figuring out the puzzle. The challenge of effectively utilizing resources or solving some sort of problem is what puts Zell in his zone.

“Business isn’t a battle to be wagged, its a puzzle to be solved.” - Sam Zell

Studying those who have traveled similar roads gives clues to success. Nothing about Sam Zell’s career has been traditional or ordinary, and yet that might be just the reason why he has built such a successful empire. If you haven’t had the chance, pick up his book for an enjoyable read and let us know what lessons you learned.

Article by Carter Johnson, Finbox.io