value and opportunity

To be honest, I knew about Sam Zell and his real estate empire to some extent but I didn’t consider him as a great general (value) investor so far. This clearly changed after reading his “Memoirs”.

As many successful entrepreneurs, Zell started his career early as a student by managing apartment buildings and then moving into buying small real estate plots and transforming them into student apartment buildings.  There he learned to mantra that especially in real estate, the combination of several small plots does result in much more value than just the sum of parts.

Step by step he moved into office building, into different cities in the US and then internationally. Interestingly, at some point in time he also started to invest into “normal” companies, usually asset heavy companies in distress like for instance railcar leasing companies etc.

Summarizing his “edge” I would list the following points:

• lot of non recourse debt
• timing extremely well the real estate cycles (he always sold close to the peak and bought cheap)
• avoid competition (he tries to buy where no one else is buying)
• understand supply and demand (he looks a lot at macro events)
• make use of tax incentives wherever possible
• downside protection focus: tries to minimize downside risk
• “leave something on the table”: Don’t kill your counterpart in a negotiation but leave something for him. This will be paid back over time via trustful relationships.

In summary, Sam Zell is clearly a modern version of a “Graham” investor. He stresses that the valuation metric that is most important to him is “Replacement value”. If he can buy well below that, he will go in no matter how bad it looks from the outside.

What I liked at the book is that he did not forget to mention some of his less successful endeavours like the Tribune deal or an investment in a then bankrupt West Coast retailer.

He also stresses how important culture is in a company which is something I am  appreciating more and more myself these days.

Interestingly, some of the non-real estate companies he was involved (or still is) are not doing so great such as Covanta (negative total return of -9% over the last 10 years or Anixter (10 year return +3,3% p.a. vs. 9,7% p.a. for the Russel 2000.

Nevertheless I would conclude that Sam Zell should be considered as one of the great “(Deep) Value investors” alongside the more famous and coveted guys like Warren Buffett, Charlie Munger and Benjamin Graham.

All in all I can recommend this book to anyone interested in Investing. It will be especially helpful for fans of “Graham style” and Contrarian investors.