Sunday, December 16, 2012

Some Thoughts from Legendary Investor Sam Zell to Consider

During uncertain periods, it is worthwhile to consider perspectives from longer-term investors such as Sam Zell.  He is Chairman of Equity Group Investments, known for its $39 billion sale of Equity Office Properties Trust during 2007 and the controversial purchase of the Tribune Company (including the Chicago Tribune, the Los Angeles Times and the Chicago Cubs).  The following are excerpts from an interview with a Columbia Business School newsletter (Winter 2012), along with Zell’s 13 “fundamental rules”.
  • The Need for Simplicity: “I philosophically believe that if you can‘t delineate your idea in one or two sentences, it‘s not worth doing… My criterion is if [my team} can‘t concisely explain their idea, then I throw them out of my office and tell them to come back when they can. Simplicity is critical.”
  • Making Sensible Investments: “I start by not paying much attention to the market … I don’t make investments predicated on the assumption that there’s a greater fool out there who’s going to buy it from me for more than I paid for it. I look for situations that logically make sense to me.”
  • Focus on Demand Drivers: “My philosophy is to invest in businesses that serve externally created demand – businesses where I don’t have to generate demand. For example, in the mid-80s, I bought the largest dredging company in the world because I knew that every day the rivers and the harbors are silting, creating demand for the product I produced.”
  • Understanding Execution Risk: “one of the greatest risks of any investment is execution risk, and I think it is highly overlooked. I have great respect for execution risk and am always sensitive to people coming up with ideas that don’t have all of the t’s crossed and i’s dotted with respect to how the plan is actually going to be executed.”

Zell’s Fundamental Rules
  1. Operate on the condition of no surprises.
  2. Everyday that you’re not selling an asset in your portfolio, you’re choosing to buy it.
  3. Ensure management’s interests are aligned with shareholders.
  4. Look for good companies with bad balance sheets,
  5. Nothing should stand between a company and its fiduciary responsibility to shareholders.
  6. Look for opportunities in markets with pent-up demand,
  7. The definition of a partner is someone who shares your level of risk.
  8. Liquidity = value, 
  9. Sentimentality about an investments leads to lack of discipline,
  10. Take meaningful positions so you can influence your own destiny,
  11. When everyone is going right, look left,
  12. Understand the downside,
  13. It all comes down to Econ 101 – supply and demand.

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