Am I Being Too Subtle?: Straight Talk From a Business Rebel

by Sam Zell

I also read risk for a living. I am very focused on understanding the downside.

Not surprisingly, a fundamental part of being an entrepreneur aligns with my tendency to walk out of step with the norm. I have a saying: “If everyone is going left, look right.” Conventional wisdom is nothing to me but a reference point.

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

would discuss world affairs, politics, and current events in the country. My parents never dumbed down the conversation for the kids. It was an environment of metaphors, a Talmudic approach, where lessons were always given from examples or stories. To this day I tell stories as a primary way of getting my point across.

Where there is scarcity, price is no object. This basic tenet of supply and demand would later become a governing principle of my investment philosophy.

But the question is still interesting, because they actually left me with so much more than money. It was an inheritance of intelligence, curiosity, drive, resilience, and self-determination. They instilled in me a commitment to learning and an understanding of how to apply it in real life, to challenge convention—to leave when others stay, to be aware of risk and prepare for it. I certainly feel “self-made” in one sense, but in another I recognize the incredible contribution of my parents in shaping my values and success.

that was completely foreign to me. He never had a doubt. Priceless. That experience never left me. It was a lesson in the value of how much you learn by seeing people in their own environments. Today I could probably get just about anybody to come to my office for a meeting, but that wouldn’t tell me much. Instead, I spend over a thousand hours a year on my plane traveling around the world to meet with people. I want to see what they are like on their home court, how they treat their people and the examples they set.

We didn’t know how to manage or rent apartments. We had no clue what it entailed. It just never occurred to me that I couldn’t do it. If you’re not aware that you’re not supposed to be able do something, the barriers to doing it are dramatically lessened.

It just never occurred to me that I couldn’t do it. If you’re not aware that you’re not supposed to be able do something, the barriers to doing it are dramatically lessened.

While I was unaware of it at the time, my real compensation for that job wasn’t monetary. It was learning about and getting comfortable with rejection. And as I would later realize, indifference to rejection is a fundamental part of being an entrepreneur.

I remember this event so clearly because it was at this point in my career that I fully realized the value of tenacity. I just had to assume there was a way through any obstacle, and then I’d find it. This is perhaps my most fundamental principle of entrepreneurialism, and to success in general.

My takeaway was a whole new respect for simplicity. Development required multiple steps, and every step meant one more chance for something to go wrong.

That was indicative of Jay. Trust was one of his abiding principles. He’d always bet a lot more on the person than on the deal. Once Jay decided that I was honest and smart, he was on board. He never called me to check on things. He never questioned where we were in our investment.

Jay taught me to use simplicity as a strategy. He had an uncanny ability to grasp an extremely complex situation and immediately locate the weakness. He always said that if there were twelve steps in a deal, the whole thing depended on just one of them. The others would either work themselves out or were less important. He had a laser focus on risk. I like to say my father taught me how to be, law school taught me how to think, Jay taught me how to understand risk.

We were having fun, and we were doing extremely well. I realized that the basics of business are straightforward. It’s largely about risk. If you’ve got a big downside and a small upside, run the other way. If you’ve got a big upside and a small downside, do the deal. Always make sure you’re getting paid for the risk you take, and never risk what you cannot afford to lose. Keep it simple. A scenario that takes four steps instead of one means there are three additional opportunities to fail.

This has always been a fatal flaw in U.S. real estate: the volume of development has been related to the availability of funds, not to demand. The industry has a long history of overbuilding when there’s easy money, without regard for who will occupy those spaces once they’re built.

A lot of Wall Street’s headaches—the executive compensation issues, the accounting scandals, the options backdating, the subprime mortgage mess—can be chalked up to misaligned interests created when there’s too much reliance on outsiders who don’t have a stake. Similarly, a lot of people who get burned by depending on Wall Street analysts, or hedge fund managers, or their local stock picker discover quickly that the advice they’re getting isn’t coming from a committed owner—it’s coming from a professional who is collecting a fee. After all, it ain’t their money.

For the next few years, I had to repeatedly explain that this was a whole different recession. I would not be raising a fund because there was no wave of grave-dancing opportunities in commercial real estate. With low to nonexistent interest rates, there was no cost to lenders to carry assets on their books. Now the real estate lending industry’s mantra was “Extend and pretend.” A rolling loan carries no loss. In other words, leveraged property owners could extend maturing loans until conditions improved. Since they weren’t forced to sell, there was no flood of bargains.

went on to outline what our industry had to do if it was going to thrive on Wall Street. Boiled down, it was all about transparency, predictability, and accountability. We had to earn investors’ trust. That meant creating REITs with high-quality properties, maintaining low debt to equity ratios, selling present income rather than future expectations, and ensuring sponsors and managers had skin in the game and were incentivized to grow shareholder value.

“Yahoo’s market cap today is $100 billion. If I gave you $25 billion in cash, is there any one of you who doesn’t think you could reproduce what Yahoo has done to date?” The conversation validated that market valuations had completely disconnected from reality. Although a few people put up a pretty good fight, ultimately everyone acknowledged that they could probably do it. Which meant there were no barriers to entry. And of course there was still that pesky little problem of revenues.

The most reliable measure of our buildings’ value remained—and had always been, in my opinion—replacement cost. Replacement cost mattered more to me than rents or comparable prices or vacancies or economic growth or stock price. This was because replacement cost determined the price of future competition.

To me, risk-taking rests on the ability to see all the variables and then identify the ones that will make or break you.

probability of success. But everybody wants to look at how good a deal can get. People love focusing on the upside. That’s where the fun is. What amazes me is how superficially they consider the downside. For me, the calculation in making a deal starts with the downside. If I can identify that, then I understand the risk I’m taking. What’s the outcome if everything goes wrong? What actions would we take? Can I bear the cost? Can I survive it?

Nothing refines your understanding and assessment of risk better than experience. But at any time, it’s about being aware and simplifying the worst downside scenario—seeing over the abyss. It’s about discipline and avoiding emotional response. And then you decide whether to play or walk.

In emerging markets, a big clue to national stability is whether a country is on the verge of investment-grade rating. Early on, I came to the conclusion there’s no other time in the life of any country when it’s more disciplined and more transparent than when it’s a year or two away from reaching investment-grade status.

I believe in the radius theory of business, where your ability to succeed is ultimately limited by the number of people between you and the decision. That’s because the farther from you the decision is made, the less you control the risk.

There’s a baseline IQ level needed to work at my firm, but I don’t need rocket scientists. After that, what best predicts your success in my world is drive, energy, attitude, judgment, conviction, and passion. And an ability to cut to the center of an issue. I’d trade another twenty IQ points for those qualities any day. I’ve had a number of brilliant people working for me who didn’t make it because they couldn’t grasp how to think about a deal. I remember walking into the office one night around 8:00 p.m. to find a guy working on a ten-year projection for a real estate project we were considering buying. I looked at what he was doing and I realized how many hours he’d spent laboring over his calculations. His approach was ass-backward. I said, “You’ve got to be able to look at the deal and know what it hinges on to know whether it works or not. If you realize that the key component works, then you use the numbers to test it. You don’t do the numbers to find out eight hours later whether it was worth starting.” I’m sure his IQ was higher than mine. But that isn’t how we operate. You have to be able to effectively assess the initial picture and see where the greatest risk is most likely to be, or you’ll spend your life doing numbers just to find out if a deal will work. And all that time lost is time you could have been looking at other opportunities.

I’ve always been inspired by the words of Daniel H. Burnham, who was influential in persuading the Chicago city fathers not to build on the waterfront but rather to create perpetual parks along the lakefront and river—one of the most critical decisions that shaped my beloved city. He said, “Make no little plans; they have no magic to stir men’s blood . . . Make big plans; aim high in hope and work.”

The minute you acknowledge that a problem is insurmountable, you fail. If you just assume there is a way through to the other side, you’ll usually find it, and you’ll unleash your creativity to do so.