Zell and the Art of Investing

By Ramesh Akkineni

Sam Zell in a speech

Sam Zell got his start by entering the world of real estate while he was still in college, by managing property for student housing. As a student himself, he understood the student mentality. Who would be better equipped, he argued, to effectively manage the property?
From there, he began to acquire and invest in property in Chicago, particularly distressed real estate beginning with the property crash in the 1970s. He went on to form REITs, became the first to publicly finance them, and proceeded to take advantage of opportunities in other segments, adding a varied set of businesses to his holdings. Sam Zell’s view on entrepreneurship is simple; at the most basic level it is all about attitude and mindset. Entrepreneurs, Mr. Zell argued, think from the perspective of an individual rather than that of an organization, or worse yet – conventional wisdom. “Entrepreneurship’s greatest enemy is conventional wisdom,” Zell said. From this foundation he continued to build the rest of the key attributes of successful entrepreneurs. Being incredibly observant and constantly curious are necessary to those seeking to succeed as an entrepreneur. These characteristics drive entrepreneurs to be on the constant look out for problems and subsequently devise their potential solutions, to always increase their knowledge base, and to see opportunities that may be invisible to everyone else. “How can I do it better? How can I make it more effective? How can I seek what other people don’t seek?”

To Mr. Zell, “The real entrepreneur is never satisfied and is constantly asking ‘What’s out there?’ ‘What’s the vision?’” Mr. Zell also stressed the importance of simplicity, logic, and common sense. He reminded us about the most basic concept of supply and demand as he related a tale about an endeavor concerning railcars. During the early 80s, the demand for railcar loadings in the United States was flat, and as it experienced no growth, the industry was deemed unfavorable. Because of this, railcar owners began to scrap their railcars, thus decreasing the industry supply by 65%. Keep in mind though that the demand was not decreasing – it was just flat. The profit opportunity Mr. Zell saw was as clear as the two supply and demand lines he drew on the board, and he was not shy about stating the obvious. Already an owner in the railcar industry, he bought up all the used railcars in the United States, adding to his fleet of 17,000 railcars until it totaled 92,000. He later sold them to GE for $2.2 billion in 1992, at a profit of $500 million.
Hand in hand with looking for opportunities is recognizing good ones, Mr. Zell added, and having the sense of urgency to take advantage of them. To illustrate an example of quick decision making and implementation, he discussed one of his holdings – Jacor Communications, a small company that held 17 radio stations. During that time, the government only allowed companies to hold 17 or fewer stations. This changed in 1996, when the FCC passed telecom deregulation and removed the restriction. Companies were subsequently free to own an unlimited number of stations provided the holdings consisted of no more than 40% of the market. Seeing this as yet another extraordinary opportunity, Mr. Zell quickly bought all the radio stations he could, ending up with a total of 234 stations. Jacor repackaged the radio stations, made their operations more cost effective, and created marketing presences to gain dominance in local markets. Jacor then sold the bundle to Clear Channel for $6.4 billion in 1998, two short years later. All this profit was generated from an initial investment of $50 million in 1995.
Moving in one direction when everyone steadfastly moves in another often translates into feeling very alone. Throughout the talk, Mr. Zell reminded us how he would often wonder where the other opportunists were when he was setting about amazing deals. Where was everyone else when Mr. Zell foresaw a fortune in buying up distressed property? Was this actually the correct tactic to take? This is where self confidence kicks in, and strength of convictions. An entrepreneur, Mr. Zell repeated, needs an enormous amount of self confidence, to go hand in hand with optimism and perseverance. For all the times that “things don’t work out,” these qualities would carry the lone entrepreneur to the next opportunity looming ahead, making the next day worth getting up for. But “Most of the time,” he would often say, “if you’re really making the right decisions, you’re more than likely going to be alone.” Mr. Zell went on to discuss the importance of selling, and being able to clearly communicate business ideas. He talked about always keeping one’s eye on the objective, and about always testing one’s convictions.
Mr. Zell closed his speech with a quote “Make no little plans. They have no magic to stir men’s blood. And probably themselves will not be realized. Make big plans. Aim high, in hope and work.”

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