Chapter 7 - Am I Being too Subtle?
This Chapter’s based on the book “Am I Being Too Subtle?”, an autobiography by Sam Zell.
Buy it on Amazon here:
https://www.amazon.com/Am-Being-Too-Subtle-Straight/dp/1591848237
Here’s what I learned from the book:
Keep your eyes and mind wide open
“The most successful business leaders are those who are open-minded and willing to challenge their own assumptions.”
— Jeff Bezos
Sam Zell teaches us the importance of being a seeker of information and a serious observer. More importantly, in this new era of information overflow, we need to focus on what’s meaningful.
Zell is a voracious consumer of information, always on the lookout for anomalities or disruptions in an industry. Having this macro perspective allows him to identify opportunities and to make better decisions. He tells us to always question and calculate the implications of broader events.
As an example, based on the simplest law of demand and supply, Zell started targetting small high-growth cities where there is no competing capital for his real estate projects. He identified that the largest fixed costs of real estate were taxes and utilities, and both were much lower in these second-tier cities and therefore his margins would be higher.
“The cost of construction was significantly less in smaller cities like Ann Arbor and—even more important—there was no competition. But the syndicators didn’t know those second-and third-tier cities even existed. So there was no real capital looking for assets in those smaller markets. Without competition, I could set the price—and the market.”
— Sam Zell
“That was my first real investment thesis. If I could replicate what I was doing in Ann Arbor in other markets, I could realize some serious upside. I would build a portfolio of assets in smaller, high-growth markets with a focus on university towns. That all seems logical in hindsight today, but back then nobody was doing it.”
— Sam Zell
“My investment thesis was still based on targeting small, high-growth cities where there was no competing capital. I continued buying apartment properties in university towns because that’s where the opportunity was. Schools in the country were growing. And the largest fixed costs of real estate—taxes and utilities—were lower in these second-tier cities, so the net margins were significantly higher.”
— Sam Zell
Opening our mind also means to pay attention to other people. Being a good listener can make all the difference, since you never know when or how you will learn something new. Similarly, in business negotiations, Zell quickly understood the value of listening and understanding what is truly important to the other person.
“This is perhaps my most fundamental principle of entrepreneurialism, and to success in general. But my experience with Mrs. D was also about the value of really listening, which is at the heart of any negotiation. Understanding what’s truly important to the other person out of the dozen or so things they might tell you. Mrs. D’s brother had to be taken care of. That was her bottom line. Homing in on that got the deal done.”
— Sam Zell
Reputation
“It takes 20 years to build a reputation and five minutes to ruin it.”
— Warren Buffett
One of the things he learned from his father is the importance of a man’s honor also known as shem tov in the Jewish community — a good name. This led Zell to do business with integrity by treating people and doing business in a fair way.
“Reputation is your most important asset. Everything you do, everything you say, is part of the permanent record. Your name reflects your character. No matter how successful I got, I never forgot that lesson. I’ve always strived to be known as a man of my word.”
— Sam Zell
“Integrity isn’t just about following the letter of the law. It’s about how you treat people, doing business in a fair and aboveboard way, and of course keeping your word. I can’t stand bullies or people who are insulting, sneaky, or passive-aggressive. And when I encounter them, there’s often a consequence.”
— Sam Zell
As such, Zell was always about building long-term relationships while handling his business negotiations. He always wanted to find a win-win situation for both parties.
“When you’re a repeat player, when your world is your business and your business is your world, it’s all about long-term relationships. In any negotiation I believe in leaving a little bit on the table.”
— Sam Zell
“My definition of “win” is not binary. It is not a zero-sum game. Negotiation that leads to a winner and a loser rarely leads to a successful transaction, or another one down the road. That’s how it’s been throughout my business career. Sometimes my team argues with me—they can’t believe we’re leaving money on the table. But I want to create an environment where everyone wants to keep playing.”
— Sam Zell
This definitely paid of for Zell, as he was able to get support time and time again from his previous partners even during his difficult times based on his integrity and reputation.
“That kind of loyalty and trust was very meaningful to me—and was a measure of where I stood with those who knew me. It’s easy to support somebody who’s hitting home runs. Not so easy to put your reputation at risk and put your name behind someone who is even remotely connected to something nefarious. Time and again I received support like that from those who had done business with me in the past. They knew me and how I operated. For me, it all came back to being, in my father’s words, a man of shem tov, a man of good name.”
— Sam Zell
Keep it simple
“I don't try to jump over 7-foot hurdles: I look for 1-foot hurdles that I can step over.”
— Warren Buffett
Sam Zell believed that the basics of business is quite straightforward: it’s all about understanding risk. Zell did not only define risk as calculating the downside, but he also took into consideration the complexity of the deal. As such, it is important to keep things as simple as it is. The more complex it is, the more risk you take.
“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?”
— Sam Zell
“Keep it simple. A scenario that takes four steps instead of one means there are three additional opportunities to fail.”
— Sam Zell
“In addition to looking at worst-case scenarios, I look at how hard something is to execute. The simpler the goals and the steps to reach them, the more likely I’ll be successful. And if they aren’t simple to begin with, I look at how I can untangle the complexities.”
— Sam Zell
Zell learned this “keep it simple” strategy from one of his mentor, Jay Pritzker, who taught him how to look at deals and how to focus on what would either make or break them.
“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.”
— Sam Zell
“I went to Jay and took him step-by-step through this incredibly complicated transaction. And damn it if he didn’t just look at me and say, “But, Sam, isn’t the real key to this whole thing just to rent the office space?” And sure enough, that’s what the whole transaction was predicated on. Jay’s level of intellectual rigor really appealed to me. And I immediately latched on to the understanding that 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. A discipline. It brought me back to seventh-grade social studies where I learned how to create an outline. It was the same core concept, just applied at a more sophisticated level. I still apply it today.”
— Sam Zell
This idea of breaking down all problems into pieces, to their barest elements, is also known as first-principles thinking and it is considered one of the best ways to reverse-engineer a complicated issue at hand. This approach of thinking was used by Aristole who once said:
“In every systematic inquiry (methodos) where there are first principles, or causes, or elements, knowledge and science result from acquiring knowledge of these; for we think we know something just in case we acquire knowledge of the primary causes, the primary first principles, all the way to the elements.”
— Aristotle
An easy way of establishing first-principles is by asking the question “why” and is oftenly used by children instinctively as they try to understand everything that’s happening in the world. This is also one of the best ways to learn and to understand things by simplifying things.
“If you can’t explain it to a six-year-old, you don’t understand yourself”
— Albert Einstein
I believe first-principles thinking is the basis of the Feynman Technique, a method of learning notably linked to Richard Feynman, a Nobel prize-winning physicist. The Feynman Technique consists of the following four key steps:
Choose a concept you want to learn about
Explain it to a 12 years old
Reflect, Refine, and Simplify
Organize and Review
It is not a coincidence that the most successful people in the world can explain complicated things in a simple manner. First-principles thinking is one of the best mental models to improve thinking and decision making.
“I think most people can learn a lot more than they think they can. They sell themselves short without trying. One bit of advice: it is important to view knowledge as sort of a semantic tree — make sure you understand the fundamental principles, i.e., the trunk and big branches, before you get into the leaves/details or there is nothing for them to hang on to.”
— Elon Musk
1 + 1 = 3
“I believe that 1 + 1 can equal 3. Or 4. Or 6. The fun and gratification are in figuring out how. For me, business is not a battle to be waged—it’s a puzzle to be solved.”
— Sam Zell
Another one of Zell’s role model is William Zeckendorf, one of the greatest real estate developers who was involved in significant buildings on the Manhattan skyline and a large swath of Chicago’s Magnificent Mile. Notably, he developed the United Nations building in New York City and the Place Ville-Marie in Montreal.
After reading Zeckendorf’s autobiography “The Autobiography of the Man who Played a Real-Life Game of Monopoly and Won the Largest Real Estate Empire in History”, Zell was even more in love with the approach of viewing the whole through its individual pieces, but for a different purpose:
“Zeckendorf’s autobiography was packed with colorful stories, but what fascinated me most was his strategy. Zeckendorf viewed assets as a sum of parts, so he could increase the value of the whole. Various parts were more valuable to different buyers, so Zeckendorf could maximize the value of his holding overall, in effect making 1 + 1 = 3. For example, One Park Avenue in Manhattan, which the marketplace had valued at $10 million, was ultimately worth $15 million in Zeckendorf’s hands. He calculated everything separately—the building’s title, the land, the leases, the individual mortgages. I thought this was brilliant. I adopted the approach both inside and, later, outside of the real estate industry.”
— Sam Zell
From Zeckendorf, Sam Zell learned the benefit of scale which became a big influence on how he would assess his future investment opportunities in and outside of real estate throughout his career:
“This series of acquisitions and the assets’ subsequent sale was my first exposure to the benefits of scale. With each additional house we acquired, we expanded the aggregate site’s ability to accommodate a larger, more efficient and economically viable development. By assembling the pieces, we had made the whole more valuable.”
— Sam Zell
“This was my first experience listening to proposals about the great “synergies” of mergers. As an investor and a risk taker, my focus has to be on what is specifically attainable. Buying another company based on the perception of opportunities for cross-selling and other intangible benefits generally represents a much higher level of risk than I believe is justified. Therefore, I concentrate on eliminating redundancies, which measurably reduces the capital required to run the business. This epiphany later became relevant across industries from drugstores, to radio stations, to supermarkets, and others. Redundancies are much more predictable and transparent than theoretical opportunities to add value. My focus is always on the downside. Overly optimistic assumptions lead to the graveyard of corporate acquisitions.”
— Sam Zell
This idea of eliminating redundancies is the basis of roll-up businesses that grow through mergers & acquisitions. Usually, these companies use their excess of cash flows to purchase businesses in the hope of increasing profits through synergies of scale by eliminating operation redundancies. An example of a successful roll-up business is Constellation Software Inc.
Furthermore, this “1+1 = 3” strategy synergy can also be found in the way Sam Zell found great partners. When Zell was investing in emerging markets, it was important for him to partner with great local developers and operators who could watch his interests on the ground every day:
“When you invest in emerging markets, you’re trading the rule of law for growth. If you think you can count on receiving justice in a foreign courtroom, you should think again. So, the first question is always “Who’s your partner?” By that I mean “Who is going to watch your interests on the ground every day?””
— Sam Zell
“So we focus on finding great partners—local developers and operators—and we help them create institutional-quality operating platforms to develop, own, and lease large portfolios of commercial real estate. We look for businesses with the potential for growth so that ultimately we can create value from more than just bricks and mortar. We infuse our portfolio companies with capital and guide them in deploying it, and we help them become institutional grade by teaching them strong fiscal discipline and corporate governance, lending our expertise in sophisticated investing and business strategies, sharing our knowledge of public markets, and introducing them to our network of banking and other relationships. Together we form that 1 + 1 = 3 equation.”
— Sam Zell
Meritocracy
“In an idea meritocracy, decision-making power is based on the quality of one's ideas and not on seniority or position.”
— Ray Dalio
As mentioned previously, Zell always keeps his eyes and mind open. As such, he loved to hear the opinions of his employees.
“I’m chairman of everything and the CEO of nothing. I stick to what I’m good at—vision, direction, strategy. That’s where I add the most value. I spend almost my entire day listening to other people. I ask questions, I probe, I raise possibilities.”
— Sam Zell
As a matter of fact, Zell loved to be challenged by his employees and more than welcomed debates. It was important for him to create a work environment where his employee’s voice can be heard.
“I constantly challenge my people to “take me on.” I want them to challenge me just like I’m challenging them. We should both be able to succinctly defend our positions on any deal. It just makes us all smarter. I’m getting the most out of them, and they’re getting the most out of me. Win-win. Increasingly over the past twenty to thirty years, I’ve had to try to get people to not treat me like the boss. To let their guard down so ideas can flow. Don’t get me wrong. I like being the boss. I accept the responsibility and I’ve done very well with it, but I don’t want to be surrounded by sycophants. The worst thing for me would be an environment where everybody just said, “Okay, Sam, whatever you say” all the time. That would be death in an entrepreneurial environment.”
— Sam Zell
As a risk taker, Zell’s greatest fear was to not have information that could of protected him from making a mistake due to the lack of communication with his staff. As such, he made sure to implement a meritocracy culture in his company to allow all his employees to be part of the decision making process.
“I give my people a lot of freedom to explore and problemsolve while I control the risk through big decisions. This autonomy, coupled with the access to fast decisions, is like crack to my people. They know I trust them. I don’t say it. I show it. When I put millions behind a deal one of my investment people sourced, researched, negotiated, and closed, it creates an electric, exhilarating environment.”
— Sam Zell
“At our core, we are a meritocracy—an environment that Bob and I cultivated in the early days. A meritocracy gives you the freedom to be yourself by eliminating superficial markers, so you are measured only by what you produce. In essence, it is an equalizer that focuses everybody on what’s important so you have the opportunity to reveal your best. Once you’ve worked in a true meritocracy, it’s very hard to settle for anything else.”
— Sam Zell
This is eerily similar to Ray Dalio’s idea meritocracy, a system hat allows the best ideas to win regardless of who or where they come from. According to Dalio, the founder of Bridgewater, the world’s largest hedge fund, this is the best way to produce the best possible decision by enabling the best thinking of all team members.
Beyond the Book
Read “First Principles: The Building Blocks of True Knowledge” by Farnam Street
Read “Richard Feynman on Why Questions” by Farnam Street
Watch “How to have an idea meritocracy in any organization” by Ray Dalio