Zell’s Guide to Investing (Or How I Learned to Love the Downside)

Sam Zell, the billionaire real estate investor, wrote a book, and I’m pretty excited about it.

Perhaps not “The Orioles Win the World Series” excited, but at least on the level of “I just found out John Prine is playing my favorite local bar tonight” excited.

Zell is one of my investing heroes and one of what I call my unwitting mentors.

By reading what he writes in articles and SEC reports, as well as what he says in various interviews and speeches, I have learned a lot from the man who has done so well buying out of favor real estate and companies. (His nickname? The Grave Dancer.)

Usually I can get an advance copy of the book, but this time around I had to wait along with the rest of the mere mortals for the book to be released on May 9th.

I dove right in and was not disappointed.

Sam Zell has a great story, and he tells it well. He is plain spoken, so it is not a complex read at all, but there are many takeaways that can help you improve your results as an investor and maybe even a little as a person.

One of the biggest takeaways from the book was that the principles of investment that Sam Zell used to become a billionaire are striking similar to what James and I are doing with the portfolios here at Choose Yourself Financial.

Zell mentions that the only reason he is here at all is that his father traveled around Europe in the years before World War II and had a much better macro view of the world that his neighbors and wisely chose to flee Europe for the US before Poland was invaded. Their train for the border had left just hours before the invasions began and the tracks were bombed into rubble by dive bombers.

Today Zell applies the same strategy. Although as points out on a much less life or death basis, when evaluating his investments.

The Zell Approach

He considers the significant trends and macro events that might cause his investments to rise or fall in value. He looks for these big long lasting trends that can add to his wealth.

It was this type of thinking that lead him to sell his suburban garden apartments and begin to invest in highly visible apartment building in urban areas with the kind of amenities that would attract millennials. That generation is waiting longer to start families and prefer to be in the midst of the action and are willing to pay top rents to do so.

The book cited many other occasions where Zell’s discovery of long-lasting social, demographic or economic trends to make huge profits but I will let you read the rest of them for yourself.

Zell frequently talks in the book about being price sensitive in his investment activities. He is looking to buy assets at bargain prices and then becomes a seller when he thinks asset prices have reached unstainable levels.

This usually takes a relatively extended period of time of time and leads to high compounded annual returns.

Throughout his career, he had been a buyer when others were selling and a seller when others were buying, and he has made himself a billionaire in the process.

No matter how good an idea or company the price you pay relative to the value of the assets or multiple of cash flow produced by the assets is a key determinant of how much money you make.

Finally, Zell talks about what he thinks is the key to making money over time. It so happens I agree with him 1000%. He writes early in the book that “It’s largely about risk.

If you have got a big downside and a small upside, run the other way. If you got a big upside and a small downside do the deal.”

Controlling the downside just as big, if not bigger part of the investment equation than finding situation with substantial upside potential.

My Favorite Lesson in Investing

I have been in and around the markets for more than 30 years now. I have heard thousands of stories about the next big thing that would make me rich beyond my wildest dreams.

Everyone talks about the upside, but no one ever speaks of the downside.

My first question when I look at a company is what can go wrong. How much can I lose if it does go wrong? I cannot control market risk but have become a fanatic about financial risk and pay a great deal of attention to the risk present in the balance sheet and income statement of the companies in which I invest.

Finding a company that has long-lasting social, demographic and economic tailwinds at a great price and are in healthy financial condition is a lot of work.

Fortunately, Zell tells us how to do it, and it is right in line with something both James and I reinforce constantly.

He reads.

In the book, he says he reads five newspapers a day. He reads business magazines all the time. He consumes information continuously and uses that to find situations that have enormous upside and low downside with the potential for life-changing gains.

I find it interesting that, like me, he reads spy thrillers and mystery novels to relax, but that’s a topic for another day.

Tim Melvin

Written By Tim Melvin

As a 30-year veteran of the financial services and investment industry Tim Melvin served as a broker, advisor, and portfolio manager. He’s combined this nearly three decades of experience with a love of value investing in order to help investors worldwide to multiply profits and build their nest eggs. As an avid value investor, Tim...