I was watching this interview with Sam Zell the other day and I thought it was reminiscent of businessmanlike thinking, a topic I explored in a recent post. While it doesn't take much to judge him a success based on outcome, I found myself thinking that he sounded like he had a good process as well.
Note: I embedded the video right here where this sentence now is. It kept automatically playing when the page loaded and I found it obnoxious. You'll have to click on the link to see the interview I'm talking about.
One thing I find interesting is this "uncertainty by the administration" meme that has taken root. It has even taken root in Zell's mind. Except that when he says that it is causing volatility, the answer to the follow up question is that it isn't affecting him with his investing decisions.
To move off track for just a moment, Howard Marks gives off this vibe as well. In his book, The Most Important Thing, he talks about second level thinking. When you know China is going to be a behemoth in 10 years, one has to think about where that isn't being priced in. There is no money in just buying "China Stock X," and that's assuming they aren't a fraud. Everyone knows that the Chinese economy will be bigger. Once everyone knows that, stocks tend to price that in. The edge in investing in the stock market boils down to knowing/understanding/concluding something that others don't/discount/disagree. This is the same edge that a businessman has, but the manifestation is not identical.
Back to Zell. Zell is asked about where he is investing. He is investing in Mexico and Brazil. Why? They have a deficit in housing supply to the tune of several million units. When the interviewer prefaces a question with the poor performance of the Bovespa, the Brazilian stock exchange, and if that impacts his confidence, he responds that "I'm not investing in the stock market, I'm investing in companies." He isn't concerned about other people's opinions (the market), but what he is actually doing with his money.
His edge is that he brings something to the game - expertise and capital. When asked why he isn't investing in Chinese property, he responds that they have plenty of capital and his expertise is of no use to them ("they don't listen"). It's also noteworthy that Mexico is probably not a place people want to invest in based on the headlines currently coming out of there. His edge is that he knows how to build and operate real estate investments and has the capital to ignore the market. He is aware of a neglected yet obvious trend.
This can be relevant for investors. I'm not moving to Mexico any time soon to start building homes, but the sentiment isn't foreign to investing through public markets. What Zell is doing is the same as sugar water in red cans. I recently looked at Xylem, the water spinoff from ITT. The masters of the universe are really sexing this stock up in my opinion. Water is a theme I see flowing around Wall Street. FT Alphaville had 2 posts on some Wall Street research on water (here and here). Businesses will make money in water someway and somehow since that is what capitalism is about. The who, what, when, where, why of it isn't that difficult - Xylem is at a choke point of pumps, analytics, treatment so it isn't the same as speculating that BYD will command major market share in the electric car market. There are certainly plenty of other "water stocks" that probably have nice growth rates even just based on their historical record. Do I have an edge in this? Not particularly beyond any cheap valuation that arises out of a market panic or volatility.
I'm interested to see the valuation on Xylem that stems from this belief, since Xylem is advertising itself as directly catering to it. The market is volatile, so the price can become disjointed from value. But as a starting assumption, it is better to assume that the market is not unaware of this phenomenon. Being attached to 2 other companies currently, it is hard to tell with Xylem, but I don't think people are neglecting the water theme currently.
One thing Zell mentions that isn't totally relevant to investing like a businessman, but worth noting is that he says there are more SFHs rented than apartments in the US. That's a unique piece of data if you ask me. I certainly wasn't aware of that. Not that I pontificate on macro, but I would think that people think that houses need to be bought and sold for a sign of a recovery in housing. Apparently this isn't the case, since a rented home takes supply off the market and its quite popular.
Has Zell made mistakes? Sure. The Tribune LBO happened at a questionable time in the market considering he was well aware it was frothy - he sold one of his property companies practically at the peak to Blackstone. Nobody is infallible. This isn't a complete profile on Sam Zell, but just pointing out an example of what I think is a demonstration of the way to think about and discuss investing.
Warren Buffett is a big advocate of investing like a businessman. Many months ago, I highlighted a video of a speech by Alice Schroeder that more or less details exactly how he approaches an investment and values it. Recently I stumbled into a blog that is compiling a great collection of talks and presentations on value investing. There is a transcript of the speech in the video on the blog, which takes about 10 minutes to read instead of the 48 minutes for the video. The historical perspective gained from reading some of the other transcripts on that site from investment pitches given several years ago is also nice. Worth browsing if you are into that kind of stuff.
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