Monday, October 22, 2007 0 comments ++[ CLICK TO COMMENT ]++

WSJ Interview with Sam Zell

Sam Zell did an interview with WSJ on the weekend. I'll quote things I found worthwhile.

Mr. Zell says, while insisting that he's told everyone he didn't try to deliberately pick a market top so much as weigh the offer against what his own instincts told him was the right price. "Somebody made an offer that was wide by a significant margin of my own valuation. So I'm looking in the mirror, and any day you don't sell, you buy, and I wasn't willing to buy at the price they were willing to pay, so I sold it."

Interesting way of looking at a selling price: if you won't buy something at a certain price, it may be worth selling.

"An adequate description of me would certainly be a professional opportunist," he smiles, "I've always had my own perceptions of value, and I've always been willing to go forward and risk my own capital on whatever basis I believed. And on many of those occasions, it was really lonely. You turn around and look behind you and there's nobody else."

When he and his partner began buying distressed assets in the late 1980s and early '90s, they had hardly any competition. Many of the buildings were so empty they became known as "see-throughs," and most savvy investors would have sooner jumped off the Golden Gate Bridge than touched some of their early acquisitions. "You know, you can really be a macho guy," he says, "but in the end, you think, well, 'I'm sure I'm right, aren't I?' But I was always pretty sure I was right."

Sam Zell is a prototypical contrarian. It's not easy to be one...

"See, I'm a professional risk taker, but I'm a professional risk taker who understands all the risks he takes. A lot of people don't."

The same economic principles cross all boundaries, he says. "Other than designing rocket engines, or biotech or some high-tech stuff, business is business and risk is risk. And the ability to incur risk and the ability to make things happen, they are all the same."

Risk is something that I have a hard time understanding. I have a feeling that the verdict on my success or failure will be based on whether I understand the risks I take. Unlike some, I have no problem risking capital. But I sometimes have a habit of not understanding the risk I'm taking.

He sets one whirring to life. The song it emits, to the tune of "Raindrops Keep Falling on My Head," begins "Capital is raining on my head / Everything is liquid / we're awash in cash to spend . . ."

That's how he saw things in 2005. What has changed now is not the existence of liquidity -- there's plenty -- but the will to use it. The problem isn't a sudden lack of money, but a lack of confidence from the people who control it. Resurrecting that confidence will be the key, and it's unlikely to happen in the near-term.

Clearly investors are scared of deploying capital right now. All of my posts on the credit problems in the ABS market shows that clearly. It's not that people don't have enough money to invest in ABS securities but that they don't want to. This is one reason I think central banks increasing liquidity by cutting rates won't have much impact (other than some tangential effect).

"We haven't even begun to see the fraud that went on here," he continues, pausing to put on his best Professor Risk face. Imagine you're a broker on a starter home in California and it's a $500,000 loan to a guy who makes maybe $45,000 a year, he says, and someone just changes the numbers and the loan goes through. "Two days later, some investor in Poland owns it. You're out. You got your money . . . What disciplines you?"

So did we get carried away with the notion of homeownership as part of the American dream? "If you need to come up with some kind of a really sophisticated journalistic approach, I think what you could basically conclude is that the country can't afford more than 65% homeownership, and that when we start pushing . . . you create a disaster. You push a bunch of people who can't afford it into the homeownership dream, you have builders overbuilding, you have brokers overselling and it always ends up badly."

Pretty much sums up Sam's view on what happened with housing. I think a lot of politicians, including many liberals on the left (I'm a liberal-libertarian BTW), like to think that increasing home ownership is somehow good for the country. As Zell points out, if you try pushing it, it ends up as a disaster. If people can't afford houses, they can't afford it! It's as simple as that. There is little benefit in trying to change that. (If governments wanted to change things they should increase the incomes of the lower classes by cutting taxes).

Mr. Zell sees some homeowners taking double-digit losses because they're forced to sell, but many won't sell if they don't get their price. And as long as employment holds up, he says, the housing market may be soft for many months to come, but there won't be a national fire sale. He also notes the oversupply is worse in some markets than others. Miami was hit badly, while cities like Seattle and New York have carried on with hardly a dip."

There is a big 'if' in there: if employment holds up. If the economy slows, I wonder if Zell's view of no-firesale will be true. If there are no firesales, I wonder how long it will take to work down the inventory.

Some fun stuff:
To get away from it all, there's always Zell's Angels, his very own motorcycle gang that takes trips around the world together, most recently riding the Dalmatian Coast from Trieste to Albania and back. Mr. Zell has about 15 motorcycles for his purposes, he says, but they're all the same basic kind, he tells me -- sport bikes -- fast and with a lot of torque. He knows exactly what he's dealing with. "I'm about as focused a motorcycle rider as you have ever seen."

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