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Newsletter - May 20th, 2023

Updated: May 21, 2023

Dear Reader,


Attached is our latest list of stocks generated from basic value screens (low p/e, ev/ebitda, debt/equity, etc.), which don’t meet our investment criteria - and our reasoning.


This may help you avoid a few ‘value traps’ or stocks that aren’t sufficiently attractive compared to the opportunities available today.


For reports of stock ideas that pass our quantitative and qualitative standards, join at the link below:



 

We were watching Sam Zell interviews last week when news flashed that he passed away two days ago. This edition is a compilation of notes from some of his interviews. Some of his points may be repetitive but they're important:

 

Sam Zell


Notes at timestamps below:


25:00 Best Deal


Zell's best deal was in Toledo, Ohio - the "armpit" of the nation. There wasn't an insurance company willing to underwrite a loan there - no competition, so margins were favorable.


Opportunities usually arise where everyone's avoiding a situation.


"What you're looking for in investments is stability, barriers to entry, and a rate of return."



43:30 Market Timing


"Every time you're a seller, you're also a buyer" (even if it's treasuries).


"Stepping out of the arc" is dangerous and the opportunity cost could be significant.

 


21:30 Be Opportunistic

"You can have a bad deal in a hot market and a good deal in a cold market."


"Some of the best deals I've made was during stress."



23:00 Focus on the downside


How bad can it get? If you protect your downside, the rest will take care of itself.



29:00 Everything you do should be understandable


Surprising to hear Zell didn't invest in real estate in the last eight years.


Only do deals where the value and pricing makes sense to you.



32:15 Don't get too statistical


Basic valuation is enough. Courage to act is more important.



36:30 Staying Power


Is critical to give investments the time to work out.



39:00 Farmland Yield


Is barely 1.5%-2.0%, not worthwhile.

 


54:30 Downside analysis


Liquidation value for downside analysis - quantify the risk before you invest.

 


1:03:30 Simplest Execution


Always choose the path of simplest execution - underestimated risk.

 


3:45 Understand where the fulcrum of risk is


Zero in on where the risk of losing money is, and minimize it. Rigorously test the sensitivity of your assumptions there.



18:30 Simplify everything


Distill the investment idea in a few sentences.



20:45 Freedom


Never give it up.



23:00 Never reach your goals


Always stretch. Echoing Buffett, paint a painting that'll never be finished - fruitful attitude to life.

 


14:00 Simplify everything


Respect the risk of execution. Minimize the number of moving parts for an investment to work.



15:30 Control the downside


Control the risk.



23:15 Ideal Negotiation


Is where both parties are indifferent to taking the other side of the deal


Zell gave an extra 0.25% to Merill Lynch bond investors to build goodwill for future financing.


Keep your counterparties happy, build long-term relationships.



28:45 Contrarian riches


Most fortunes were made thinking unconventionally.


And high profit margins are rare.



40:45 "Buy a Ticket"


You can't win if you don't play.

 



14:30 Statistics may not reveal oversupply


Insightful anecdote where Zell saw the oversupply in the commercial real estate market before the pandemic.


Wework was overbooking office space in anticipation of demand years down the line - but Zell saw through it. Oversupply was eaten by Wework rather than the market (end-user demand). Statistics are a lagging indicator.


Practically speaking, assess the situation after oversupply is priced into securities.



29:15 Buying below replacement cost


Zell's strategy was to buy real estate well below replacement cost - locking in his competitive edge.



38:00 Go where the competition is non-existent


Toledo, Ohio example again - when there's nobody to compete with you, margins are attractive.


Go beyond the obvious reasons that others know - second-order evaluation of asset pricing is required.



42:00 Save Taxes


Impact of taxes on realized gains is significant - best to minimize as much as possible.



46:30 Equity Office Deal Breakup Fee


Interesting to hear Zell's thinking on minimizing breakup fees to encourage other bidders when he auctioned his properties (something Buffett would never participate in). And later obtaining higher prices for higher breakup fees.


Incidentally Blackstone's strategy in this deal is interesting - they locked up sales of two-thirds of the portfolio at the time of the deal and came out fine - not the ultimate buyers though (buying at the peak of the real estate market late in 2006).



59:45 Freedom


Nothing more important.

 



16:45 Simpler the better


Quality of the decision is usually directly related to the simplicity of the decision.



32:15 Risk/Reward


On considering a short idea, thesis may be correct but if the risk/reward ratio isn't skewed in your favor, it isn't worthwhile.



57:30 Oil


Zell was an investor in the oil bear market of 2015 - he believes demand for fossil fuels will persist despite climate activism.



1:01:15 Liquidity = Value


Even if you're a billionaire, lack of liquidity can end the game.



1:04:45 Don't get too micro


Don't get lost in the details; and the macro can kill you.



1:05:30 Partners


Best definition of a partner: Somebody who shares the same risks with you.

 



17:00 Competition


Go where the competition is weak.



22:00 Discounts to Replacement Cost


Buy at material discounts to replacement cost; margin of safety is the barrier to entry in investing.


Zell was buying railcars in the 80s selling at 20-30 cents on the $ when loadings were flat. If the demand is permanent, at some point demand and supply will return to equilibrium - and investors can make a lot of money. (Incidentally Icahn also invested in railcars at the time - ACF Industries in 1984.)

 


18:30 Oversupply


Zell making the case for oversupply back in 2018.



28:00 90% LTV


Non-bank credit was booming at the time - offering loans up to 90% of market value (because banks were restricted by regulation). Looser lending standards - another sign of a bubble.



40:00 Micro


Even with bad macros (Japan), it was possible to make good investments based on local economic fundamentals.



46:45 Buying under NAV


REITs trading well below NAV are worth a look.



54:15 Technology


Parking apps have dramatically reducing rental cash flows - interesting.

 


9:45 Necessity of REITs


REITs were the only source of financing in the 90s after the real estate crash in the late 80s - born of necessity rather than a bull market.



13:30 Changing the odds at auction


Zell sent a non-refundable check with no conditions to win the auction.



18:45 The Godfather Offer


Zell entertained the sale of his real estate assets when he received a $48 bid from Blackstone when the NAV was $41 - he eventually sold for $55.



24:45 Think independently


Without reference to what others say, do, or think.



29:45 Optionality


Always prize optionality in life choices.



33:00 HP 12 Calculators


Didn't know DCF calculators increased competition in the real estate industry.



35:00 Transferability of Real Estate Skills


The experience of doing deals was valuable in Zell's other business pursuits.



40:15 Staying Power


Quantify the downside; "staying power is the whole thing".



43:00 Industry Consolidation


Elimination of supply is key in certain industries. Instead of getting misled by "synergies", eliminating redundancies resulted in large profits.



49:30 Knowing the numbers


Be grounded in your investing decisions.



51:45 Dealbreakers


Understand the dealbreakers for both parties in a negotiation, and give a little extra to build goodwill in a long-term relationship.



53:00 Keep it Simple


If you can break down and simplify a situation, you can better understand it, and mitigate risk accordingly.

 


10:00 Liquidity


Gives you great power - especially in a downturn.



14:45 Patience, Discipline, Caution


Essential traits in investing.



17:00 Zeckendorf


Autobiography of William Zeckendorf - apparently developed a significant portion of New York's urban landscape - on the reading list.

 

Until next time, Cheers!

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