Lessons from the ‘Grave Dancer’

  • Escaping the Second World War to great success
  • Time to put on your dancing shoes
  • Plus, now it’s your turn…

Sam Zell is a man who knows how to make money.

If you don’t the name, you probably should. His career in investing is as compelling as they come.

He’s the son of Polish Jews who fled the German occupation and arrived in America with little money and no English.

Zell’s father became a prosperous businessman.

But his son Sam took success to a whole other level.

Today, Sam Zell is a billionaire.

This is someone we can learn from…

I am currently reading Sam Zell’s memoir. It’s called Am I Being Too Subtle?

It’s a short, punchy read. I haven’t finished it yet, but I’m already thinking of it as Profit Watch’s unofficial bible.

Here’s why. At one point in the book, Zell tells the story of someone approaching him and asking him what he does.

He answers: ‘I’m a professional opportunist.

That’s exactly the mantra I think we should bring to the market.

Sam Zell began his investing career in college. He pitched to manage some local student housing, despite having zero experience.

Soon he was borrowing money and buying up properties himself.

By his mid-20s, he was already a self-made millionaire.

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But it was the real estate crisis of 1973-74 that turbocharged his wealth and career.

This is when he earned the nickname that still sticks with him today: The Grave Dancer.

This is based off an article he wrote at the time, pointing to all the opportunities in the market.

Here’s a picture that ran with the piece…

Source: samzell.com

There were so many properties in distress that he was able to buy up prime locations on the cheap.

That’s not all…

He was able to borrow at a fixed rate of 5% when inflation in the US was rampant — near 13%.

That drove up the prices of his real estate while depreciating the real value of the debt he carried.  

He made a killing.

At no point in the book (so far, anyway) does Zell mention the Fed or the general economy or the market when he considered the deals that came his way.

Usually, he solved problems using tenacity and intelligence.

Consider the constant hand-wringing and worry over the economy.

Sam Zell has built multiple billion-dollar business. Many of them were born in the various crises that America has suffered over the last 50 years.

The crises were the opportunity.

Zell’s ability to anticipate change — and back his view with money — mattered more than anything.

But there’s also another insight we can glean from Zell…

Look down before you look up

He hammers this point home many times. Zell always considers the downside of any move before he considers the upside.

You can’t eliminate risk — so you have to decide how much you’re prepared to lose before committing your time and money.

One of Zell’s failures is very revealing on this front.

He took a major stake in a cruise company about 20 years ago.

The reason was that it had a monopoly on travel between the Hawaiian islands due to an obscure US maritime law.

The two ships the company owned were ancient. Zell wanted to refurbish them and build more. The outlook was good relative to the price he paid to acquire the asset. 

Then the 9/11 terrorist attack happened and crippled the travel industry.

It sent his Hawaiian venture to the wall. Zell lost US$100 million.

But Zell still considers this a ‘good’ trade, even in retrospect.

That’s because his downside was low and his upside huge when he made the decision.

A totally random act, which no one could expect, is always a possibility.

But you cannot cower in fear all the time. Otherwise, you will never do anything.

The same mindset saw him achieve many winning deals over 50 years. The success of those deals far outweighed the ones that didn’t work out.

That’s true of many other storied entrepreneurs and investors I’ve read about over the last 12 months, including Richard Branson, Jim Rogers and Rupert Murdoch.

It’s their willingness to embrace risk when the odds are in their favour that made them rich.

Time to move, twinkle toes

Anybody can sit around pointing out all the problems in the world. That’s what most people do.

Why not get on board with the men and women who focus on finding solutions?

You have a similar opportunity right now. The 2018 market was not kind to many small-cap stocks. A lot of good businesses with bright prospects got sold down.

Zell has an interesting phrase he uses: ‘Liquidity equals value.’

The more buyers, the more pressure on prices to rise.

Many buyers disappeared from the small-cap market in 2018.

We could put it down to fear over rising interest rates, a slowing China or the Royal Commission. I’m not sure which. It doesn’t matter, except to say it happened.

That there is the opportunity.

Now’s the time to put on your dancing shoes and go looking for those stocks that are cheap relative to the upside. 

We saw US stocks surge last night, based off expectations that the trade war between the US and China will be resolved.

That’s the kind of optimism that can sweep through the market in the short term.

Now’s the time to position for this outcome. After all, I’m sure Sam Zell would say the opposite result is already built into existing prices.

In other words, upside large, downside minimal.


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Callum Newman,
Editor, Profit Watch


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