The Exchanges

Q Which two people have had the most significant influence on your career?

A My father. My father was a great decision maker. He made a decision when he was age 34 to leave Poland. And save his family. Unfortunately, probably thought he was never wrong again. That created a very challenging relationship with his son. And probably the other was a man who's been deceased for some time named Jay Pritzker. Jay was incredibly successful investor. Certainly the Warren Buffett of his time. I was very fortunate to meet him at a very early age and spent a lot of time with him. He was the smartest assessor of risk that I'd ever met. And in many respects, the kind of simplistic view that I take of investing is very much the result of having spent the time I had with Jay.

AI assessment note: “My father... And probably the other was a man who's been deceased for some time named Jay Pritzker.”

Q I'd love to turn a little bit to current opportunities. We've been in a market at least till recently where everything felt expensive, and maybe even start with real estate. Where have you been seeing potential opportunities on the horizon?

A Since the great recession of two eight oh nine, we have been The least acquisitive of real estate. Since we began, we run two public companies for which we're responsible for, and they have added to their portfolios, but they're very big companies, and therefore they're subject to being more aligned with the market than being opportunistic. About six years ago, we took over a company called Commonwealth REIT, and we acquired about, with that process, a company with about seven billion of assets. And over the last five and a half years, we've sold a 142 out of a 146 properties. We have not bought a single one. And what's really amazing is that I sit here today and I say, okay, I just sold over a five year period, a 142 properties. Am I sorry that I sold any of them? And my answer is no. I think that's an indictment of the pricing of the real estate market in this period of time. So I think that if you go back to the end of World War II, real estate is cyclical, and each time it gets cleaned up, each time it results in kind of a mark to market. And it corrects and begins again. In oh eight, oh nine, we didn't deal with a mark to market. We dealt with pretend and extend. So I think that the overall real estate market is probably still inflated. And certainly, when the yields that people are willing to buy stuff for today reminds me of the story about shorting a stock at a dollar. …

AI assessment note: “We have not bought a single one... the overall real estate market is probably still inflated.”

Q If you look back at all the deals you've done over the years, wondering what's the biggest mistake you've made and what you learned from it?

A Well, it may sound overconfident to say that I really don't have A perception that I made a lot of mistakes. I think I made deals that didn't work. I operated under assumptions that didn't occur. Perfection is nice, but you know, if you're a baseball player, you make 25 or thirty million dollars a year if you can be right one out of three times. I need to be right seven out of 10 times, but more important than my need to be right, I need not to be very wrong. And so, again, that goes back to the definition of risk, and in effect, defining the downside. Of all the transactions that I've done over 50 years, obviously the one with most unattractive result was the Tribune Company. The problem I have with it is that the logic under which I did the deal is indisputable. It was a deal where we assumed that the newspaper business was shrinking. We did an underwriting, whereas instead of underwriting revenue going up, we underwrote revenue going down. We assumed the level of suppression. And that number was six percent a year. Well, the first year was 35%. That basically overcomes any logic. So there have been obviously negative results, but not negative results because I believed in an invention that didn't work or, or gee, I wish I could do that over again. If the Tribune scenario were presented to me today, I can't believe that I wouldn't do it again, because my assumptions were real…

AI assessment note: “obviously the one with most unattractive result was the Tribune Company.”

Q I'm curious when you went through that whole period of time with significant leverage, there was clearly a lot of risk, right? Leverage creates its own risk and downturns. How did you think about and evaluate risk?

A Well, I think I start by saying that evaluating risk is very simple. Bernard Baruch, who was a financier in the twenties, and who supposedly sold out of the stock market before it crashed in 1929, had a wonderful phrase, which was, nobody ever went broke taking a profit. And so my definition of risk Has never been anything other than, what's the downside? And can I figure out what the downside is? Because if I can do that, then each step of the way represents a commitment to go forward and a reflection that that downside represents the risk I'm taking. So, I mean, one of my most successful deals was the deal we lost fifty million on. But before we did it, We did a risk analysis, concluded that if it didn't work, we were going to lose fifty million dollars, and that's what we lost. And so, from my perspective, that was a very successful deal, because I had identified the risk, turned out that what I had hoped was going to happen didn't happen, but on the downside, on the fire sale analysis, the risk I had identified was one I could handle. Now, obviously, every decision about what the downside is has to include the other side, which was, can you handle it? If identifying the risk says, I've got one, and the risk I'm taking is three, that's a very, very different view of playing cowboy.

AI assessment note: “my definition of risk Has never been anything other than, what's the downside?”

Q Sam, I'd love to ask you a couple of fun questions before I let you go. So what's your favorite activity outside of work and family?

A Well, obviously it's changed as time goes on. I probably would answer riding motorcycles, which I've been doing around the world for 40 years and continue to do. I made reference to your question about my upbringing and my parents, and I made this focus on how important they viewed freedom. Well, riding motorcycles is the ultimate definition of freedom. When that wind is blowing through your helmet, And you're completely dependent on your own skill set and your own ability to observe. That's really freedom. And I've done some of my best thinking while I'm riding my motorcycle. So that for sure is the single most common thread in terms of fun. I mean, I've been a skier, I've been a card player, I've been lots of other things, but riding my motorcycle is just a blessing.

AI assessment note: “I probably would answer riding motorcycles, which I've been doing around the world”

Q What are some of those other relevant principles that you've learned along the way?

A Well, I think it starts with the word competition. We live in this unique capitalist environment where you're taught from day one in school how important competition is and how competition creates and perpetuates price discovery and how it reduces inflation and how it increases efficiency. All of which seemed very logical to me. With the exception that none of it focused on the producer. It only focused on the consumer. Once I found myself as the producer, whether it be apartments or other things, I all of a sudden looked out and said, wow, competition is awful. Given an opportunity, tell me where I can achieve a monopoly or an oligopoly, but wide open competition is ultimately destructive, because there's always someone who's willing to do it for cheaper than you are. Or do it in a manner that you're just not willing to do. So I think it starts with openly competitive situations. Situations without barriers to entry are not the things that produce outside results. Keep in mind, I never had any capital to begin with. So, from the very beginning, I had to create situations and investments that didn't generate a return as much as generated an opportunity to amass capital, which much later in my life became, how do I invest for a return? But in the beginning, the focus was, how do you amass capital? Obviously, Jack Welch said it all when he said, if you're going to be in an indust…

AI assessment note: “Well, I think it starts with the word competition.”

Q How have you inculcated that type of approach to your team? So a lot of times, you as an individual may have that constitution, but it can be hard to have the culture so that a team can execute, particularly when you've gotten now to a much bigger scale than where you started.

A Well, I think it begins with The 11th Commandment, which is thou shalt not take oneself seriously. So from the very beginning, I've been very focused on creating and maintaining a culture of activity within our operation. And that culture is one of complete access. So the door to my office has been closed less than five times in 30 years. So what that means is that anybody can wander in, and they do. And the message is sent out that it's okay to wander in. It's okay to ask a question. It's okay to show a weakness, which is maybe you don't know anything. When the boss says, I don't know, that creates a lot of confidence among the people. The fact that we meet between one and five days a week as a crew and just talk about what we're doing. On the theory that one, everybody should understand, everybody should be aware of what the risks are, and everybody should be a willing contributor. I think the other piece of the equation is from the very beginning, everybody who had a decision-making role in our operation had a piece of it. And everybody, peace was dependent upon their willingness to contribute some form of capital so that we were aligned and everybody had skin in the game. When you put together the things that I've just outlined, I think as a group, they all come together and say that's how you create a community where everybody is worried about everybody else. The bad guys …

AI assessment note: “the door to my office has been closed less than five times in 30 years.”

Q So you might not have been able to in Commonwealth, but perhaps in your opportunistic pools, where have you then redeployed capital?

A Well, we have historically, for lack of a better word, followed themes. And in the last six or so years, what we've discovered is that there is an interesting phenomena going on. We like to refer to as generational investing. And that means that private companies have been built up over a long period of time. You now into the second generation. That second generation is maybe eight or 10 people. In that second generation, there's one or two that are involved in the business. And the other six or eight wait for a check. And what we've been able to do, and do very successfully, is provide the capital to take out the ones sitting on the sidelines, allowing the two that are involved to roll over into the future of the company. And then we provide both the capital and the discipline and the knowledge of running companies to basically improving these businesses. What we found is that number one, I think in the last seven or eight deals, we were not the high bidder, which meant that we were getting credit for what we are and what we do. That's a very important theme. Because, in effect, the minute you don't get credit, then you're a commodity. Commodity investing doesn't have a long positive track record. So the results have been very successful. We've basically found ourselves providing structure and discipline and hiring and a lot of things. There are a lot of companies that succeed…

AI assessment note: “in the last six or so years... We like to refer to as generational investing.”

Q In what feels like a risky time in markets, what are you most excited about going forward?

A I must get the question all the time of what markets are you investing in? What direction are you going? And I could obviously make up a great answer. What I would tell you is that our history is one of responding to opportunities, and so like this generational investing I was describing, it was an opportunity, and we saw it and took advantage of it. At other times, we recognized the value of net operating loss carry forwards and took advantage of them. We've been very successful in investing in the energy business. At a time when everybody else doesn't want to play. So I think the answer is that as much as I'd like to identify something I'm excited about, I'm excited about opportunities that arise because other people don't look at them the way we do. And other people aren't capable of executing the way we do.

AI assessment note: “I'm excited about opportunities that arise because other people don't look at them”

Q So in addition to that, how have you layered in some of the things you talked about earlier with supply, demand, and balances, limited competition in those types of deals? So is it a combination of the ownership structure and then certain sectors that you've been attracted to?

A Basically, we get involved. We buy our position. We spend a lot of time with the guys that are going to remain to make sure that they understand what our objectives are. We deliver a message that says, if you play with us, here's our track record, and it's pretty good. Historically, where we don't do well revolves around a scenario where the seller takes the money, but doesn't really think about the fact that he sold. And if you therefore need to remind him, that's usually a challenge to the viability of the investment. But we come in and, uh, we look at business very differently. So we bought a business on the West Coast about three or four years ago that had multiple functions and multiple branches. And as a whole, it did great. We then went and said, but up here, you guys are selling for more than it costs you. So, you're in effect losing on the right, maybe you're making up for it on the left, but look what happens when you change margins. Or the role that we've played over the last year and a half, I mean, we've been admonishing all of our companies about inflation, and about the fact that we have to be prepared for it. Now, you don't remember that I'm 80, so I began in the sixties, so I lived through the seventies in inflation. Most of the people we deal with have had no experience with it. And so by, in effect, bringing it to the table, getting everybody focused on their…

AI assessment note: “Basically, we get involved. We buy our position. We spend a lot of time”