Billionaire real estate investor Sam Zell made his fortune by anticipating shifts in the market and moving in the opposite direction to what everyone else was doing. Being a contrarian is an important part of value investing, but to Zell, it’s not just about being right when others are wrong - it’s about avoiding competition as much as possible in order to make the easy money. He explained this position in a November 2018 interview at the Prime Quadrant Conference.
It’s hard to stand out in the herd
Zell said that while he is in favor of competition on a large scale, when it comes to the businesses and assets that he invests in, he prefers monopolies (or at least oligopolies). The reason for this is that investing in areas where there are a lot of people trying to do the exact same thing is always going to result in margin compression. Going in the same direction as everybody else makes it difficult to stand out:
“My secret sauce is that I didn’t know how I was going to excel if I went in the same direction as everybody else. If you look at the Forbes 400 and you take out [the] 25-30% of the people that inherited their money, the rest of the people went left when conventional wisdom went right. And that obviously is directly related to the fact that you can’t produce high margins if you and everybody else are doing the same thing...You have to create capital by identifying areas and methodologies where you can achieve exponential growth.”
Zell believes in moving away from areas of high competition toward those where it is limited. This is particularly applicable to capital-intensive areas like real estate, as well as things like shipping and rail cars, or anywhere where there is a limited supply.
“When we became buyers of distressed property, the major thesis was that we were buying properties at material discounts to replacement cost. That really comes down to if I own an office building and I buy it for 50 cents on the dollar, then in order for somebody to build an office building to compete with me, it costs them 100. And the difference between 50 and 100 is my competitive advantage. That’s my edge. That’s my barrier to entry.”
Avoiding competition brings two major benefits. First, investing in a business that has few competitors, or one that has recently consolidated many competitors, is a surer bet than getting involved in an industry with many similarly-sized companies. Second, if you are investing in an area that is out of favor (and, therefore, has less competition among investors), you likely will be able to purchase assets at a discount to their intrinsic value.
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