market folly

Next up in our notes from Invest For Kids Chicago is Sam Zell of Equity Group Investments.  He gave a sobering talk and recommended putting some money in 'black swan scenarios.'

•    Zell was the most active real estate investor in US in 1974 through 1976 
•    Zell is just glad he “didn’t have to mark to market” 
•    Wrote an article in which he described his activities as a "grave dancer" (GrizzlyRock Note: Thus earning him one of the better moniker’s in the business!) 

•    How does Zell get the confidence or optimism to go forward in face of uncertainty?  
o    What he found was that he had the confidence because it was embedded in the belief that he was buying things inexpensively 

•    Same sort of situation in 1990 and 1991.  Zell was buying office buildings at less than replacement costs with no value being ascribed to the land

•    What does the world look like circa 2012? 
o    Europe with disintegrating currency and cross winds between parties, 
o    Demographic death spiral, attempt to create austerity 
o    Europe going into recession and maybe more than a recession 
o    Emerging markets growth slowing (China, India, etc) 

•    "Why are stocks so high?  Why are re prices sky high?" 
 •    Would seem to Zell that things would be cheaper that they are given the environment 
•    Middle market debt inefficiently priced and thus interesting 
•    There are "sand dunes of uncertainty" in the US. 
•    Solving uncertainty is better than flooding the world with dollars" 


Zell's Idea: Black Swan Scenarios

•    Zell's idea was to invest some capital in true black swan scenarios 
•    Long run certainty is lacking and a fundamental problem in the US.

This is interesting when you consider that Tiger Management's Julian Robertson (who has seeded tons of hedge funds) was recently interviewed where he said many hedge funds are overly hedged and poised for doomsday scenarios.  Robertson also cited this as a reason as to why hedge funds are underperforming.  Zell obviously agrees with those managers as he advocates some tail risk hedges.


For the rest of the hedge fund presentations from the event, head to notes from Invest For Kids Chicago.