Following the first part ( you can find it here) here's the last 4 principles!
- Benefit from observing the law of supply and demand in action
The investor argues that this, one of the main maxims that govern the market, functions as one of the best thermometers for investment analysis. During his career, Zell has always sought to take advantage of situations in which prices were discounted due to lack of interest (demand) from other market participants.
The mega-investor states that situations tend to turn in their favor when, due to lack of investments - due to the low attractiveness perceived by the market in certain businesses -, a scarcity of supply begins to appear.
The result of this scenario is beneficial for those who know how to accumulate neglected assets in perennial businesses during periods of low. When the trend is reversed, these businesses, which were previously neglected, can present good returns to investors.
- Protect yourself from losses before thinking about upside
Zell likes to prioritize structures with many fixed assets, aiming at a limit to his losses, which are, at most, in the value of the possible sale of the assets of the assets in which he invests. The idea behind this method is very similar to the safety margin concept. Thus, by purchasing neglected assets (and, consequently, below their liquidation value), Equity Group is less exposed to significant or total losses.
The reason for this is that, even in the worst cases, the amount to be recovered is the same or very close to what was allocated, configuring a positive asymmetry for returns.
“People love to focus on the upside. That's where the fun is. What amazes me is how superficially they consider the downside ”,
commented Zell on what he considers to be a behavior problem of people in general.
- Look for opportunities in emerging markets
Zell founded the Equity International branch in his company in order to reproduce his investment philosophy, as well as to mark his entry into emerging countries. In this way, he was able to find more than he ever sought: opportunities overlooked by the majority. The following sentence helps to explain his mentality:
“I like markets that are thirsty for investors. This creates an environment where salespeople and partners are willing to do anything and bow to you ”.
The lack of competition with other investors, from which he benefited, is due to the usual uncertainties in these countries, which also have greater growth potential. This ability of the emerging countries usually stems from population booms and the rise of the middle classes.
Prioritize your areas of expertise
Finally, it is worth noting that Zell was only able to apply all the principles described above because he knew the nature of his business a lot.This care represents the idea of the competence circle, which has Warren Buffett as one of its main defenders.
Understanding favorable distortions in real state prices is only possible by looking at how things work, mitigating mistakes in times of euphoria with excess available capital and saturation of competition.
As we have already mentioned, the billionaire has always remained loyal to the wealthy businesses in order to obtain the liquidation value as a loss limiter.
This fact became visible when, even when expanding his scope to other sectors, Sam Zell continued to look for opportunities in which most of his decision-making pillars could continue to be respected.
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