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Taking Care of Business Oct 2021

I never intended to be CEO. I fell into that role by necessity. I understood the business of medicine on a small scale. Directing a corporation, the size and complexity Evergreen has grown to be, is something I was not prepared for. I still have a lot to learn.

I learned by doing, by making mistakes, and by asking questions. And I have learned by reading. Reading books written by successful leaders is like receiving free tuition others have paid with their own life experiences.

Let me give a few examples:

Patrick Lencioni: The Ideal Team Player.

Message: it’s critical to hire well.

Lencioni emphasizes finding people with these 3 qualities: Humble. Hungry. People Smart. It requires asking the right questions.

In a services industry, it is people, culture, and team execution that really differentiate one firm from another. Therefore, a services business should build a differentiated recruitment, screening, and interview process if they want differentiated and sustained performance.

The people who skip the hard questions are in the majority, but they are not in demand. Hiring well is hard.

Managers tend to look for their own traits in applicants. A good manager will use different team members as specialized interviewers to root out a candidate's talent and character. If there is a mix of qualities you're looking for in a specific role, put together a group of interviewers who embody these qualities collectively.

Look for candidates that ask brilliant questions more than offer right answers. As the world continues to change, those people that are curious, lifelong learners and adaptable will likely help your organization more.

Steve Schwartzman: What It Takes

Message: Don’t let your ego get in the way.

Steve went to Yale. Got a job on Wall Street. Worked at Lehman Brothers. He perceived he had access due to his talent. When he quit, and he could not get appointments with the same people he used to do deals with, he realized much of his success was based upon where he was vs. himself. He was humbled. He founded Blackstone which is one of the world's largest private equity firms. They birthed Blackrock which is the largest fund manager in the world. That fall out also was a result of an ego battle, that Steve admits was his mistake.

Below are a few of the points from that book.

  • The harder the problem is, the more limited the competition, and the greater the reward for whomever can solve it.

  • Success breeds arrogance and complacency. You only learn from your mistakes and when the worst happens.

  • It’s just as hard to achieve big goals as it is small ones. The only difference is that bigger goals have much more significant consequences.

  • You’ve need to sell your vision repeatedly. Most people don’t like change, and you must overwhelm them with your argument, and some charm.

  • To be successful you must put yourself in situations and places you have no right being in. You shake your head and learn from your own stupidity. But through sheer will, you wear the world down.

  • The biggest mistake I've seen people make with their careers is, when they're good, after two or three years - and they happen to be smart - they announce that they're going out to start their own firm.

Sam Zell: Am I being too subtle?

Message: How to be a successful rebel. Trading conformity for authenticity.

Sam is the billionaire chairman of Equity Group Investments which he started. He chairs five public companies including one of the nation’s largest REIT’s. He started from humble beginnings.

Lessons from his book:

  • An entrepreneur is someone who doesn’t just see the problems, but also sees the solutions and the opportunity.

  • In any negotiation, leave a little bit on the table.

  • Money’s just a way of keeping score. I’ve always been more drawn to the experience.

  • Don’t depend on people unless you understand their motivations and you are confident that your interests align.

  • The fatal flaw in U.S. real estate is the volume of development has been related to the availability of funds, not to demand. The industry has a long history of overbuilding when there’s easy money.

  • It’s not that risk is to be avoided. It must be understood. Taking risk is the only way to consistently achieve above average returns- in life as well as in investments.

  • “I didn’t invent the modern REIT industry, but I helped make it dance.”

  • Timing is everything.

A couple of examples to illustrate some of the above:

In March 1988, Zell wrote an article titled “From Cassandra, With Love” Cassandra was a character in Greek legend cursed by Apollo with the ability to make accurate predictions that no one believed. Think my brother John and Covid management.

Zell’s article was pointing out a structural change in real estate. Although oversupply was a factor, the damage was compounded by other emerging realities in the marketplace. Savings and loans provided federally insured loans at long term fixed interest rates. When inflation rose and the Fed doubled rates, S&Ls were no longer competitive for depositors and lost most of their busines to money markets.

Then the tax reform act of 1986 destroyed the primary motivators of real estate investment – capital gains and depreciation. No one believed Zell as to the crash coming. So, he created an opportunity fund. He asked investors to put up cash so he could purchase distressed real estate.

It was a hard sell. Returns were 12% or better in real estate that year. Zell sold his funds based on vacancy rates and metrics. By early 1990’s, most private real estate was leveraged at 80-90% with falling occupancies and rests. Debt service was unsustainable. Total losses of the industry in this period exceeded $80 billion. Commercial property values had fallen 50%.

Zell saw first the problem – and then the opportunity. He earned the title “the grave dancer.”

In 2008, the market crashed again. All his investors wanted to repeat 1990. Zell explained this time was different. With low to non-existent interest rates, there was no cost to lenders to carry assets on their books. The mantra was “extend and pretend” or “a rolling loan carries no loss”. They weren’t forced to sell, so there were no bargains.

What looks the same may not be the same. Timing is everything.

Zell purchased a department store chain in the 1990’s. While deciding whether to purchase the company, Zell told one of his employees to look at every store, the entire inventory, who we would sell it to, what we would get for it, if the deal goes south. The answer: “we would get 80% of our purchase price back.”

It went south. Bankrupt. They lost $50 million – which was exactly 20% of their investment. Zell considers that investment a success. He understood the risk and the calculation was exactly right. You cannot play in the game without risk. Risk taking rests on the ability to see all the variables and then identify the ones that will make or break you.

It’s a privilege to share this time and this experience with you.

Tim Powell MD

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