When Sam Zell returned to Chicago, he was rejected by 43 law firms. When he finally landed a job at a small law firm, he lasted four days. Reviewing contract details all day was painful. When he quit to start doing deals again, the firm made him an offer: if he would stay, they’d do his legal work for him and give him a 50% commission on any legal business he brought in.

According to his autobiography, Sam did so well bringing in new business that he made three times as much money as the junior partners. The firm cut his commission to 25%. What he brought to the table wasn’t being valued, so he quit, which was risky given that his wife was pregnant. Sam was 25 and didn’t want to be held back by anyone else’s rules. He wanted to control his own destiny.

He started his own investment firm focused on investing in small, high-growth cities with limited competing capital. Colleges were growing, so he focused on buying apartments in cities with universities. In 1966, he closed his first major deal, a $1 million apartment building, with his father as an investor. Sam predicted it would yield 19% annually, while his father thought it would yield 8%. It ended up generating 20% annually. Sam expanded to Tampa, Orlando, Jacksonville, and Reno.

He tried to develop properties from scratch, but mistakes with Lake Tahoe and Lexington, Kentucky, projects burned Sam. He learned that development was complex and risky. Things outside of your control can change and doom a project between the idea and completion stages. Sam couldn’t stomach that level of risk.

In 1969, Jay Pritzker, part of the family that founded Hyatt Hotel Corporation, tried to hire Sam to scout deals for him. Sam declined, but Jay became a mentor and co-investor with him. Sam’s relationship with Jay elevated his thinking as an investor. Sam learned to understand risk, that most deals depend on one or two things, and that you can organize your thinking to cut to the heart of something complex by breaking it into pieces and creating an outline.

Around 1970, Bob Lurie rejoined Sam in Chicago at the firm, now called Equity Group Investments. Bob complemented Sam and they worked well as partners. Bob stayed in the office, viewed things pessimistically, and focused on details. Sam was Mr. Outside, an optimistic salesman who hated details. They had a team of 10 in the 1970s and encouraged everyone to wear what they wanted, believing that if you dress funny and are great at what you do, you’re eccentric. They wanted to attract eccentric who would do a phenomenal job, not mediocre people who could dress the role. Early on, Bob and Sam reinvested everything in deals and their business, so they were cash poor and ran the company on a shoestring budget.

In the 1970s, Sam and Bob met a brilliant dealmaker named Arthur Cohen, and they learned a valuable lesson from Cohen’s struggles. Cohen acquired an offshore mutual fund that offered daily redemptions to investors, but it held real estate, which couldn’t be sold quickly. When the market turned sour, the combination of long-term assets and daily investor redemptions put pressure on Cohen to raise cash quickly. Sam and Bob took advantage of Cohen’s predicament and bought several of his properties at attractive prices because they could decide and close quickly.

Things were going well for Sam until 1976. Then, partners at a law firm he used to craft tax-advantageous deals were indicted. One partner, Sam’s brother-in-law, was convicted. Sam was indicted, too, but the case was dropped. The stain of an indictment on his record would follow him for years. Sam learned how important reputation is when people began to question his.

Sam was in control of his own destiny, but being in control didn’t mean things were always smooth. Sam learned painful lessons, most notably how to understand and minimize deal and reputational risk. A focus on risk would play a critical role throughout his career, but especially in the next phase of his journey, a period when Sam was known as the Grave Dancer.

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I finished reading Sumner Redstone’s autobiography, A Passion to Win. The book gave me insight into Redstone as a person. It describes how Redstone took National Amusements, Inc. (NAI) from a family-owned, drive-in theatre business to a publicly traded media empire worth tens of billions of dollars. At the time of the book’s publication in 2001, Redstone’s empire included cable channels, movie theatres, radio stations, broadcast stations, and much more.

Redstone recognized that he needed to be in the content business. Drive-in theatre growth was slowing because of cable, and he was tired of fighting studios. If he couldn’t beat them, he would own them—partially at least. He used NAI’s cash flow to buy substantial ownership in publicly traded movie studios such as Disney and MGM. Redstone scored profits of tens of millions of dollars each on several investments. He profited by $26 million—a roughly 100% return—when Coca-Cola bought Columbia Pictures in 1982. Redstone’s ownership in studios was profitable, educated him on the business, and deepened his industry relationships.

When the leveraged-buyout craze began in the 1980s, Redstone found himself battling with raiders and others who were trying to buy public companies he owned at valuations he thought were too low. In 1986, at age 63, he found himself in a battle over Viacom International, a cable and television programming business that owned MTV, Lifetime, and other assets. After digging into the company’s potential, he decided to buy it outright. He learned to raise debt and fought ferociously to secure the deal (crazy story in the book!). In 1987 he closed the deal. After spending $3.4 billion, he was finally in the content business.

The deal proved lucrative. MTV ended up being a cultural force with a young audience. The channel was the cornerstone of Viacom, “providing more than 50 percent of Viacom’s cashflow” annually in the 1990s. The Cosby Show was another amazing asset. In 1989, its syndication sales were $4 million for each of its 125 episodes. The syndication of that show brought in $500 million to Viacom that year, a record at the time.

Redstone took things further in 1994. He acquired Paramount Pictures for over $10 billion after a brutal battle against Barry Diller and John Malone (another crazy story!) while simultaneously acquiring Blockbuster Video. At roughly age 71, he was in the business of creating movies and producing broadcast television shows (e.g., MacGyver). He owned a library of almost 800 classic films, including The Godfather and the Indiana Jones movies. He also owned the leading video rental company, which would quickly become a thorn in his side.

In 1999, at age 76, Redstone acquired CBS Broadcasting Inc. for $32 billion. CBS was an advertising powerhouse offering radio, cable, and broadcast channels and outdoor advertising (billboards). Surprisingly, this mega deal didn’t involve any battles.

He was number one in radio, cable programming, and outdoor advertising and “would own the number-one audience deliverer both nationally and locally in television.”

Sumner was “the king of content as well as king of distribution.” He had finally won.

Read my first and second parts of this series on Sumner Redstone here and here.

Note: If you’re interested, the book provides granular specifics on negotiations and financials for each deal mentioned above.

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I’ve finished rereading Ed Thorp’s autobiography, A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market.

My last two posts covered Thorp’s rise from living in a house with fourteen people to academia to founding the hedge fund Princeton Newport Partners (PNP). PNP turbocharged his life’s trajectory, but then it encountered problems it would never recover from.

Jay Regan, Thorp’s partner, ran the Princeton, New Jersey, office, while Thorp ran the Newport Beach, California, office. In late 1987, Rudy Giuliani, US Attorney for the Southern District of New York, was after Michael Milken and Robert Freedman. Regan was friends with both of them and did business with them through PNP’s Princeton office. The office was raided by federal authorities, and Regan and four other leaders in that office were charged with various crimes. They were convicted, but years later their convictions were reversed on appeal; all charges were eventually dropped. Authorities never questioned anyone at the Newport Beach office, and Thorp and his office weren’t aware of what allegedly was happening in Princeton. They learned the details from PNP’s lawyers and news reports. The ordeal resulted in PNP winding down.

After leaving PNP, Thorp reflected on his next steps. He had more money than he could spend and decided to optimize his time for travel, time with his wife and kids, and exploring interesting problems.

Thorp went through a “period of adjustment,” he said. He consulted for an institutional investor, which led to his uncovering Bernie Madoff’s Ponzi scheme in 1991. He restarted his hedge fund operations with only four team members and focused narrowly on hedging Japanese warrants and investing in other hedge funds. In 1990, Ken Griffin was trading options and convertible bonds from his Harvard dorm room. Thorp recognized Griffin’s potential, shared PNP’s secrets with him, and became the first investor (i.e., limited partner) in Griffin’s new Citadel Investment Group. Thorp also came close to seeding David Shaw, founder of DE Shaw, the hedge fund that Jeff Bezos quit to start Amazon.com.  

In 1992, Thorp restarted his statistical arbitrage operations, choosing to manage a single large account for a large institution. In 1994, he launched Ridgeline Partners to manage his and others’ money. Between the two, he managed over $450 million (PNP’s peak had been $272 million). Thorp’s staff at PNP had been roughly eighty people across both offices. To run Ridgeline and the managed account, he had six people. He’d figured out how to run his new hedge fund in a way that suited the life he wanted to live.

In 2002, Thorp decided to wind down Ridgeline. More hedge funds were using statistical arbitrage strategies, which reduced the number of investable opportunities and thus his firm’s returns. More importantly, he wanted to have more time to enjoy his children and grandchildren and his wife. When she died of cancer in 2011, Thorp was thankful he’d prioritized time with her over making more money.

PNP’s demise was “traumatic” and likely destroyed future wealth in the billions for Thorp. Thorp wisely used that event to transition to the third phase of his life—one centered on spending time with people he cared about, not wealth accumulation. He continued to invest and solve interesting problems in a way that best served his new way of living. Thorp had created his ideal life.

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I’ve reread two-thirds of Ed Thorp’s autobiography, A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market.

After profiting from playing blackjack and the royalties from his book detailing his card-counting system, Thorp lost money investing in the stock market. He decided to learn his way out of the problem and spent the summers of 1964 and 1965 reading books on economics, finance, and the markets—all while still losing money.

Thorp’s two summers of learning established a foundational understanding of markets, and he absorbed practical lessons about anchoring and other pitfalls. He eventually discovered a pamphlet describing common stock warrants. A warrant is a derivative security. It gives the owner the right to purchase a company’s stock during a specific time window at a specified price. It’s basically a call option issued by the company. Thorp realized that math could be used to value warrants and to offset any risk by hedging. Thorp had found his way to beat the stock market.

In the fall of 1965, Thorp joined the University of California Irvine’s Math Department, where he learned that economist Sheen T. Kassouf had written his PhD thesis on warrant valuation and hedging. Together, Kassouf and Thorp refined their methods, invested their own capital, and published what they learned in Beat the Market: A Scientific Stock Market System in 1966.

Additionally, Thorp devised a formula to identify the precise worth of a warrant, option, or convertible bond. This formula increased his returns, confidence, and investable opportunities. He began managing accounts for friends and coworkers, one of whom introduced him to a thirty-eight-year-old Warren Buffett. Buffett ran a $100 million hedge fund, Buffett Partnership, Ltd., and invested in warrants, too. Thorp decided to mirror Buffett’s partnership structure to simplify managing his $400,000 in assets in a single account.

Jay Regan read Beat the Market and cold-called Thorp. The two agreed to start a hedge fund based on Thorp’s methods. Thorp would manage the research team in Newport Beach, California, while Regan managed traders and back-office administration in Princeton, New Jersey.

Princeton Newport Partners (PNP) launched in November 1969 with $1.4 million in assets. Thorp split his time between PNP and his professorship. A decade later, PNP had $28.6 million in assets and achieved an average annual return of 14% after fees, far superior to the S&P 500’s average annual return of 4.6%. In the 1980s, PNP expanded to statistical arbitrage, a “fund of hedge funds,” and other strategies. At its peak in 1987, the firm managed $272 million. From 1979 to 1987, PNP generated average annual returns of 18.2% after fees; the S&P 500, 11.5%. PNP had no losing years or losing quarters.

Thorp was 55 years old and managing roughly 40 people at PNP full-time. He was making millions annually. His life had reached heights he’d never imagined because of his curiosity about the markets, love for math, and willingness to share what he learned with others (before PNP, at least).

The good times wouldn’t last forever.

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Jim Simons’s biography mentioned another notable investor, Ed Thorp. I’d read Thorp’s biography, A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market, but I started reading it again.

This quote sums up Thorp’s life:

“In the abstract, life is a mixture of chance and choice. Chance can be thought of as the cards you are dealt in life. Choice is how you play them. I chose to investigate blackjack. As a result, chance offered me a new set of unexpected opportunities.”

Thorp was a college professor, started two quantitative hedge funds, and created a blackjack revolution. He’s ninety-one now and still doing chin-ups and push-ups.

Where he started, the distance he traveled, and his choices along the way are all notable.

He was born during the Depression to struggling parents. Ten relatives lived in his home, and he attended one of the worst-ranked high schools in his city. Seeing how the Depression and World War I had shaped his father’s future, he vowed to do better.

Thorp shrewdly recognized that he could use math and science to change his life if he ranked first in the state’s chemistry exam. He finished fourth but took the physics exam the next year and ranked first. He received a full scholarship to UC, Berkeley (and transferred to UCLA for financial and social reasons). His decision to focus on acing state exams did indeed change his life’s trajectory.

While working toward his master’s in physics and PhD in mathematics at UCLA, he wondered if math could improve the odds of winning at blackjack and roulette. While on a teaching assignment at MIT and with the help of Claude Shanon, the “father of information theory,” he proved that they could, in both games. He shared his blackjack findings in an academic paper and a bestselling book, sending armies of blackjack players to Las Vegas. His curiosity about gambling led to unexpected highs and lows. He was introduced to the underworld of Las Vegas and was nearly killed. But book royalties and gambling winnings gave him his first financial cushion.

Thorp reflected on the type of life he wanted to live. He didn’t want to live in casinos and deal with shady people. He wanted to follow his curiosity, solve math problems, and work with smart people. He became a professor at New Mexico State University and began investing his savings—but his investments lost money. He wondered if math could improve his odds as an investor. He began looking for a link between math and the market. His curiosity—about the stock market this time—would change the trajectory of his life . . . again.

Thorp was dealt a tough hand, but he was able to change his life through good decision-making. His curiosity and love for math led to breakthrough discoveries in gambling and to working with the brilliant Claude Shanon. His decision to share that knowledge led to more opportunities and improved his finances. By age 29, his life had drastically improved. His next decision would propel his life to unimaginable heights.

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I’m finishing up reading The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman. The book gives readers insights into Jim Simons’s life and how he built Renaissance Technologies into a $130 billion investment firm.

As I shared yesterday, Simons racked up accomplishments early in his career. He was an Ivy League professor and started a manufacturing company in Colombia, among other things. When he started RenTech in 1978, Simons was forty. His success at RenTech was anything but up and to the right.

Simons knew that to succeed, he had to build an environment of original thinking and exploration and also one of collaboration and great ideas that could serve as a foundation for other people’s future ideas.

To do this, he recruited mathematicians, let them develop mathematical models, and gave them capital to trade using their models. Some worked for RenTech, and others Simons seeded as independent firms. He encouraged everyone associated with RenTech to collaborate and share learnings.

Simons closely monitored the models’ progress and returns. Some took several years to reach production and longer to become profitable. Simons merged the most promising models into a single model at his flagship Medallion fund. And once a model was incorporated into the fund’s model, it was part of RenTech’s core investment approach and something others could continually improve upon.

Navigating this journey was far from easy for Simons. He went through a divorce, two of his sons died in separate freak accidents, and he struggled with self-doubt. Professionally, he endured crushing losses at times. Some key employees and fund managers whom he’d seeded jumped ship. Simons pushed through.

In 1990, twelve years after launching, RenTech was finally on solid footing. A reliable statistical model that could generate above-average returns was in place. RenTech had only $30 million in assets but generated a pre-fee profit of $23 million that year (the year before, it was $0). Three years later, the firm had $122 million in assets and generated $66 million in pre-fee profits. By 1998, the firm had $1.1 billion in assets and generated $628 million in pre-fee profits.

Simons’s early career was characterized by rapid success and many accolades. Then he became a founder. Twelve years of pain followed before he saw consistent and accelerating results. Every founder’s journey is different, but Simons’s reminds us that sometimes things take longer than we planned: persistence is key. You have to stay in the game long enough to win!

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Jim Simons was the founder of Renaissance Technologies, a $130 billion hedge fund. It’s a private partnership that usually invests in public markets. When I read an article about Simons passing earlier this month, I decided to read the biography I’d purchased months ago.

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman details Simons’s life and journey to build RenTech. Simons generated incredible returns for his investors and created a personal fortune worth over $30 billion.

Simons was a gifted mathematician. He taught at MIT and Harvard, worked at the Institute for Defense Analyses (IDA), and cracked coded Soviet Union messages. He chaired and built the math department at Stony Brook University from scratch. He received the American Mathematical Society’s Oswald Veblen Prize in Geometry. By age 40, he was accomplished by any standards.

What motivated him to become a founder? Why did he build a hugely successful investing firm from nothing? I learned that his motivations were like those of many founders.

Outsider

In an interview for the book, Simons shared, “I’ve always felt like something of an outsider, no matter what I was doing.” “I was immersed in the mathematics,” he said, “but I never felt quite like a member of the mathematics community. I always had a foot [outside that world].”

Simons didn’t enjoy the community at Harvard. He had interests that other academics didn’t have. He’d traded soybean futures and loved the thrill of being in the markets. After teaching at MIT, he started a company in Colombia with a college buddy manufacturing vinyl flooring and PVC piping.

Simons needed a place that embraced everything he enjoyed: entrepreneurship, markets, and math. He didn’t feel comfortable in a standard box.

Control

As an academic, Jim didn’t have much money. He borrowed to invest in the Colombian manufacturing company. To pay his debts, he secretly moonlighted, teaching classes at Cambridge Junior College.

He took the job at IDA partly because it doubled his salary. Even at IDA, Simons searched for ways to make more money to pay debts. A failing attempt to launch iStar, an electronic stock trading and research firm, was one effort.

Jim realized he wasn’t in control of his destiny when IDA fired him for opposing the Vietnam War in a Newsweek article. With three children, he was rocked by the abrupt firing. He uprooted his family to Long Island, New York, and took a job at Stony Brook University.

These and other experiences reinforced his need to control his destiny. He realized that money equated to control and power. “He didn’t want people to have power over him.”

Founders are a different species. They don’t fit in standard societal boxes. To be the best version of themselves, they need environments where they feel in control. These worlds don’t exist, so they need to create them. Founders are world builders. So, in 1978, Simons created his own world, RenTech.

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After reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, I wanted to learn more about the CEOs profiled in the book. I was especially interested in Henry Singleton, given that Warren Buffett likely borrowed from Singleton’s playbook when building Berkshire Hathaway.

Singleton didn’t do many interviews, and no one has written a biography about him. I managed to dig up Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It. It’s hard to find, but I got lucky and started reading it.

Singleton went on an acquisition spree during Teledyne’s early years in the 1960s. Two things likely led to Singleton embracing this strategy and making it so effective:

• The stock market valued Teledyne richly in the 1960s, and Singleton shrewdly took advantage. He used Teledyne’s stock as currency. Teledyne traded at a double-digit P/E multiple ranging between thirty to seventy times earnings (i.e., high valuation) as a public company, while smaller, private companies were valued at single-digit P/E multiples of roughly nine times earnings (i.e., lower valuations). Singleton recognized this arbitrage and paid for his acquisitions using overvalued Teledyne stock.
• World War II took place mostly in the 1940s. New technologies were created, and many small companies were founded to help the war effort. After the war, veterans benefited from the G.I. Bill, receiving tuition-free college educations, from which they learned new technologies and methods. This combination of newly educated and tech-savvy veterans and a wave of new technology led to a boom in entrepreneurship in the 1940s and 1950s. By the 1960s, many of these small companies had matured, and the founders were ready to sell or needed growth capital to reach the next level.

Singleton’s genius was in recognizing that he was positioned to benefit from twin tailwinds. Two forces were occurring simultaneously, and he crafted a strategy to take full advantage of both. There was a large supply of entrepreneurs interested in being acquired, and he could fund acquisitions using richly valued Teledyne stock instead of cash. His strategy led to over one hundred companies being acquired in a decade and Teledyne growing from $4.5 million in revenue and $58,000 in profit to $1.3 billion in revenue and $60 millions in profit annually by the end of the acquisition spree.

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As I’ve been reading Cable Cowboy: John Malone and the Rise of the Modern Cable-TV Business, I’ve gotten a clearer picture of John Malone. Malone is brilliant and shrewd. I’d consider him more of a financial engineer than anything else. He excelled at deal making, strategy, and capital allocation—but not at building a cable service customers loved or a company that was sustainable long-term.

Between 1973 and 1989, he completed 482 deals, or one every two weeks or so. From the company’s low in 1974, not long after Malone joined, through mid 1989, the stock rose 55,000 percent, a spectacular return.

Malone’s constant deal making created remarkable shareholder value. But it came at a cost. Customers hated TCI. Malone’s goal was to charge as much as possible for his service but spend as little providing it as he could get away with. This strategy maximized cash flow but resulted in notoriously poor customer service, massive rate hikes, unreliable service technicians, and inconsistent cable service. TCI’s poor reputation with customers and its business practices (including others not mentioned here) led to Malone being forced to appear before Congress to defend himself and TCI’s business practices. He and various state and federal politicians became enemies. TCI’s shareholders were happy, but Malone and the company were under constant attack.

Malone was in a service-oriented business selling to consumers, but he didn’t approach it that way. He focused on engineering financial outcomes, not making customers happy. He got the financial returns he wanted, but he and TCI were vilified by customers, politicians, and competitors. It all took a toll on Malone over the years. As I read this part of the book, I couldn’t help but wonder if all the hate he encountered was worth it. Couldn’t he have gotten a similar outcome if he built something people loved, not hated?

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Last week I learned about John Malone while reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. This inspired me to buy and begin reading Cable Cowboy: John Malone and the Rise of the Modern Cable-TV Business.

Tele-Communications Inc. (TCI) was a cable company founded by rancher and cottonseed salesman Bob Magness. TCI laid wires to allow cable to reach homes and charged monthly fees for access to its infrastructure and programming.

Magness used debt to expand TCI and got in over his head. In 1972, he recruited Malone to get the company’s finances in order and take it to the next level.

Malone focused on increasing the long-term value of TCI, not short-term profits. He ignored reported profits and concentrated on the company’s cash flows, not net income. He reinvested cash flow in ways that would generate a high return and increase TCI’s market capitalization (i.e., valuation). Here are two key things I noticed Malone did:

• Depreciation – Cable systems were depreciable assets. Once a system was acquired, TCI depreciated this cost over time, which minimized (and often eliminated) TCI’s tax bill. The lower the tax bill, the more cash TCI had to buy more cable systems. The more cable systems TCI purchased, the more cash flow Malone had to reinvest and the more depreciation lowered TCI’s tax bill. The bigger the system became, the more subscribers Malone had to use as leverage in negotiations.  
• Programming – Cable system operators thought programming was a commodity they had to pay for. Malone realized programming companies were valuable because they had two revenue streams: advertising and payments from cable systems (like TCI) based on subscribers. New channels increased fees to cable systems as popularity increased. Malone realized that owning part of new programming (i.e., new cable channels) would allow TCI to profit twice by owning “both the pipe and the water flowing through it.” He could offer new channels broad distribution early and negotiate lower programming rates for TCI, a win-win. Malone started seeding new cable networks. He provided capital and access to subscribers in his system in exchange for 20% of new programming channels.

Malone ended up building a powerful flywheel that increased TCI’s long-term value. The more cable systems he bought, the more cash flow and subscribers he had. The more subscribers and cash he had, the more leverage he had with new cable channels. The more these new channels succeeded, the more revenue they had and the more valuable they became. The more valuable new programmers became, the more valuable TCI became.

Using this approach, Malone ended up owning stakes in BET, the Discovery Channel, the Family Channel, and others.

I haven’t finished the book yet, but I can already see why Malone is considered one of the best capital allocators.

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