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Morgan

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There a certain age bias in this current situation , both on terms of health as well as financial risk. Zell has a lot more to lose than to win at this Point than let’s say a 30 year old private equity guy.

 

First, he has a much higher chance to get killed by this disarrayed, second with this being an unprecedented situation l he really doesn’t know how this plays out economically. So he won’t play until he sees it, plain and simple.

 

Compare this to a 30 year old private equity guy who probably is willing to roll the dice with other people’s money and if it doesn’t work out, he is just going to try again a couple of years later with a different shop.

 

The different starting situation and incentives lead to different decision making bias.

 

Does the 30 year old not have significant career risk in doing that? I think Buffett and Zell have been relatively straight shooters (particularly Zell) about the opportunities they see at any point in time. I don't think they would have any reason to waver now unless they truly saw a wide range of outcomes. Also, Buffett was about 78 when he went through the Great Recession, so taking his comments and assigning some risk-averse age argument doesn't hold water to me.

 

It's kind of interesting Buffett's comments about $137 billion not being that much in the context of worst-case outcomes. That is a way different tone than his "we only need $20 billion to survive even the worst catastrophe" , and suggests to me he thinks coronavirus will be a huge issue for insurers, not dissimilar to what Dupperrault and others have said.

 

Maybe these guys are simply operating in areas (insurance and real estate) where there is close to maximum uncertainty right now about how things play out. During 2008 perhaps Buffett could pick up bargains because he knew his insurance subs were not as exposed to 2008 risks as the current insurance business is to the fallout from the pandemic?

 

I’ve been thinking and talking to people about this a lot. If you look back a few decades ago, both Warren & Charlie groused a lot about what they called “social inflation” in insurance. Things that weren’t covered became covered because it was politically palatable to do so. I suspect they are worried about some pain sharing that the politicians might inflict on insurance carriers.

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There a certain age bias in this current situation , both on terms of health as well as financial risk. Zell has a lot more to lose than to win at this Point than let’s say a 30 year old private equity guy.

 

First, he has a much higher chance to get killed by this disarrayed, second with this being an unprecedented situation l he really doesn’t know how this plays out economically. So he won’t play until he sees it, plain and simple.

 

Compare this to a 30 year old private equity guy who probably is willing to roll the dice with other people’s money and if it doesn’t work out, he is just going to try again a couple of years later with a different shop.

 

The different starting situation and incentives lead to different decision making bias.

 

Does the 30 year old not have significant career risk in doing that? I think Buffett and Zell have been relatively straight shooters (particularly Zell) about the opportunities they see at any point in time. I don't think they would have any reason to waver now unless they truly saw a wide range of outcomes. Also, Buffett was about 78 when he went through the Great Recession, so taking his comments and assigning some risk-averse age argument doesn't hold water to me.

 

It's kind of interesting Buffett's comments about $137 billion not being that much in the context of worst-case outcomes. That is a way different tone than his "we only need $20 billion to survive even the worst catastrophe" , and suggests to me he thinks coronavirus will be a huge issue for insurers, not dissimilar to what Dupperrault and others have said.

 

Maybe these guys are simply operating in areas (insurance and real estate) where there is close to maximum uncertainty right now about how things play out. During 2008 perhaps Buffett could pick up bargains because he knew his insurance subs were not as exposed to 2008 risks as the current insurance business is to the fallout from the pandemic?

 

I’ve been thinking and talking to people about this a lot. If you look back a few decades ago, both Warren & Charlie groused a lot about what they called “social inflation” in insurance. Things that weren’t covered became covered because it was politically palatable to do so. I suspect they are worried about some pain sharing that the politicians might inflict on insurance carriers.

 

The 10-Q had a line that was likely alluding to this possibility:

 

“The potential effects of the pandemic may be further affected by judicial rulings and regulatory and legislative actions pertaining to insurance coverage and claims that we cannot reasonably estimate at this time.”

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Good interview. I like Zell and he's got some insightful things to say. It is true, outside of the net lease market, there's not really any transactions occurring. It might be perplexing or scary at first, but I think the answer is relatively simple. Once a month the rent comes due. These assets trade on their cash flows. Until it is determined that the revenue streams are either a) permanently lower, or b) back to normal, most people, both on the buy side and the sell side, dont really want to take the risk of making a mistake.

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Good talk, and right on the money with the lack of price discovery, a large part due to anchoring bias.

 

So Sam Zell, Buffett, and Icahn are cautious on the sidelines and on the other side you have folks like Bill Ackman. Take your pick...

 

Interesting observing the age differences there. The young feel invincible, the old not so much?

 

Either that, or Ackman has already made his year by hedging the original downdraft and riding the ride up.

 

He probably isn't as worried about additional downside in markets because he's already locked in massive outperformance for the year, earned his fees, and will probably have dramatic alpha for 2020 regardless of if markets are up or down over the next 8 months  . 

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Great interview.  I heard an interesting framework on the TSLX conf call this morning, namely crises have 2 phase liquidity phases & "work out' phases.  For now the liquidity phase is done and peaked in March.  The much longer & far reaching "work out" phase now begins.  This will be where the restructuring folks will do their magic.  Two differences between now & the past lower interest rates & an abundance of rescue capital.  I think folks will get a decent return here but what folks were used to in the past.

 

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There a certain age bias in this current situation , both on terms of health as well as financial risk. Zell has a lot more to lose than to win at this Point than let’s say a 30 year old private equity guy.

 

First, he has a much higher chance to get killed by this disarrayed, second with this being an unprecedented situation l he really doesn’t know how this plays out economically. So he won’t play until he sees it, plain and simple.

 

Compare this to a 30 year old private equity guy who probably is willing to roll the dice with other people’s money and if it doesn’t work out, he is just going to try again a couple of years later with a different shop.

 

The different starting situation and incentives lead to different decision making bias.

 

Does the 30 year old not have significant career risk in doing that? I think Buffett and Zell have been relatively straight shooters (particularly Zell) about the opportunities they see at any point in time. I don't think they would have any reason to waver now unless they truly saw a wide range of outcomes. Also, Buffett was about 78 when he went through the Great Recession, so taking his comments and assigning some risk-averse age argument doesn't hold water to me.

 

It's kind of interesting Buffett's comments about $137 billion not being that much in the context of worst-case outcomes. That is a way different tone than his "we only need $20 billion to survive even the worst catastrophe" , and suggests to me he thinks coronavirus will be a huge issue for insurers, not dissimilar to what Dupperrault and others have said.

 

Maybe these guys are simply operating in areas (insurance and real estate) where there is close to maximum uncertainty right now about how things play out. During 2008 perhaps Buffett could pick up bargains because he knew his insurance subs were not as exposed to 2008 risks as the current insurance business is to the fallout from the pandemic?

 

I’ve been thinking and talking to people about this a lot. If you look back a few decades ago, both Warren & Charlie groused a lot about what they called “social inflation” in insurance. Things that weren’t covered became covered because it was politically palatable to do so. I suspect they are worried about some pain sharing that the politicians might inflict on insurance carriers.

 

I have a friend at Swiss Re who says social inflation is a huge problem for them in the US. He said it almost doesn't exist anywhere else. It's troubling to hear people describe the country as being governed by the rule of law, when in practice you see the law being flouted when it's politically expedient.

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Fascinating.

 

https://www.iamagazine.com/magazine/read/2020/03/02/the-jury-s-out-social-inflation-is-on-the-rise

 

Social inflation, shifts in social attitudes that cause a hike in liability expenses for insurance companies, is ballooning into every insurance market and independent agencies and their clients’ wallets.

 

Social inflation happens when juries and courts increasingly side with plaintiffs in claims against corporations, which in the insurance world leads to rising litigation costs and their impact on insurers’ claim payouts, loss ratios, and, ultimately, how much policyholders pay for coverage, according to the Insurance Information Institute.

 

...

 

https://tim.blog/2020/01/23/sam-zell/

Sam Zell — Strategies for High-Stakes Investing, Dealmaking, and Grave Dancing

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Good talk, and right on the money with the lack of price discovery, a large part due to anchoring bias.

 

So Sam Zell, Buffett, and Icahn are cautious on the sidelines and on the other side you have folks like Bill Ackman. Take your pick...

 

Interesting observing the age differences there. The young feel invincible, the old not so much?

 

Either that, or Ackman has already made his year by hedging the original downdraft and riding the ride up.

 

He probably isn't as worried about additional downside in markets because he's already locked in massive outperformance for the year, earned his fees, and will probably have dramatic alpha for 2020 regardless of if markets are up or down over the next 8 months  .

 

Another difference is that Ackman is more of a finance trader who looks at each part in isolation. Buffett, Zell, and possibly Larry Fink are all looking at the intricacies of the economy, as a collection of complex systems, from a bird's eye view. Think of it as the difference between object oriented vs system design coding.

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