A Real Estate Career: Lessons Learned (2010)

Almost exactly when The Year of Reflection had ended, I received a call from an old contact, Tim.

He wanted to know what I was up to these days, and whether I might be interested in helping him out.  Over the phone, I couldn’t really process what he was saying.  He spoke of taxes and property values excitedly.  I know how that sounds.  But yes, he was excited.

From what I could make out, it was evident that this was an opportunity that had risen because property values had crashed.

One thing did stand out, though, and that was the word “ridiculous”.  Tim was using the word “ridiculous” quite liberally to describe the situation, the money, and the job itself.

If there was anything I had learned about myself in my career so far, it was that I was a ridiculousness hunter.  Intrigued, I accepted his invitation to come in and check out their operation.

Indeed, when I arrived at their “offices” in Manhattan Beach, I found the situation a little ridiculous.  The office was a two bedroom apartment off Manhattan Beach Boulevard with no natural lighting, and seven people were working in it.  Files were scattered everywhere, like debris from a bomb explosion.  I met Jason, who worked with Tim in the master bedroom.  Gary, the owner, worked in the second bedroom.  Everyone else worked in the living room.  Files were stored everywhere, including in the kitchen cabinets and in the oven, which no one used.

The operation was one that appealed property taxes.  This meant going down to the assessors’ office of the California counties and argu-, demonstrating that our clients’ properties were not worth the inflated prices they had purchased them for.

Jason, Tim, and Gary explained this to me as I surveyed the wreckage of an office, and asked me when I could start.

That weekend, I moved to Manhattan Beach and came into the office the following Monday.

Bureaucracy causes pain, and pain causes opportunities.  This whole operation was there, because dealing with the county assessors’ offices was a bureaucratic and logistical nightmare.  If my experience at ERA was like being in a time capsule from the 1970s, the assessor’s offices were dated at least a few decades earlier.  They communicated only by phone, mail, or through in-person hearings, the latter of which gave it the flavor of judicial and legal proceedings.

All this is to say the following.

Challenging the roll value of a property in California, in most of the counties, [was] free.  Free.

But like most things taxes, people hired us to do the job for them because they couldn’t understand the process.  Or even if they did, the psychic pain of having to be put on hold and transferred through the various departments of the assessor’s office, having to search for information on values retroactively to the assessment date, or attend hearings in the middle of the day scheduled months in the future, caused them to hire us.

The business was unglamorous, taxing, under the radar, and operated out of a master bedroom with soiled carpets.  And at Property Tax Advisors, we were discreetly generating ~six digit sums in fees, per week.

This is when I learned that a real business eases pain.  A real business is not the storefront, or the colleagues, or business cards, or a website.  A real business is where someone pays you to do something they can’t or won’t do themselves.  At real scale.  And sometimes you can create a profitable business out of something that is already free.

Don’t be afraid of boring businesses.  I’m sold on boring businesses.

The substance of the work was scouring through reams of data, photos, and assembling a case.  The actual analysis didn’t take long, but it was time-consuming, carpal-tunnel inducing, and after working out of the cave of a master bedroom for about a month, I noticed another something.

I was losing a lot of weight quickly.  People have a misconception about Southern California.  They think if you live by the beach, it’s balmy and tropical.  It’s not, especially in the South Bay.  Most of the time it’s under cloud cover, and if you’re not under the direct sun, there’s a sea-cold to it.  I lost 10 pounds the first month I worked there, just from the ambient bone chill.

The cold and the enormous workload brought something out of me that had lain dormant for a few years.  It was time to dust off my Excel macro skills.

Over a few weeks, I made a program that automatically valued our cases at the rate of one every two minutes, which was a vast improvement over the 45 minutes it took to do it manually.

Because in order to win a case, we had to present a preponderance of evidence that proved the house was overvalued.  “Preponderance” meant that often we pulled together hundreds of pages of evidence for a single property, replete with pages of full color photos.  We took this burden of preponderance seriously, and made sure that our cases were also preponderantly heavier, in actual weight, than the appraisers we faced.

Sometimes I could see a visible sigh from the appraisers when they saw the buckets of paper we hauled in during hearing days.  It was a psychological tactic.  Because when I saw those sighs, I knew that we were winning.

And you might think that it’s weird I use the word ‘winning’ in conjunction with something like a valuation.  But I discussed this before; the concept of value is a vague one.

What is value, really?  Value is a consensus arrived at by subjective opinions.  Everyone starts with the same facts.  Your value is what you choose to emphasize and omit out of those facts.

The assessor’s office was biased towards preserving the roll value.  We were biased towards lowering the roll value, to alleviate taxes for our clients.  And it was a clash of opinions and wills.

But whatever side you’re on, bias takes its toll.  For instance, when you believe that values are too low and are going to go higher forever, like a broker does, you’ll start making yourself susceptible yourself to frauds and bubbles.

This is just as true on the other side.  Exhibit A was our owner, Gary.

There are people you’ll encounter who seem absolutely suited for the work they do.  Sometimes this is because when you do something every day, it can’t help but influence the person you become.  And sometimes it’s the other way around.

For Gary, I couldn’t tell if he was always the way he was, or it was the 20+ years in the tax appeals business that had shaped his entire worldview.

To back up, our work involved looking for direct evidence that our clients had overpaid.  Every case needed to be presented as, “our clients made a mistake and bought at the top of the market and everything is worth about 30-50% less.”

And repeating this story thousands of times over a few decades, I can’t help but think it influenced Gary a little.  Because Gary categorically believed that everyone in the world was overpaying for everything.

From $20 million megamansions in Bel-Air to gym memberships at Equinox, Gary opined endlessly on the ways not to get f**’ed, how to not buy at the top of the cycle, and how to save money.

To him, any debt of any kind was idiotic, even mortgages, and he railed against buying any car new.  One summer when I dropped by to say hi, riding a rented Audi (a free upgrade from the Chevy I had reserved, which was out of stock), he had some choice words.

He was the type of person who, as a Manhattan Beach millionaire, thought nothing of sometimes walking across the street to the motel and helping himself to the free continental breakfast, with a wink and a nod to the staff.

Or walking into the gym with free passes and registering multiple times under different names to extend free trials for months.

Or on Tuesdays, skipping a place for lunch because on Fridays, that’s when they had a promotion and it was 15% cheaper.

Or expounding on the exact depreciation schedule of items like sofas, automobiles, cutlery, and researching gas stations miles away, where prices were pennies cheaper than our local one.

At the time, Gary was going through a lot.  The financial crisis had halved his net worth from $20 million to less than $10 million (I know).  And he was in the middle of a bitter divorce.  All this, I’m sure, conspired to make him feel poorer than he really was, but part of it was probably also in his makeup.  The son of a mailman in Hawthorne, he had always looked at the society people in the towns around him like Palos Verdes, and wanted to be them.

But now he was them, but I don’t think he ever felt like them, nor wanted to be them.

He always had some words about the overpriced nature of the houses around us, and the fallacy of the dual-income homeowners who had taken out million+ dollar loans for them.  How can it be worth it to live like that, and slave for decades just to pay off the mortgage on a property, he would rail.  Why would he buy that car when he’s a [enter profession here] and making [enter salary here], he would exclaim.  Why do people feel like they have to keep up?  He would rant for the entire 40 minutes it took to drive to downtown LA for a hearing.

And slowly, I began to take on his mentality too.  I couldn’t help it.

This was in the ashes of the financial crisis, and still shell-shocked from the previous year, I began making it a game to see how frugally I could live.

For a time, I slept on the carpeted floor of my apartment on a sleeping bag because I didn’t want to buy a bed.  I proudly clipped coupons and returned to my old trick of asking people in restaurants if they were going to finish their meals.  I needed to regain those 10 pounds, after all.

The irony, again, is that the year was turning out to be my best yet, financially.  Again.  I was drawing on two sources of income, and making consulting calls to clients in Russia and Arizona alike, stepping outside on the patio.

Anyway, Gary was shameless in a way with his frugality.  And Jason, who handled sales and collections, was just…shameless.  And shameless about his shamelessness.

Shameless people are an object of fascination in our society.  They have their role.  And in our office, Jason was the id.  He was the walking manifestation of the things we wanted to say and do, because he had no filter.

If you’ve ever worked with real good salesmen, you’ll understand they’re a different breed of person.  Until I worked at the Harris Group, I’d never met real good salesmen, even at Wharton.

Jason had more energy than anyone I’d ever met.  This wasn’t drug-addled energy.  This was just raw male energy, like he was a wind-up toy that was just always…on.  If you stood next to him it became uncomfortable from waves of enormous body heat, like some sort of constant metabolism of targets was taking place.

This extreme energy had him going through a hundred phone calls a day, with no let up in pace.

Like all good salesmen, he didn’t care about rejection.  And unlike other good salesmen, he was completely honest.  He was almost honest about everything he believed and felt, and that made him good on the phone.

Being honest and tireless also made him good with girls.  Bear with me through this section because there is a point.

Every weekend he went out and found himself another girlfriend.  He hooked up with a girl who was going door to door selling magazines, who he invited in to his apartment.  He hooked up with a girl who was selling hats on 3rd Street Promenade.  He had hooked up with the woman who he had purchased his used car from, offering a lower price and a steak dinner.

When he was at bars, he was completely straightforward about what he wanted.  If a girl he was pursuing had a boyfriend or a husband, he didn’t hesitate to say the conversation was over.  He didn’t want a relationship, and every Monday, the endless stream of text messages from his weekend romances bounced in, letting up only around Wednesday.

You may or may not condone this.  I regarded this then with a mixture of wonder and grudging respect.  If nothing else, he was honest.

That honesty extended to the office.  He was not above hanging up violently on clients after calling them dishonorable scumbags for not paying, or calling out people within the office for not working hard enough – and he was right.

For him, what was right was right, what was wrong was wrong, and he knew exactly what he wanted and did not want.  And it always struck me, seeing someone so honest, that people do not really respond well to honesty.

Clients who had been through the Jason treatment didn’t pay until Gary called them back and apologized, assuring them that they were not dishonorable but just “forgetful”.

People in the office who were slacking did not step up their game when called out.  They shut down, and resisted the idea that they were fallible.

And the endless stream of girls (I’m using girls instead of women deliberately) who he had warned in advance and made clear all throughout the duration of their 36 hour romance, that he was not interested in anything longer than a weekend, texted him endlessly.

It’s just a point to consider.  People don’t listen to the ‘what’, they listen to the ‘how’.  Jason knew the effect of never filtering himself, but he accepted the consequences and lived as he did.

Also, back to the energy point.  It’s hard to win against or resist someone who has higher energy.  10 pounds lighter and feeling lightheaded from my endless working, I found it hard to ever win an argument against Jason, no matter how hard I tried.  He kept coming.  And I would definitely never even have a chance after lunch, when I was soporific and for some reason he was going the same speed as at 10 in the morning.

It was then I realized that energy levels are an underrated part of success, especially when you’re working for yourself, and need to be cultivated as carefully as other resources like money or time.

The work was interesting, the growth in revenues was inspiring, the money was lucrative.  But midway through the year, I decided it was time for me to go back to business school.  Reasons to be discussed in a later post.

If I had stayed, I would have earned my way into a relatively easy few million dollars over the next few years.  I knew that.  And I still gave up my equity.  To be clear, I did stay involved with the business over the next few years.  It was one income stream.  But I gave up ownership in order to be free, and have time to do my own things.

People ask me all the time why I did it.  And for a long time I found it hard to articulate.  It just never felt like my thing, or my destiny.  It was Gary’s thing.  It was Tim’s thing.  It was not my trade.  Does that make sense?

Also, maybe it was just hubris again.  Still, I believed that I would find that few million dollars somewhere else, in the future.

Finally, maybe because I just wanted more…adventure?

A Real Estate Career: Lessons Learned (2009)

I started my own boutique, real-estate focused consultancy, in the first week of September 2008.  You’ll notice that’s about the time the global real estate market – and everything else, by the way – came crashing down with it.

A lot of people have described that period as feeling like the world was ending.  It didn’t quite feel like the apocalypse, I never felt in physical danger.  But it did feel like the world order was shifting, that something fundamental was gone.

You can debate all day long whether or not that’s actually true, but for the end of 2008 and during 2009, I was in a state of confusion and loss.

You might think that given what I wrote about my previous job, I was crazy to branch out and start my own consulting company based on it.  Optically it is so.

But I had a lot of good reasons too.  I had cultivated some good relationships with who I thought were solid clients.  One of them, a savings bank that was running itself like a hedge fund, had promised me and my partners a retainer and guaranteed contract over the next two years, worth a few million dollars.

As it turns out, this particular client then went to jail.  I didn’t know yet that savings banks shouldn’t be running themselves like hedge funds.

Another good client of mine, an entrepreneur-turned-developer, wanted me to help them actually project manage the construction of their theme park.  Moving into an actual implementation and development role sounded exciting to me, after being in the world of theory for years.  I believed in this client, because they were one of the only ones that seemed savvy about the whole game – I was and eye-witness to them wrangling about $600 million in concessions for their project from the government.

It turns out a global financial crisis cuts off funding a little bit.  $600 million in savings means nothing when you’ve lost $1 billion in other commitments, I guess.

The third reason was that I felt that being an independent consultant meant I would be my own boss.  Meaning I could work on other projects on the side.  Because simultaneously with some other friends, I was arranging another partnership focused on real estate acquisitions and development deals in LA.

With my consultancy, I thought I would be making millions.  And with my private equity group, I thought I would be also making millions.  Pretty soon, in a few years, I would retire.  It was a neat little plan.

You might notice that even though I believed the world had gone insane in terms of real estate development, I was still fully committed to the field.

This might sound like a paradox, but it was a true blind spot.  I thought that for sure, the projects that the ‘other’ clients were working on were crazy and wouldn’t work, but for sure ‘my’ clients and projects would work.

This is classic bubble thinking, and you could also call it heavy commitment bias, youthful arrogance, delusion, maybe even a form of insanity.

Needless to say, things didn’t work out that way.

2008 closed out with weekly kicks to the face of bad news after bad news.  I learned all the verbal commitments had been worth nothing.  All the projects I had planned became mirages.  My romantic relationships were blowing up.  At one point, I was earning nothing, and it got so bad that I had to move home with my parents.  Back to the San Gabriel Valley where it all began.

At one point, I became so depressed that I decided to write myself a mantra.  It was about a paragraph long, and I wrote it every day for about two months until I felt like I could actually get up in the morning.  I wish I could find it now, which is another reason to keep a journal.

If you talk to people in my generation in the finance or real estate industries, the ones who were a few years into their career when 2008 happened, we are all a little shell-shocked, still.  It was a defining moment, when suddenly the rug got pulled out from under us.

Everyone still daydreams about another financial crisis.  We still think it might be around the corner.  And we have a huge portion of our assets stashed in cash, not equities, just in case something like this happens again.

This is also probably deluded thinking.

But, there are a lot of ironic things that happen in a complete meltdown.  Things reverse in more ways than one.

I gave up on the RE fund.  My partners there, were less serious, than my consulting partners.  And I needed to focus.

But what happened, ironically, was that 2009 turned out to be my best year financially, up to that point.  This, despite working far less.  This is just what happens when you remove overhead.

Despite all that, I didn’t feel any triumph or joy at the end of 2009.  It still felt unstable.  Besides, I was still working and living at home with my parents, and therefore what I was doing seemed illegitimate.

In the years since, I would reverse my opinion on that, but I was still insecure.  What I’ve realized in the years since, is that companies and structure fulfill many needs for people, but one of them is a feeling of legitimacy.  For me too, for a long time.

Being your own boss is not for everyone.  For some people, being able to go into an office, being surrounded by a corporate structure and procedures, and a predictable routine, just feels more stable.  Seeing all the people around you engaged in the same mission drives you.  And the office, the people, and the purpose, give you the sense that you are part of something stable.  Whether it’s true or not.

But all that is what I missed the most when I first quit to become an entrepreneur.  Being your own boss is hard.  You take ultimate responsibility for everything.  You are responsible for the sales, the marketing, the production.  You determine your own working hours, your work-life balance.  All this usually fills you with anxiety.

And the only thing I can recommend for anyone who is thinking about going independent is to install routines and protocols as soon as possible.  Carve out space for the work, away from your personal life, especially your bed.  Create a workplace, whether it’s real or virtual.  That way you will “go to work” and do professional things as a routine or habit, and not just when you feel like it.

Because you’ll only build a business with the accumulated, compound interest of putting in work every day.  This self-regulation was the single hardest hurdle for me.

With more time on my hands and the funds to do so, I started traveling more.

It’s true what they say about memory and learning.  You don’t know what will stick.  In an International Finance course, I had a professor who left us with some words of wisdom during the last day of classes.

I don’t remember much else about the class, except going to him during office hours with a newspaper of exchange rates, interest rates, and other financial news.  My question was that why was the exchange rate moving in the other direction than as predicted by the models we were learning about?

He smiled and just said it was price movement from trading, and that’s when I learned about how there was a force of human nature called trading that helped violate all neat theories.

Anyway, at the end of this class, he wished us well, and recommended that we should visit two places in the world before we died: Machu Picchu, and Angkor Wat.

And so during my consulting jobs, I went to Angkor Wat.  And as he recommended it to me, I will recommend it to you.  Archaeological sites are fascinating for many reasons, but I love them – and love Angkor Wat the most – because of its Ozymandias and memento mori themes.

An ancient kingdom in the middle of the jungle, rich beyond imagination as attested to by the sheer volume and intricacy of its stone buildings, moats, and storehouses.  Grandeur and glory, extravagance, reverence, arrogance, fear, and ultimately, life – you can feel all of these things in the ancient city, where humans once lived under a kingdom that believed it would last forever.  Built by people whose names we no longer know.

Anyway, so you’ll see that the year was a lot of soul searching for me.

And the last lesson I learned is that, whether it’s with yourself individually, or the world around you, in your darkest and deepest times is when the seeds are being planted for future growth.

You should rejoice and celebrate when you feel like you’ve hit bottom.  The journey down to the bottom is the demoralizing, hard part.

The good part – although it’s not easy – is when you’ve actually hit bottom, because that’s when you’re free.  Freer than you’ve ever been.

And likely, when you make it out again, you’ll be a different person.  You’ll be proud of who you became in the process because you’ll have learned how to fight.  And much, much later, you’ll look back at this young, hungry version of yourself in admiration and wonder what happened.  At least that’s how it was for me.

When I think back on this time, I realize that during that year, when I felt like I had no options left, I actually had the most options ever, since graduating.  I could have literally done anything, studied anything, become anything.  A world order had collapsed, and no one would have said anything to me about a career shift or transition into a totally new field.

I could have, but I didn’t.  I was too fearful – what would my resume look like, what would I do to survive, etc.  In hindsight, these were trivial worries.

I did know I wanted something new, something different.  And I would indeed find it in the years to come.

But at the same time, I was also scared to walk away from what I already knew.

A Real Estate Career: Lessons Learned (2006-2008)

Background: before I graduated from Penn, I was fooling around with searches on Google, which was this new search engine that my gf (at the time) turned me on to.  Before that, I was a Yahoo! guy.

On Google, I was typing in any combination of terms I could think of, that would lead to job openings that I thought were a fit.

As you might have figured out by now, I basically failed the on-campus recruiting system process, with 0 interviews and 0 prospects.  The reasons why are a subject for another and much longer post.  So I was on my own.

Using search terms like ‘analyst’ or ‘research analyst’ or ‘economic research’, I randomly stumbled on various consulting companies, think tanks, and research shops.

The particular search terms I used also led me to a company somewhat boringly called Economics Research Associates.  Despite the dry name, ERA was a theme park, resort, and casino real estate consulting company.  They worked worldwide in exotic locations.

It looked exactly like my type of company!  So I applied.

And this is nothing but a story of persistence.  At the time, I was told there were no positions available, but over the next two years I kept in touch.

Sometimes I called them to let them know I was still interested and had “built some skills” [lol].

And other times they called me.  One time a partner called me when I was in a car with a date and I had to drive erratically around and ignore her while doing an impromptu interview.  By the end, I was sweating profusely and not surprisingly, the date did not go well.  Struggles.

Midway through the summer of 2006, a partner of the firm called me and offered me an interview.  The interview led to a job offer.  I said I would think about it (ha!), and “accepted” a week later.

On the first week of the job, they put me in a business class seat and flew me to attend a presentation in Asia; at this presentation, the governor of a large province declared that he wanted to build an F-1 track, a few casino resorts, two theme parks, and twenty-thousand hotel rooms.  Actually, he wanted more than that, and said that the original plans were too small.

So…I had entered the peak bubble zone.

Now to understand what that was all about, you have to understand what ERA did.  ERA was a staid old consulting firm with partners who were in their 50s to 70s.

ERA was started by the original economic consultant to Walt Disney when he built Disneyland in 1955, and for the next 50 years, the firm was the official consultant of choice to any developer, government, or operator who wanted to build or expand leisure real estate operations.

Our job was to validate the financials and make sure the projects would work.  To perform feasibility studies.

That meant that over the next two years, I sat in a clearinghouse of insane real estate ideas.  Again, this was peak bubble.  This meant that every week, we would be bombarded with plans, sketches, and visions of any conceivable leisure entertainment land use you could think of.

If you remember back to this time, this is when Dubai was announcing a new ludicrous project every few weeks, from the Palm and World Islands, to the tallest tower in the world, to malls larger than cities, and mega theme parks larger than Disney World.

But what is less known, is that it wasn’t only Dubai back then.  It was everywhere, from Iceland to Cambodia, Korea, Mississippi, Spain, Cabo, Kazakhstan, Russia, India, and everywhere in between.

Everywhere but China.  China’s time would come after the financial crisis.

I saw drawings of 100 square mile theme parks, sphere-shaped casinos floating in water, and plans for assault rifle-themed or guitar-shaped theme parks.  I saw 100-story buildings in frontier market cities, biofuel farms, and resorts on deserted islands in the middle of the Pacific Ocean.  Every month, someone out of our Europe/Middle East office would send a Powerpoint deck full of pictures for projects in Dubai, with question marks and exclamation points and icons of oil barrels next to them.  At the risk of this sounding like a Ginsburgian “Howl”, let’s stop here.  But you get the idea.

I often think about why there was such a theme park craze during this time.  It seemed like any real estate developer or government was planning one.  I can only posit that it’s because every place in the world had borrowed the Dubai philosophy, which had borrowed it from Las Vegas – build it and they will come.

Before, I mentioned that the Marcus & Millichap San Diego presentation from 2004 should be enshrined somewhere in the Historical Annals.

Equally, any theme park, attraction, or real estate development presentation from this period should also be nominated for the canon.

I shuffled and sat through countless numbers of these: presentations featuring glossy color renderings of buildings that defied physics, and video fly-throughs set to cinematic soundtracks, all meant to hypnotize the viewer into submission; i.e. parting ways with their money.  If you can find them, I recommend sampling the 2007 vintage, which was a particularly ludicrous year.

According to my humble estimate, the total amount of mirages projects being proposed in this manner, coming through our doors alone, totaled more than $100 billion.  Just in Korea, where I was flying almost every month, more theme park projects were being proposed than existed in Orlando.

All this dreaming wasn’t free.  The cost for our services was in the six-figure USD range, so people were dedicating real resources to these projects.  And where was the money coming from?

Who knows.  It was like a spigot in the sky was turned on and the whole world was drinking from it.

Which brings me to the first thing I learned, which was a reinforcement of what I’d been learning since Marcus & Millichap.  Which is that once in a while, the world goes mad.  Actually, the world is probably always insane, and it’s your ability to recognize the lunacy that ebbs and flows.

Also, that there’s no one really in charge.  You think the adults are in charge, but they’re not, they’re nowhere to be found.  No one knows anything.

When I did the analysis for these projects, most of them simply couldn’t work.  It was impossible, unless you extrapolated out economic growth of 10% indefinitely, or you assumed population growth would double, or similar types of leaps of faith.

But, clients simply refused to believe us.  Entire teams of developers had bought into the notion that their fantastic visions were valid, and that they were going to make spectacular sums of money from it.  They had dug in already.  They had hired teams of analysts and drivers, rented out expensive office space, and already spent millions of dollars on designs and licenses and studies.  This is when I truly saw the fallacy of sunk costs at work.

So sometimes clients received our reports and turned it into a negotiation session.  Because they were going to present the report to the government and investors, they needed to juice the numbers past our single-digit return figures.

And it was during this time I realized the truths about Excel that I wrote about in the previous post.  Because they were being used on me.

All clients in some way would argue with us, but some more than others.  One client in particular, in response to our report, sent back a fifty sheet Excel workbook that had reverse-engineered the logic from the study, and plugged in so many variables and cross-linked assumptions that it took me a day to figure out that what they were really trying to say was: the project would make money in the 20%+ range, unlevered, because it would sell out enough villas and golf course memberships in the middle of nowhere, to fund a billion dollars worth of construction costs.

From the outside in, you could see the lunacy.

But maybe from the inside, it’s hard to just reel it all back in, isn’t it?  More on this later.

Also, again, money: money amplifies, it buffers, it can shield and hide a lot of things.  And during a bubble time, money expands like a balloon into cracks and allows you to ignore reality.

Everyone is making extravagant claims, and money allows you to delay the moment of truth.  Another thing I learned related to this.  Times like those breed a lot of crooks and swindlers.  But you don’t know who they are, because during bubbles they can keep financing their schemes and extravagant claims.  As Warren Buffett says about the tide and that only when it goes out can you see who is swimming naked.

It’s only when the bubble pops that you see it clearly.  Anyway, two of my clients from this time went to jail.

Don’t get me wrong.  I think more clients than that went to jail or got in trouble in their home countries.  But these are the only two I interacted with.

I think the common thread between them was that they were both good talkers.  Good talkers and sellers sometimes start believing their own…exaggerations.

Having interacted with both of them for extended periods of time, I don’t think either set out to commit crimes.  But when you start talking about visions that are outside your reach, and money is widely available, things happen.

Your exaggerations spawn fractally, and so do your promises.  It slowly creeps into the future, first one year, then five years, then ten years.  Your sums grow from 5%, 10%, to 50%.

In your own enthusiasm, hallucinating from your IV drip of capital, you start making promises you want to fulfill.  Not promises that you know you can.  It’s a fine line.

After all, what is a Ponzi scheme but an infinite daisy chain of claims that stretch far into the future?  It’s sustained by nothing else than belief, and sold by sellers who can persuasively sell others on their visions of the infinite future.  And cheap money delays and delays.  That’s one of its primary characteristics.

And that’s all I can say about that.

Personally though, about two years into the job, I hit a wall.  The work was not making sense and I was getting metaphysically anxious.

Beginning in 2008, I could see stirrings of economic fallout.  Bear Stearns had failed, and some of the economic news I’d been reading about mortgage brokers made me uneasy.  I had no idea what was going to happen, but I couldn’t help but think that this stuff was not going to last.

It’s hard to express my sentiments during that time.  I keep writing this, don’t I?  In 2007, it seemed like we were having an End of World Party.  Then in 2008, we started seeing the fault lines.

Simultaneously, ERA was getting acquired.  Talks for it started in 2007, and rumors were circulating about the implications.  Mostly about the bad implications, like restrictions and new evil overlords.

So during the summer of 2008, exactly two years after I began, I made the decision to leave and go independent with some partners.

I didn’t know that in the week I quit, Lehman would go under.  Sigh.  We’ll continue with that in the next installment.

To close this out though, let’s talk about what happened to the company, because I learned a lot from it.

After ERA was taken over at a high multiple, and the financial crisis happened, 29 out of 30 partners either quit or were fired.  The once-proud, established firm then just became a carcass of its former self within 2 years.

From the outside, I could see it disintegrating in slow motion.  Inexorably, but still happening.

Honestly, I was quite surprised when I left, and no one else left with me.  This is not me applying 20/20 hindsight.  You could see that 90% of our work was for clients who were chasing clouds.  You could see that there were cracks appearing in the real estate markets, everywhere in the world.

I didn’t know where I was going, but I knew I didn’t want to see what happened, so I left.

A few years later, I worked with an older investor named Larry who mused, often, that companies are hard to kill.  It’s hard to kill a company, he would say, shaking his head, as he talked about his failed businesses.  When he said this, I would always think of ERA.

I left because I thought the company would blow up.  But it didn’t.  It took a while. a year or two, before it all fell apart.  Companies are groups of people, and groups of people who are not nomads don’t just pick up and leave overnight.  Even when from the outside it looked like there was no way this company could survive the Lehman fail and the resulting financial crisis, people still hung in there.

From the outside, it looked like people were huddled.  Maybe out of fear.  Maybe because this is all they knew, and it was a family.  Maybe because from the inside, there was a sense of comfort in seeing that the same people in familiar surroundings.  In peoples’ heart of hearts, maybe they knew – but they didn’t want to face the reality.  Familiar chord, isn’t it?

It took a lot longer to disintegrate than I thought it would.  But its end came, and it was a long, sorry fall.  In its corner of the amusement park industry, ERA was a giant, a monopoly.  And because it was a monopoly, a lot of things had happened to the company over the years.  For one, there was widespread complacency.

For a company that charged McKinsey-level rates, I couldn’t believe that the company still didn’t have a central database or repository of knowledge.  There were relics in our office that again, I should have saved or asked for, because they should be enshrined in the Annals.

Typewriters from the 1960s.  Dewey-decimal card systems for a physical library of brochures, books, encyclopedias, and reports, many of them terribly outdated by decades.  Brochures from World Fairs during the 1960s and 1970s.  Reports and relics from failed Japanese theme parks of the 1990s.  Secretaries who took down dictations of reports and emails/letters by older partners.  On typewriters.  Older partners who off the top of their head could dictate 5 to 10 pages at a time.  Slide rules.  11×18 spread, sheets.  If you don’t know what that last one is, think a notepad of graph paper-like cells in them, except wider – basically like a physical version of Microsoft Excel.  And partners who would take a No. 2 pencil, do a cash flow, and do the sensitivity analysis by writing a different variable at the top and erasing/replacing each individual cell on the rows below it.

The office was a hybrid of a Mad Men set and a modern workplace.  The first day I joined, I introduced myself to a 70-year partner who guffawed, slapped me on both cheeks, and said it was good to have some young blood in the office.

But I mention all this because if nothing else, the company is a case study for the power of a brand.  Having a brand that was present at the creation myth (Disneyland) of the entire industry gave you immense value.

The value helped the company coast through a decade or two in a state of inefficiency.  This was the beginning of when I began to realize things about companies.  Like the fact that a larger a company gets, the more latitude there is for inefficiency.  Again, companies are groups of people.  Is it harder to kill 2 people working out of a garage or a band of 100?  Probability-wise, unless you’re a company like Instagram, I’m choosing the latter.

A brand markets for you while you sleep.  A brand allows you to charge hundreds of percent premiums.  A brand allows you to coast and smoothes over suboptimal product quality – although you shouldn’t do this.  But always do try to build a brand.

But, probably because of its brand, the company had become complacent.  Some of the analyses were trash, frankly speaking.  Some of the partners had checked out, a long, long time ago.

And maybe that was the biggest lesson of all for me.  And when I think about it, it’s perhaps the real underlying reason I left – seeing that complacency in a lot of the people, I realized it’s not what or where I wanted to be.

A Real Estate Career: Lessons Learned (2006)

After about a year at the brokerage, I moved across the courtyard of our office-industrial complex to a smaller shop where I became a monk at the temple of Excel.

In retrospect, before I left, I should have tried to become an agent and at least do a deal or two and actually deeply understand everything from the lead stage to closing.  I understood it better than most, but not as much as I could have.

But I didn’t do these things.

It’s hard to articulate my thinking at the time.  I was naive and arrogant/blind.  I mentioned before that because of the tremendous amount of money some were making, they either felt guilty or like it wasn’t theirs.

For me, looking at the tremendous amount of money others were making, sometimes working 5 hours a week, it gave me the impression that money was abundant, and that to earn it required little skill, and more like random optionality and knowing the right people.

I also should have tried to learn more from the actual hard-workers in the office, like my boss Greg.  But partly because he was never in, and partly because I was arrogant and blind, I didn’t.

So now officially, I became an analyst at Del Mar Equity Partners, a TIC sponsor.  This means nothing to anyone outside of real estate, but it suffices to say we were basically an investor looking for good deals, and syndicating them out to a range of other investors.  Like doing a group-buy of real estate.  And making some money in the process for being the originator.

In practical terms, this meant I moved from an office of a group of 15 young hooligans doing eating competitions, boxing matches, arm-wrestling and push-up tournaments everyday, to a sedate environment where I worked with only two other people – my boss, Martin, and an administrative assistant.

This provided much less pandemonium, and less time devoted to psychological analysis of extreme humans, but things were no less entertaining.

Since agents and brokers around the country knew we were a source of capital, we got bombarded with deals.

Some of these deals showed up unsolicited in the mailbox in the form of postcards and too-good-to-be-true brochures.  Others showed up in my inbox, with rent rolls attached and scarcely any explanation to them.  Some of these deals made sense.

Others did not, like deals where you were supposed to invest, and you got no money or any return for a few years, and then at the end you got an unspecified return on the appreciation of the property.  Like a zero-coupon bond.  Except even riskier, and again, no guarantees on what your principal was worth at the end.

And sometimes people called.  Sometimes I would get calls from guys who sounded like they were working in boiler rooms.  Some guy with a wiseguy accent would call and ask me if I wanted to hear about an opportunity.  Then if I said yes, he would ask me if I was ready, if I really wanted to hear about the opportunity, if I was really ready or not.  It sounded like these fluffers were trying to get me to stay on the line until they called the real closer over, but I never stayed on the line.

Anyway, for the next six months, I became a master technician of Excel.  Not a master real estate analyst, understand: a master technician.  More on this later.

My job was to model out the deals we were getting pitched.  This meant I had to model a few dozen a week.  Now looking back at it, I spent those months doing what I thought at the time was ‘analysis’: filtering dozens of deals a day, modeling them, and recommending the ones that ended up with good returns.

But what I was actually getting good at was not analysis, nor real estate evaluation.  It was Excel.  Partly because of the sheer volume of deals, and partly because of the sheer time I was spending with the program, I became obsessed with Excel itself.

I started slowly by implementing functions like dynamic rent bumps, and probabilistic Monte Carlo simulations on rents when the leases rolled over.  I implemented arrays and quintuple nested functions referring to INDIRECT and OFFSET cells.  I had macros that pulled in information from demographic sources to update assumptions.

It had become my goal to model the behavior and performance of a building, to recreate it in a small file sitting on my laptop.

This wasn’t analysis at all, and this Excel work itself didn’t actually help me become a better investor.  What I was doing was ascribing Excel with an intelligence it didn’t have, and hoping to imbue this construct with decision-making and analytical capabilities.  It was intellectual laziness, in a way.

If I could have this period back again, I would: conduct more interviews, do actual on-the-ground research, talk to owners, brokers, shopowners down the street from the building, in the name of articulating a thesis on different markets/types, and then test these theses continuously.

What I’ve realized ever since, is that in real estate, doing an initial filter on a deal is not some arcane exercise of testing 100 different assumptions.

It’s an exercise in evaluating maybe 5 core ones, like cap rate, rents, growth, supply, and expenses.  A good investor will probably only spend five minutes on the back of an envelope filtering a deal, and if it passes, then spending 95% of the time testing these core assumptions with research.

I didn’t know any of this yet.  I didn’t have a filter system so I was looking at every deal like it was some sort of abstruse puzzle that could only be unlocked with my magical tool, Excel.

What I was lacking was critical thinking, big picture thinking, and thinking from first principles.  Anyone can learn or be taught to become a technician.  Becoming an actual analyst requires you to think.

I didn’t know how to think yet.  I didn’t have a view of the analysis I should be doing, and because I thought that just “doing Excel” was the whole job, I was bored, frankly speaking.

And so I left this job too, six months after joining.  We did two deals when I was there, out of the hundreds I had scoured.  In retrospect, that’s a lot for six months.  But in my naivete, I thought it was too little.

Also, one of the deals was literally nothing more than an off-market property that we flipped within a few months, sight-unseen.  This deal just about sums up both my experience there and the spirit of the time.

I left because in a sense, I thought there was no more growth opportunity for me.  And I believed it for a while.  Only in recent years have I realized it couldn’t be further from the truth.

In any kind of job, there is a wide range of ‘winging it’.  Because I had only worked at small companies and everyone kind of did everything, I thought (at the time) that this prevented me from falling into a ‘winging it’ mentality.  After all, I did what was assigned to me and did it well.  But I was still in a lazy zone.

In any job, there is a level of performing the job that is beyond just doing the job.  This level is thinking like an owner, like you have something at stake.  Thinking like an owner will open your eyes to new opportunities, because you’ll understand the opportunities and constraints, and how decisions are made.

In the years since I’ve worked these first two jobs, I’ve come to believe that unless you start thinking like an owner, you have no real knowledge about your business or industry.

And the way you know whether you’ve grown as far as you can grow in a job is, can you do the owner’s job?  For me, the answer was no, for both jobs.  Therefore I hadn’t tapped out my growth potential.

But back then, I didn’t realize any of this yet.

I quit and for a time I was jobless.  And a little directionless.

I interviewed at a surf company.  I remember walking into their Orange County office in business casual and drawing stares, because everyone else was in t-shirts and shorts.  Talk about a game theoretic exercise: do you dress down for a job interview at a surf company, potentially disrespecting the interviewer, or do you dress up, and run the risk of looking clueless?

Anyway, I didn’t get the job, but the interviewer did give me a new wetsuit as a sort of compensatory prize.  It was a little small for me but thicker than my existing one, and better for winter surfing.

Now we were in the summer of 2006.  After a few months, I was going to be in for a real treat.

Things I’ve Learned as a Consultant – Part II

  • As an extension of the last point of the last post, when you’re in professional services, whether banking, law, design, consulting, whatever, you’re trying to sell someone something that there are no physical results of. And sometimes, not even precedents. You’re saying ‘trust us’. So how do you build that trust? A brand goes a long way.
  • But having been on both sides of this — the salesman and the person doing the contracting/hiring, I believe the absolute best thing that will help you nail the pitch, without question, is a sample. Samples are the strongest test, for the simple fact that having something that addresses the requirements perfectly makes you impossible to ignore. This not only makes them know you are capable of doing the job, but that you’ve listened. It is a rare client that knows 100% exactly what he or she wants before the service has started, because as I’ve written in the previous post, clients engage you based on a dark nebula of capabilities they imagine you can do. In the beginning, it is important for them to know that you are responsive, that you can react to their feedback.
  • But I cannot stress this enough: “Let em test the product, give em a promo show/Just a breeze, not enough to catch a real vibe/Then we drop a maxi single and charge em two for five/Ain’t tryin to, kill em at first just, buildin clientele/So when the album drops the first weeks it’s gon’ sell” — Jay-Z (Rap Game/Crack Game)
  • The reason is that if you have a sample or a pitch that addresses their requirements, it will cause them anguish if they have to pick someone over you. It will cause them to justify their own metrics. You will be remembered.
  • If you are in a profession that does not allow you to provide a work sample, just be aware that a buyer of services, especially if they are purchasing a particular service for the first time, will latch onto other things (attribute substitution). For example, how polished of a speaker are you? Do you buckle under pressure? Do they like you? Do you have the proper gravitas? Are you older, do you have a few grey hairs? Many of them are unfair and irrelevant, but this is what happens, so it helps to be aware.
  • Related to that last point, there are people in the consulting business who dye their hair grey and wear glasses in order to appear older and more experienced. Just saying. When you’re a bright young person it’s easy to become disillusioned about this. But if you encounter this situation, it is better to step back. What is it really telling you? That as much as you think clients are paying for the actual insight, they’re paying for reassurance. They are buying the brand.
  • The higher your fee, and the longer you take, the higher the expectations of your client. They will grow. And grow. It is better to program in interim deliverables to anchor their expectations early and allow for feedback. This is as a result of differing perceptions of time between those in the flow of doing work, and those waiting for something.
  • But curiously, even if you are able to finish something ahead of schedule, having any extra time left leads to doubts. You’ll check and recheck your work. Due to Parkinson’s law, the project has a good chance of actually always ending up taking the amount of time allotted to it.
  • Everything is about good communication. It’s not just about having the facts or a superior product. You can have a superior product and still lose the pitch, you can have all the facts and insights but fail to engender understanding. And you can have titular authority in your firm, but fail in managing or marshaling the resources of the people under you. Good communication includes soft skills, connecting with people, speaking with enthusiasm, being authentic, etc.
  • Smaller clients are good because often you work directly with the person who is both the decision-maker and stakeholder in the service. But smaller clients have less to lose when they try to negotiate your fee — down — after you’ve already performed. They can also be demanding, and your interactions will be subject to the whims of the person buying your service, who is often the same person writing your check. Big clients will often have no problem paying you, but because the stakeholders, decision-makers, and people you are interacting with can be three different sets of people, the layers of hierarchy and management can lead to confusion, delays, conflicting directives, which ultimately means, more time spent on it and more work for you.
  • Since consulting is the business of selling brains, the necessary conclusion to this premise is that the better the brains perform within a given length of time, the more value you can capture, and the less costs you incur. Research has shown that cognitive thinking is a physiological process, meaning it’s another body function regulated by energy levels. Keep up your energy levels and you have the potential for longer periods of higher thought. Exercise, meditate, eat right. This cannot be stressed enough, and goes back to the athletic component of traveling for consulting.

Things I’ve Learned as a Consultant

  • As in any other job, being good at the job is a process, not an outcome. Pursuit of the frontiers of the field, a focus on incorporating new ideas, relentless introspection and feedback, hard work, and constant improvement of technical skills will help you stay ahead.
  • Identifying and improving the necessary technical skills was the easy part. Merely recognizing what the other necessary skills were, like salesmanship, self-discipline, introspection, hard work, was harder, and it was hard to miss that I didn’t even have them.
  • Consulting is a lifestyle choice. This is not only when it comes to travel, although that is a significant portion of it. The consulting lifestyle revolves around the project lifecycle. It starts with the pitch and sale, moves onto research and analysis, and concludes with presentation and feedback and iteration — with different required skills in each portion of the cycle.
  • When extensive travel is required across multiple time zones, being good contains a physical, athletic aspect to it as well. Maintaining clarity of thought, focus, and polished communication skills when I am physically in a meeting with a client while my biological clock is deep in an REM cycle, is as physically demanding as being in minute 32 of an intensive Muay Thai workout.
  • There is another, longer cycle, which is the lifecycle of a consultant himself or herself. As an entry-level person, you are primarily engaged in research, analysis, report preparation. As you progress out of the back office (figuratively speaking) and into more of a client-facing role, you are called on to do more meetings, pitches, presentations, face-to-face communications with the client. Before you know it, your job is no longer research and analysis; it turns into that of a representative, salesman, and manager of the younger versions of you. As with the project-cycle, different skills are required at different points in the cycle.
  • There are several things about the nature of the job itself. First, a consultant is a paid outsider, so that no matter how convincing you are, nor how much you know, you have no inherent power to actually implement your ideas. Clients can and will ignore your advice. This can be demoralizing.
  • Another important thing about the nature of the job itself is that that you’re in the business of selling time — your time, which is finite. Consulting is the business of selling your capabilities to achieve a recommendation, insight, or strategy, which in itself is the product of human minds working in real-time. If that sounds vague, that’s because it is. And because what you’re selling is so undefined, there is naturally a huge variability to it, regarding both the actual product and your client’s expectations. Managing both of these things becomes a huge drain on resources and time. Clients will, almost as a rule, demand that you do anything and everything for them that they’ve seen you do, read about you doing, heard about you doing, and imagine that you can do.
  • Because of this variability (also known as customization), scaling a consulting practice is difficult. Consulting is the business of leasing a limited portion of human brainpower for a limited period of time to accomplish a task. Unless the human brains in your employ can be programmed to think faster and more effectively at the same time, increasing the productivity of the fundamental resource (brains) has natural limits.
  • But scaling can be done, and in order to do so, the metric that I find natural and easy to focus on is the implied professional fee that is being charged to the client. This can be done in almost any service industry: think about what you’re charging the client in terms of an implied per hour cost. Take your fee and divide it by the number of hours you or your people will work. Whether it is $100, $200, $500, $1000+, the principle is the same.
  • If you want to scale and grow, you need to ruthlessly outsource tasks that can be performed at an equivalent level to those with the lowest rate. If your rate is $500/hour, does it make sense for you to be doing document preparation or formatting that you can pay $15 to $20/hour for? Or even to be maintaining a model yourself? The argument to this is that by removing yourself from the work, the overall work will lose quality. As a thought experiment, does a film lose quality because a director is not doing the cinematography or acting himself? This is a big problem in small consulting companies where everyone is expected to do everything. My experience has suggested to me that this is immensely inefficient.
  • Merely going through this exercise will force you to develop systems, templates, methods, and training, which will increase the productivity of the entire team. Another issue at play here is the sheer economics of batch tasking and the costs of switching. Switching tasks incurs mental and thus temporal costs. Even if, theoretically, there were a ‘superstar’ consultant who could do each of 5 individual tasks at a superior rate than anyone else in the organization, this person may still be slower to complete the entire ‘set’ of tasks than 5 different people specializing in those tasks, because of the switching costs.
  • This is the kind of issue you deal with as you make the transition from entry-level positions to higher ones, and you’ll have to abandon old habits and gain new ones. This is the kind of struggle you experience at any professional services firm. Where you go from being a person who produces work, to the one who guides and oversees it, and then finally who ‘manages’ and sells it. You remove yourself from the work that you were originally hired to do, and you need to develop new skills to adapt.
  • It may very well be the case that you are content with the level of sales and work-to-reward ratio you are experiencing. Then none of this applies. But in a changing world, stagnation is by definition a regression. To even keep up, we must keep growing and optimizing.
  • More on people — who as brain-carriers, are a consulting firm’s primary asset, as the saying goes. Programmers talk about the 10x programmer, and to a certain extent I believe this is true of people in any service-oriented industry. Performance conforms to a distribution with fat tails on either end. 80% of the people are in the middle, which does not imply mediocre. It just means everyone is clustered there. Then there are the 1–5% who are outliers in either direction. Alternatively, if you think about the 80/20 rule, it is saying that a sufficing level of work, the 80%, is easy to achieve. This is the equivalent to getting a solid B in a bell-curve weighted class. I hated this system in college, by the way. But the 20% is the spread field, where you distinguish yourself from others. It’s a wide open field. 20% is the details, and this is where people differentiate themselves by adding more value than others.
  • Think of it this way. Say you hire a painter to paint your walls. Both cover the walls in paint, but one of them pays attention to the details. He covers your existing furniture, he pays attention to the finishes, making sure the edges and corners are perfect, nothing is smudged, no glue is on the ground, nothing has been broken, making sure there is absolutely no blemish anywhere, everywhere. Conscientiousness and care go a long way in differentiating yourself from the pack. To use a consulting example, at the analyst level, this would be someone who works faster and harder than others, builds new frameworks and approaches, even while paying attention to formatting and presentation, to typos, wording, someone who builds models that can be easily followed by others, someone who integrates frameworks located across different sources, someone who doesn’t hard-code inputs in Excel, etc.
  • All of the above is in the name of widening the gap between implied hours charged for, and hours actually worked. The other way to do this, obviously, is by increasing the number of implied hours charged for; i.e. charging more. The easiest thing to envision, in theory, is the hardest to pull off, and this is to develop a truly unique skill. A moat skill, a monopoly skill, one that no one else has. As in the story of the repairman and the hammer. When you develop a skill like this, you can charge whatever you want. But this is incredibly difficult to do.
  • The more realistic thing that can be done is develop a brand and a reputation for good work. A brand is something that does marketing for you even while you sleep. A brand helps you charge more for work of an equivalent quality, because in consulting, the hardest thing to realize is that people are not buying the service itself — they are buying the reassurance. This is why lawyers can get paid even when there is a risk of losing, and consultants can get paid when there is the clear possibility of finding nothing new. This relates back to the old saying that consultants are in the business of using the client’s watch and getting paid to tell them what time it is. But people hire them anyway.