Tuesday, April 21, 2009

Walter Shorenstein: what I've learned

Taken from the Bottom Line blog at SF Gate .com
Walter Shorenstein: what I've learned
The following is a transcript of San Francisco real estate owner Walter Shorenstein's contribution to an oral history project conducted by UC Berkeley's Bancroft Library Regional Oral History Office.

Lessons Learned from 94 Years of Perspective and Success

By Walter H. Shorenstein

After serving in World War II, I arrived in San Francisco with no job, a pregnant wife, and less than $1,000 to my name. Over the next 60 years I built one of the nation's largest privately-owned real estate firms -- San Francisco's largest owner of office properties with distinguished holdings including the iconic Bank of America Building.

I've lived through the Great Depression and several wars, and I've ridden the ups and downs of economic and real estate cycles. Now in my tenth decade, I've seen things and learned lessons that apply to individuals and families, small businesses and multinational corporations, as well as state and federal governments -- especially now, as people struggle to makes sense of the current financial upheaval. I don't mean to be preachy -- I simply want to share some of what I've learned.

It should be clear by now that we can't count on government regulators to protect us. Just because we can sign up for new credit cards or buy things called "credit default swaps," doesn't mean that we should use borrowed money to invest in things we don't understand. Even if our regulatory agencies rediscover their spines, government overseers will never supplant individual responsibility and common sense.

Maybe you should trade credit default swaps if you've spent your entire adult life studying derivative contracts. However, if terms like counter party risk, mark to market accounting, and capital structure arbitrage aren't part of your everyday conversation, then don't risk your future on something you don't understand.

As my company grew steadily larger and more successful, so-called "experts" told me to diversify. I wouldn't. I stuck to what I knew, what I had experience doing. (I have my own personal interests that I've always kept separate from my business, such as the Shorenstein Center for Press, Politics and Public Policy at the Kennedy School, and the Asian Pacific Studies Program at Stanford.)

And don't worry -- you won't be missing out on some magical, get-rich-quick, money-making scheme. Just because a new investment fad sweeps through certain crowds, that doesn't necessarily mean it's a smart place to put your money.

Just look at the recent track record of the so-called "Best and The Brightest" -- the titans of our financial industry and government. While often mistakenly used as a compliment, it's worth remembering the intended irony in David Halberstam's use of the term in his book about the academics and intellectuals responsible for the Vietnam War debacle.

Halberstam used the term to make the point that even educated (and wealthy) people can show extremely bad judgment and make stupid mistakes. He detailed how the "best and brightest" made "brilliant policies that defied common sense" in Vietnam, and ignored the advice of experienced policy experts.

Education is a wonderful thing, (which is why I'm closely involved with both Harvard and Stanford), but it's not everything, and classroom learning can never completely replace real-world experience. Most of the successful real estate folks in my day never went beyond grammar school.

My most valuable education came from serving in the military, and spending the Great Depression helping my dad sell clothes at his store. There's a great Yiddish word, "seykyl" which translates loosely as "street smarts." I always preferred to hire people with street smarts than book smarts.

It's said that if you're chased by a tiger, you don't need to outrun the tiger, you just need to be faster than the person next to you. Similarly, many wealthy people have learned that you don't have to be super smart to succeed, because there are always dumber people out there.

Advanced degrees and computer models too often replace common sense. Financial common sense is not that different from old-fashioned, back to basics, everyday common sense: What goes up usually goes down, and vice versa. If you don't understand it, don't invest in it. If it sounds too good to be true, it probably is. Invest in things you understand -- companies you trust, that make products you use and appreciate. Don't over-think things, trust your gut instincts.

In the military, one of my duties was to assess new recruits and assign them to a service branch. I had 15 minutes to evaluate their character and decide their fate -- I had to trust my gut. And I still trust common sense and gut instincts more than a group of people with PhD's and fancy computer models.

Be careful with credit. Using leverage can be useful and necessary -- but don't overdo it. When I bought the Bank of America building, the most cash I had into the deal was $2 million -- a relatively small portion of the total package, but I did my homework and understood my risks.

Too many families and governments underestimate or simply don't understand the power of compound interest. Just as compound interest can work for you in a good investment, it works against you with lingering debt stuck on a credit card or a mortgage. Warren Buffett says that "borrowed money is the most common way that smart guys go broke." I would emend that adage to include smart countries.

Brokers used to be limited to a 10:1 leverage ratio; however, recent regulatory changes loosened the limits and freed companies like the late Lehman Brothers to gamble recklessly with the house's money. After they crashed and burned, we learned that Bear Stearns and Lehman Brothers were leveraged more than 30:1.

In the midst of the froth and excitement of a bubble economy, there is always a boisterous and delusional group declaring an end to gravity and logic. People claiming that "the old rules don't apply" are simply part of the pattern -- an element of the cycle that repeats itself in every bubble, from Tulip-mania in 1636 to the recent tech bubble. In my line of work, for example, Real Estate Investment Trusts (REITs) were all the rage in the early 70s and late 90s, but what do you think happened to them in the 80s and again now? To paraphrase: "Those who refuse to acknowledge the cycles of the past are condemned to be unprepared for them."

The absurdity of bubbles seems obvious in retrospect, but it's the simple things that get overlooked and forgotten during wildly prosperous times. Deregulation and irresponsibility have combined to give individuals, businesses and governments too much access to capital and not enough understanding of market cycles.

My military experience taught me to be ready -- to have not just a Plan A, but also a Plan B and a Plan C, because things change, and while you can't control everything, you can be prepared for variety of circumstances. These are interesting, but not unprecedented financial times. It's simply time for Plan C and an extra helping of good old-fashioned common sense.

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