While I was unaware of it at the time, my real compensation for that job wasn’t monetary. It was learning about and getting comfortable with rejectio… - Sam Zell

Opportunity is very often embedded in the imbalance between supply and demand. It could be rising demand against flat or diminishing supply, or flat demand against shrinking supply. When there’s an imbalance, I look at where the two lines will intersect and then determine whether it is cheaper to buy or to build. Usually the answer is in acquisition, which eliminates a lot of the risk inherent in development. I like to invest below replacement cost, thereby creating a competitive advantage.

Risk is the ultimate differentiator. I have always had a deep and complex relationship with it. I am not a reckless person, but taking risks is really the only way to consistently achieve above-average returns — in life as well as in investments. My father proved that when he left Poland. I am probably more comfortable with risk than most people. That’s because I do as much as I can to understand it. To me, risk-taking rests on the ability to see all the variables and then identify the ones that will make or break you.

Around the same time, Congress passed the Economic Recovery Tax Act. Among other things, it extended the life of net operating loss carry-forwards (NOLs) from seven to fifteen years. NOLs allow companies to offset their current year’s taxable income with past losses, thereby reducing current tax liability. The goal of the act was to help struggling companies recover and to enable their shareholders to benefit from the prior losses. We took a look at all of the public companies with large NOLs and found something surprising. These companies had virtually no change in share price as a result of the new legislation. The market was overlooking the significant value added through the extended life of NOLs. That presented us with an enormous opportunity to gain control of those NOLs and create holding companies for businesses whose profits would be shielded. If a company was trading at $3 a share for a total enterprise value of $45 million and it had $350 million in NOLs, we knew we could create profits that were sheltered and convert those NOLs (which were valued at $0) to roughly $100 million of cash, or 25 cents on the dollar over time. And that’s just what we did.