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Today, we will learn more about:

1. Sam Zell - Capital Allocators Podcast

2. Hindenburg Research shorts Tingo Group

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Sam Zell - Capital Allocators Podcast

On May 18th, Sam Zell, the founder and chairman of Equity Group Investments, passed away, leaving behind a 60-year legacy of domination across the real estate and publishing industries, among others. This episode of Ted Seides’ Capital Allocators podcast is a one-on-one conversation published in memoriam in which Zell discusses the formative childhood experiences and initial bouts in entrepreneurship that shaped his investment strategy and comfortability with contrarianism. Zell also offers rich insights surrounding business development and the emerging investment landscape. We will summarize Zell’s foundational background and explain how this gave rise to a set of five core beliefs we have extracted from the podcast.

Foundational Background

Zell’s parents escaped to Chicago from Poland during World War II. He was born 90 days after his parents immigrated and learned about the United States with them simultaneously. Zell’s father worked demanding jobs to keep the family afloat and pushed his children to succeed academically. This domestic atmosphere rendered the word “fun” nonexistent and unnecessary because of the bountiful opportunities accessible only in America. He describes his childhood as one that always demanded seriousness from him.

Through his father's experiences, Sam equated making money with freedom and flocked to capital-bearing opportunities. First, he started a photography business at his middle school prom. Later, he purchased $0.50 Playboy magazines, read them on the train, and then resold them for $3.00 to his friends. He quickly discovered the thrills and fruits of profit generation.

Sam attended the University of Michigan for his BA and JD degrees. There, he made his first real estate investment and met Robert H. Lurie, who would become his lifelong friend and business partner. In return for a free apartment, Zell and Lurie managed off-campus housing from a local landlord. During his junior year, he bought, renovated, and managed his first building, enabling him to double the rent on the now-elevated units inside. He continued this with Lurie throughout college and law school, amassing incredible business acumen in his early twenties.

Sam graduated in the top quarter of his law class and intended to work as a lawyer. After many application rejections, he landed a first-round interview in which the interviewing partner began by asking Sam to discuss his deal experience. Sam was perplexed to learn that the law firm had no interest in hiring him but rather was interested in how he built the apartment management business he described on his resume.

Core Belief 1: Common Sense Isn’t So Common

Reflecting upon this moment, Zell invoked the wisdom of Abraham Lincoln, commenting, “Common sense isn’t so common.” He remarks that he never thought his accomplishments were extraordinary, because he was simply employing common sense principles in areas where he saw an opportunity. Zell walks Seides through his process. He sought to acquire an asset at a low price, make the minimum improvements needed, sell the asset at a high price, and reinvest the return in his next opportunity.

Acquiring low-priced, often highly distressed assets and resurrecting them earned Zell the reputation as a “grave dancer,” a term coined in his 1976 article about contrarian investing. He embraced this nickname, repeating that common sense and unemotional logic always reigned supreme, regardless of the decisions of other investors.

Core Belief 2: Limited Competition Unlocks Exceptional Margins

In addition to common sense, Zell repeatedly discusses how he navigates competition. Zell sought markets with little or no competition, contrasting the real estate opportunities in cities like Ann Arbor, Reno, and Tampa to those in cities like New York, Chicago, and Los Angeles. He scored better deals in these smaller cities, and the limited competition allowed him to produce exceptional margins as the number of deals he struck escalated.

Core Belief 3: Liquidity = Value

In one anecdote, Zell remarks reading an article that assessed his net worth as north of $1bn while concerns loomed about how he would make payroll that Friday. He explains that leverage allowed him to have a large, albeit illiquid, volume of assets and no cash. This engendered the belief that the viability of turning something liquid is what gives it its true value in the long run.

Core Belief 4: Maximum Downside Evaluation

Zell references one of his “most successful” deals, which was one in which he lost $50mm. He reveals that as his portfolio and responsibility grew, he began to evaluate each investment by the maximum downside it may bring and whether his firm could tolerate the downside. The aforementioned deal was deemed successful because of his impeccable accuracy in predicting the loss. Before investing, Zell calculated that his firm would lose $50mm in the worst-case scenario. Also as predicted, his firm tolerated the loss and charged on.

Core Belief 5: Thou Shalt Not Take Oneself Seriously

In contrast to his childhood, Zell repeatedly emphasizes the importance of laughing at yourself and having fun. He speaks considerably about fostering a culture of creativity at his firm and the precedent he sets as a leader, mentioning his firm’s near-negligible attrition rate. When hiring, he looks for people that are hungry, loyal, and orientated for the long term and that will elevate the standards and goals of his firm. He explains that he has spent his entire life testing his limits as a “professional opportunist” and seeks people that will do the same while enjoying themselves and having fun.

Zell’s personal and professional beliefs give us a lot to learn from and admire as we remember his unparalleled achievements and everlasting influence.

Hindenburg Research shorts Tingo Group

A few weeks ago, we wrote here about the report published by Hindenburg Research on Icahn Enterprises. This past Tuesday, the investment research firm published a report shorting Tingo Group (NASDAQ: TIO). In this case, Hindenburg argues that the company is basically a scam with no underlying business.

Hindenburg believes TIO is running a scam for six key reasons:

1. Bogus CEO Background

   1. The company is headed by “Dozy” Mmobuosi, a more careful background analysis showed many concerning aspects that question the validity of his accomplishments

      1. Dozy claims that he developed the first mobile payment app in Nigeria

         1. The Tingo website claims Dozy helped launch Nigeria’s first SMS banking solution called “Flashmecash”

         2. Hindenburg reached out to Flashmecash’s actual creator, Deji Oguntonade, whom they verified as the holder of Flashmecash’s patent, along with web searches. He informed them that Dozy’s claims were “totally false” and shared a WhatsApp post he wrote to Nigeria’s top fintech companies and regulators asserting that Dozy’s claims were a “pure lie.”

      2. Dozy claims to have received a PhD In Rural Advancement from UPM, a university in Malaysia, in 2007

         1. Hindenburg contacted UPM to verify the degree. The institution wrote back stating that no one with his name (or similar variations) was found in their verification system

      3. In 2017, Dozy was arrested in Nigeria and faced eight charges including conspiracy, obtaining by false pretenses, and issuance of approximately $70,000 in faulty checks

         1. The case was later settled in arbitration, according to local media and company filings, but is certainly not what investors aspire to see in an executive

      4. In 2019, Dozy claimed to launch “Tingo Airlines” and posted social media posts encouraging customers to “Fly With Tingo Airlines Today”

         1. The page was removed after observers noticed that the planes had too many windows and were missing a door, owing these oversights to a poor Photoshop job

         2. Dozy later confessed to never owning the planes and blamed the failed launch of the airline on Covid

2. Food Business Lines full of red flags

   1. Tingo’s food division (~68% of reported revenue) claimed to generate $577.2mm in revenue and $143.5mm in operating income last quarter alone, representing 24.8% operating margins

   2. This margin is higher than every major food company in the world, so you would expect them to own a fully integrated vertical chain. Instead, they actually act as a middleman between farmers and an unnamed third party that manages its food processing

   3. Despite the great operating success to date, in early 2023, the company announced plans to construct a $1.6bn food processing facility in Nigeria, with completion scheduled for mid-2024

      1. Advertisements showed a rendering of the planned facility which was also used in Tingo’s investor presentation and was featured on a billboard at the groundbreaking of the facility, held on February 9^th, 2023

      2. Internet search reveals that the rendering of Tingo’s planned facility matches a picture from stock photo website ArtStation

      3. In its Q1 2023 results filing, reported May 15th, Tingo said that since its groundbreaking, it has made significant progress, explaining, “Since then [the groundbreaking ceremony], significant progress has been made on the construction of the facility including the installation of infrastructure, drainage, water supply and the foundations of its numerous buildings.”

      4. Hindenburg decided to visit the location and found several cinderblocks that were in place as part of the ceremony, but no additional bricks or additional site prep, despite the company’s claims and supposedly being only 18-24 months away from targeted completion

3. Phone Business Lines (Tingo Mobile) full of red flags

   1. Tingo claimed its mobile handset leasing (~15% of reported revenue), call, and data segments generated $128mm in revenue last quarter

   2. Hindenburg visited Tingo Mobile’s office in Nigeria and found a sign posted by Federal Tax Authorities stating that Tingo is delinquent on tax obligations

   3. Hindenburg checks with the Nigerian Communications Commission indicate that there are no records of Tingo being a Mobile Licensee

   4. Hindenburg tried contacting Tingo’s support team to buy a phone but found no success (particularly suspect given that the company says it is adding millions of users)

4. Online Market Place (NWASSA) full of red flags

   1. Tingo claims that its NWASSA platform (~15% of reported revenue) is a groundbreaking innovation that cuts out middlemen by allowing farmers to sell products wholesale or retail directly in their home marketplaces. The company calls it “Africa’s leading digital agriculture ecosystem”

   2. DNS records for the NWASSA web domain show it was registered in May 2022, two to three years after the claimed launch date of the platform

   3. The website has been “Under Maintenance” and inoperable for months

   4. The company does not seem to be pricing its products at competitive prices, despite recently expanding the NWASSA platform into Ghana because of Nigerian success

      1. In one instance, the company offered a bag of “Ting Rice” of unspecified quantity for $2,500. In contrast, Ghana’s GDP per capita is about $2,400

5. Export Business Lines (Tingo DMCC) full of red flags

   1. When you learn how to make a DCF, you learn that the perpetuity growth rate should be lower than the GDP growth rate. Otherwise, in the long run, you will find yourself with a company larger than the country it is operating in

      1. Tingo Group seems to have missed a similar lesson, in fact:

         1. Tingo’s 2023 Sales Projections ($1.34bn) are higher than the entire nation of Nigeria’s annual agriculture exports in 2022 ($1.15bn per Government Data)

   2. A search of Nigerian customs data provided through import/export aggregator Tradesparq yielded no results when searched for keywords “Tingo,” “Tingo DMCC,” “Tingo Group,” “Tingo Mobile,” or “Tingo Foods”

   3. DMCC’s website has numerous non-functioning links and includes a fake testimonial that appears leftover from the website template

6. The company’s financials seem fabricated

   1. Tingo’s financial statements are riddled with errors and typos:

      1. Financials include a note to oneself that someone apparently forgot to delete: “Please Update For The Tingle (sic) Transaction”

   2. Beyond typos and other errors in notes, the company’s core financial statements also exhibit major irregularities:

      1. For example, Tingo’s cash flow statement reported that receivables decreased by $150.1mm. Its balance sheet in the same period reported that receivables increased by $345.2mm

   3. The cash balance generates less interest than expected:

      1. Interest rates in Nigeria (where cash is held) are around 8%. Tingo supposedly had $500mm in cash at year-end 2022 and $780mm at the end of Q1 2023. If we conservatively assume a $600mm average cash balance, Tingo should have received about $12mm in interest income for the quarter. However, the company reported just $1.4mm for this metric

These six key reasons merely summarize Hindenburg’s dissection of TIO, and we recommend reading the full article report. It provides an elegant and thorough example of how to research a business.

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