The Very, Very Rich and How They Got That Way (33 page)

President

Arthur W. Rubloff And Company

Rubloff has been in real estate since he came to Chicago from Minnesota in 1919. He pioneered Chicago’s Magnificent Mile and Sandburg village projects, then went on to develop Bayshore Properties in San Francisco and to create the Grand Bahama Port Authority in the British West Indies.

If I had $5000 and I were a young man, I’d go out and buy a small building of some kind, preferably a residential piece of property such as a two-flat or a three-flat or a brownstone or whatever, that I could buy for, say, $15,000 with $5000 down and the balance over a period of time.

An old building or a new building?

An old building. You couldn’t very well touch a new building. But I’d buy it in a promising neighborhood, like the Near North Side of Chicago or the Northwest Side.

Aren’t old buildings risky?

Well, of course, there’s a risk in everything; there’s a risk in walking down the street. But if you look at it from a practical point of view, you have to have a little expertise, and it takes great courage and imagination, too. It’s easier said than done, but it’s been done on countless occasions. I’ve read countless stories about how young fellows get started in buying a two-flat or a brownstone for a little money against a mortgage and putting it in condition and renting it and building up the income, then selling it and making a small profit, then taking that with his original investment and buying another piece of property.

Can you find that kind of property for $15,000?

Oh, yes. It depends on the neighborhood and the seller and a lot of factors. I don’t mean that it’s easy to go out in the market and buy $15,000 of good property for $5000 down, but it’s done. You have to work at it. I know one man in particular, a junior executive with one of the major insurance companies. He’s a man of limited means, but he’s bought four little properties on the Near North Side, all on his own initiative. He didn’t ask anyone; he didn’t seek any advice. And he’s doing well with them. He collects is own rent. They’re converted properties.

You said a “promising” neighborhood. Does that mean a decent neighborhood?

Not necessarily. The neighborhood may or may not be so decent. I’m talking about a neighbourhood where you have real-estate activity, where there’s a demand for living quarters. Of course, there’s a tremendous demand for older apartments today, anyway. I never saw the demand for older apartments that exists today.

More so than new apartments?

More so by far, because people need larger areas and they can’t afford to pay the rents of new buildings because of the high costs of money and construction, and so they have no alternative if they want a roof over their heads. So they take an older apartment and make some of the repairs themselves. You take the North Avenue and Sedgwick area. You can pick up small flat buildings for $15,000 to $20,000, and the guy that wants to sell might take $5000 down. There’s a tremendous demand for that kind of space.

And that’s the way you’d do it if you were starting now?

That’s the way I started. I didn’t know any more about the real-estate business than my grandmother. I got a small interest directly in a piece of property and I pyramided that, and I put the capital into something else. And as I went along, I had several pieces of property, and then I had many more pieces of property over the years.

What could a person using your formula expect to realize in, say, ten years?

It depends, of course, entirely on the leverage [money borrowed]. If you bought a piece of property for $15,000 with $5000 down, you’d have a mortgage of $10,000. Say that the money and amortization cost you 12% – that’s a lot. That’s $1200 a year. And maybe your operating costs would be $300, for a total of $1500 a year. Suppose rents amounted to $200 a month, or $2400 a year. You’d have a profit of $900 and $900 represents almost a 20% profit on an investment of $5000. Well, it doesn’t take too long on that kind of profit, and with residential property you can take accelerated depreciation – so that our $900 might come back mostly tax-free. Of course, there are some other problems today, because they’ve changed the tax laws. Now, if you sell the property before ten years have elapsed, you have to give back the depreciation. But, even so, it isn’t bad.

And then you reinvest the profits in other properties?

With time and a little patience and ingenuity, you can do it. And as you get more property, you get a little bank credit. And if you get bank credit, you move in on something that’s a little larger. And if you get money at 9 and 10% and you can make 12, 14 or 15%, then you’re making profit on your money, aren’t you? The point is that the bank will look at the man as a part of the security, at what kind of a person he is. And banks are willing to take some risks on small people. If you talk to investment bankers, they’ll tell you how good it is to buy 81⁄2% bonds or buy the market. I don’t know anything about that. I know I’ve lost my money in the market, but I didn’t lose it in real estate.

President

Metropolitan Mutual Assurance Company

Harris grew up in Chicago, working first for the city, then taking an interest in real estate. During the Twenties and Thirties he specialized in vacant-land acquisition, financing, planning new construction and mortgage counselling. In 1940 he became president and general manager of the Parkway Amusement Corporation. He joined Metropolitan in 1956. Harris served as present of the National Association of Real Estate Brokers from 1953 to 1959.

If I had some special talent or interest in a specific business, I’d go into business. If not, I’d buy land in a developing area. With $5000 there’s very little you could buy in improved property; so I’d look for land on the periphery of the city. I might even be able to make a down payment on a tract of land.

You mean an acre or two?

Maybe more. The owner might be willing to sell on contract.

How would you determine which land to buy?

Simply by looking over areas and by following real estate ads in the newspapers. I’d also keep an eye open for future developments such as new highways or changes in highway locations.

So you’d prefer that method to, say, the stock market?

Well, it would depend on the person, of course. Land investment is long-range, but if I were a young man, I could afford to wait for its value to rise. On the other hand, if I wanted immediate return on my investment, I wouldn’t go into the stock market. I would buy bonds or debentures, which are now paying in the area of 9%.

But don’t such bonds lock you in?

You can’t redeem them for five years, but every year you’re going to get that 9%. So a man with $5000 could buy five $1000 bonds and would get $450 a year for his investment. This could go on for quite a long time. Some bonds being issued now mature in the year 2000 or 2010. And that 9% is guaranteed until that time.

Where do you buy such bonds?

Any of the bonding houses [listed under Bonds – Special Investment in the Yellow Pages]. They publish ads in the newspapers all the time listing new issues coming out. Consolidated Edison, for example, is just putting out a new issue of bonds that will pay from 91⁄4 to 91⁄2%. If I wanted immediate return on my money, I’d buy them.

Chairman Of The Board

Chicago Mercantile Exchange

Melamed graduated from the John Marshal Law School in 1955 but began trading in commodity futures “with a very little money” while still in school. Now he’s the principal partner in a law firm, partner in an investment company and is serving his second term as chairman on the Chicago Mercantile Exchange. The exchange is a marketplace for the buying and selling of future contracts in pork bellies (uncured bacon), live cattle, hogs, potatoes, eggs, turkeys, lumber and hams.

First a person has to determine in his mind whether he’s looking for security by way of an income. But $5000 is so small and insignificant a figure to start building a base on that it almost rules out any kind of investment that would give you income security – either via bonds or stock market or anything like that.

Supposing, instead, he’s looking for quicker results?

Even then, let’s face it, $5000 is not a dramatically big figure to start with. But, certainly, commodities could produce some good results. However, I would immediately hasten to advise the young man – or whoever – that before he takes a dive into commodities, he should very carefully research the subject, do some self-educating on it, talk to some people in the industry and find himself a reliable brokerage firm. After he’s done that and after he realizes that his venture into the commodities may lose him the $5000, after he’s done all that and he’s willing to take the risk, then I would say, certainly, commodities can offer the opportunity for a very good return.

What kind of a return?

A person can look forward over a year, if he’s done very well, to making 50 to 100% on his money.

That’s very well, indeed.

Well, let’s say in a year or two. Please understand this is a very, very difficult area. You just can’t go blind into it, merely relying on somebody’s opinion. If he wants to be involved in what he’s doing, he should consider commodities. If he wants to invest $5000 into something where he can just forget about it and be sure that it’s going to make him some money in years to come, that’s not commodities. In commodities you’re involved, you have to keep abreast of trends, you have to be interested. You just can’t invest in commodities and turn around and let your broker worry about it. It isn’t good enough. The successful people in commodities worry about it themselves and pay attention and learn as they go along. And they do well.

All of them?

They
can
do well. Naturally, there is a multitude that don’t do well. It doesn’t turn merely on paying attention, obviously. If that were the only criterion, then everybody would pay attention. It requires an ability to analyze and learn statistics and to discuss it with a broker. Naturally, he’s going to rely heavily on a broker’s advice, but in order to understand the broker’s advice, he has to first educate himself.

How would he begin this education?

There are a number of good books and pamphlets on commodity trading that would give him a base. The exchanges themselves offer much information that’s free – historical facts about what commodities do, seasonal trends, and so forth. After he has the basic education, then he should get in touch with a reputable broker.

Are some commodities better than others for the neophyte to begin with?

There are various guidelines he’ll learn, and one is to begin with a commodity that isn’t too volatile. Something like cattle or a grain that rises and falls, but not dynamically overnight. Trading in pork bellies or eggs, let’s say, which are affected by various factors daily, should be done only after the trader has some experience – though it should be an objective. Pork bellies is the number-one trader at this time. Another rule would be not to go into too many commodities at one time, even if he were successful. You’ve got to pay attention, as I said before. And you can’t pay attention to all of them at one time. One or two markets are sufficient at the start. He’ll have to do that, and he’ll have to learn how to cut his loss when he’s wrong and to admit an error so that he can fight again.

He’s got to learn when to sell.

Yes, as quickly as possible he must accept his loss. In the area of commodities that is perhaps the most salient rule of all. Learn to take your loss quickly; profit will come. Chance dictates that you’ll be right some of the time. The question is, how much will you lose when you’re wrong versus how much will you make when you’re right? And you’ve got to learn to limit your losses. But you said something about “when to sell.” That’s human nature. We always think of buying first and selling later. In commodities that isn’t necessarily the case, because they travel in both directions and it’s not like stock. You can invest in a sale first. The short side of commodities is potentially as good as the long side. The public is hard pressed to learn that.

It’s a hard concept to understand – selling something you don’t have.

It’s a promise, so to speak. But, nonetheless, it’s got to be part of the good commodity trader’s repertoire. And for that reason good stock firms have done well with commodities, because even in these hard times in the stock market, profits from commodities have continued pretty good. Good brokers have learned that there are two sides to the commodity market, and they’ve learned to tell their customers.

Isn’t trading in commodities really just gambling?

The rules of gambling and the rules of chance and probabilities do not apply to commodities, and people who think that are not going to make money in it. It’s not gambling. It’s supply and demand and economics.

Chairman Of The Board

Urban Investment And Development Company

Klutznick is best known as the developer of Park Forest and three of the Chicago area’s major shopping centers, Old Orchard, Oakbrook Center and River Oaks. He served as U.S. representative to the Economic and Social Council of the United Nations under President Kennedy and as a member of several delegations to the General Assembly of the UN. Recently his company announced with Sears and Marshal Field and Company a quarter-billion-dollar community to be developed in Lake County. Urban Investment will also build a $60 million complex on North Michigan Avenue.

What kind of person are you talking about? Is he married? Does he have children? Is his education completed?

Let’s assume you were beginning your career.

If I were beginning my career again as a professional man and I had $5000 and a young family, I’d put it in either a savings account or a savings-and-loan association, or I’d buy something that is extremely secure, such as a U.S. government bond or municipal bond. If I were going into business, I’d invest it in my business. I would not gamble with $5000 if I were beginning my career. I would learn the habit of saving.

Supposing you were single and didn’t have quite all those responsibilities?

The first thing I would do with the first money that I had, if I were young and starting, is to save it and not gamble with it. I’d gamble only when I’d accumulated enough that I could afford to gamble by buying equities and common stocks. I’m a conservative man.

How much would “enough” be?

Enough to carry myself if I lost my job.

After the $5000 doubled, for example?

After it doubled or tripled, depending upon what the dollar was worth at the time.

How many years would it be before you began investing?

Depends on how much money I was making. I think the most important habit that a young man starting out must learn is to save, and, having saved to the point where he has a measure of transient security then he should invest in the equities of this country, which I consider to be great. I’m sorry, but that is the way I would live my life.

And is that what you did?

No. When I was in college in 1929, I invested in the stock market.