#69 Stephen Schwarzman: What It Takes

Blackstone CEO Stephen Schwarzman gives advice on attracting and assessing strong talent, making smart decisions, and how to press forward when the chips are down. Go Premium: Members get early access, ad-free episodes, hand-edited transcripts, searchable transcripts, member-only episodes, and more. Sign up at: https://fs.blog/membership/ Every Sunday our newsletter shares timeless insights and ideas that you can use at work and home. Add it to your inbox: https://fs.blog/newsletter/ Follow Shane on Twitter at: https://twitter.com/ShaneAParrish Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Speaker 00

  And I believe the most important decision is to not lose money. Some people care about the upside, they don't worry much about the downside if they think the upside is great. I like to start in the reverse, sort of like a doctor, you know, do no harm.

• 0:26Shane Parrish?

  Hello and welcome. I'm Shane Parrish and this is The Knowledge Project, a podcast exploring the ideas, methods, and mental models that help you master the best of what other people have already figured out. As some of you have no doubt already noticed, we've started exploring more diverse subjects. The Knowledge Project aims to explore pretty much everything, from science and history to relationships and decision-making, all with the goal of helping you better understand yourself and the world around you so that you can live a more meaningful and conscious life. We truly want to master the best of what other people have already figured out, and that's not limited to one particular domain. You can learn more and stay up to date on new episodes at fs.blog/podcast. Farnham Street puts together a weekly newsletter that I think you'll love.

• 1:11Shane Parrish?

  It's called Brain Food and it comes out every Sunday. Much like this podcast, it's high-signal, timeless, and mind-expanding. You can read what you're missing at fs.blog/newsletter. Today, I'm speaking with Stephen Schwarzman, the CEO of Blackstone Group, one of the largest private equity firms in the world. This conversation took place in Blackstone's office in New York. We dive into how his high school track coach, Jack Armstrong, taught him enduring lessons that helped him overcome early pitfalls, the one thing the Harvard MBA teaches you, and why he wanted to drop out of Harvard in his first semester, overcoming the early struggles of Blackstone and his divorce, and some of the lessons he's learned about people, running a business, and making better decisions. It's time to listen and learn.

• 2:07Shane Parrish?

  I'm so happy to be sitting down here with you today. Thank you for taking the time to do an interview.

• 2:13Speaker 00

  It's my pleasure.

• 2:15Shane Parrish?

  I'm wondering what the biggest lessons you learned from your parents were growing up.

• 2:19Speaker 00

  I learned to always keep trying. I learned that you can't look to anyone else for validation. My parents never congratulated me on anything I ever accomplished. It was just assumed that that's what you were supposed to do. So I sort of got used to that. And I've never done things for external validation as a result. It's just the thing itself. If it feels good to me, if it's worthwhile, if it's something that I've created or done, I have to own it myself. I can't depend on anyone else to tell me that was a good thing.

• 3:05Shane Parrish?

  Is that how you are with your kids today?

• 3:07Speaker 00

  Pretty much. I don't push my children. I've told them what I want is for them to do the best they can do. It's something of their choice. And I want them to be happy. And I think they both are.

• 3:21Shane Parrish?

  One of the things that struck me as I was reading your book was the role of Coach Jack Armstrong in your life. Can you expand on that a little bit? Give us some context as to...

• 3:31Speaker 00

  Yeah, I had a track coach in high school who was a remarkable person. And he won 186 dual meets and lost four.

• 3:42Shane Parrish?

  One of the most amazing records ever.

• 3:44Speaker 00

  Yeah, he had Olympians and he was at different school districts, public high school districts. And so you're aware it had nothing to do with the athletes themselves. It was the coach. Because in high school, you don't select your athletes. You're just given them by the nature of where people live. And he was a really... A lovely man. He would give us workouts to do, not as individuals as, you know, sort of sprinters got a certain kind of workout and middle distance and, you know, sort of long distance runners got different workouts. The workouts changed every day, but they were designed to push you to the limit of your capability and endurance.

• 4:29Speaker 00

  And he was unflappable. He was cheerful. No matter how much pain you were inflicting on yourself, he found that almost amusing because he knew, and you knew, that he was pushing you to the absolute limits of your capability. And as he would say, when you'd run past him in training, he'd say, "You have to make deposits in training so that you can make withdrawals for game day." And so, as a result of this kind of really intense training, we all looked forward to actual track meets because it was so easy.

• 5:11Speaker 00

  We didn't have to work nearly as hard. And, you know, he had a sense of what it took to motivate adolescents. And we all loved to just play our hearts out for him.

• 5:23Shane Parrish?

  How did that feel when you felt like, I mean, especially when you first come across that, you're learning where your limits are and you feel like you've passed them? And what was his response to that?

• 5:34Speaker 00

  He'd obviously seen it before. And, you know, he had almost a wry sense of amusement as to how far you could be pushed and whether you could go through whatever that barrier of pain was that built not character, but built endurance. If you end up competing against somebody who's quite good and you have to go into that extra gear, that extra dimension to just push yourself. You know, you could do that as a result of the entire approach that he took with you as a person and as an athlete.

• 6:10Shane Parrish?

  Were any of those four losses while you were there?

• 6:12Speaker 00

  No.

• 6:13Shane Parrish?

  And how is that different from Yale? When you went to Yale, you got in with track, like you were doing track there and you said the coaching was completely different.

• 6:21Speaker 00

  When I went to Yale, unlike high school where everybody gets out at the same time, at a university, people take different courses. So of course, you get to the track at different times and sometimes there are very few people there, sometimes there were a lot of people there, but you trained as an individual, not as a group. And I found that totally uninteresting. And for what? I already had a bunch of medals. It wasn't doing anything because I couldn't be the best. So I said, you know, I'd rather take my energy and put it into learning at college. And that was a great choice.

• 6:59Shane Parrish?

  Was there a moment when you realized you were more competitive than most people?

• 7:02Speaker 00

  I've always been like that as a kid. I loved athletics. It didn't matter, you know, what the sport was. Even when I was really young, I always ran faster than everyone. So as a kid, when you don't have skills and all you have is like getting someplace faster, you know, whether it's capture the flag, you know, I always just loved being ahead, just like letting your body do what it could, you know, and the farther you could push it, the faster you went. And I found that very pleasant, actually.

• 7:38Shane Parrish?

  One of the things that interested me while I was reading the book is your trajectory from your first job in investment banking, which I think you admitted you basically should have been fired, all the way to today where you're one of the most respected, well-known CEOs and leaders in the world. Can you walk us a little bit through how you got started in investment banking, what the lessons were that you took away before you went to Harvard and came back and started over again?

• 8:03Speaker 00

  Yeah, sure. It's a journey, as they say. I got my first job pretty much by accident. It was at a firm called Donaldson, Lufkin, Generec, which was sold years later to Credit Suisse, First Boston. And, you know, I had met somebody working at a reunion who was like a grown up. He was 37. And one of his classmates was one of the three founders of DLJ and I didn't have a job. After I graduated, and I didn't even know who this man was, but I had given him and his children a book that my father used to read to me called Babar the Elephant. And I don't know why I did that. They just looked like a model family at a reunion.

• 8:44Speaker 00

  You know, it was like a husband and wife and two kids, a nuclear family. And I looked at that and I said, geez, you know, that's like a idealized portrait of some type. And I just went out and I didn't have much money. And I bought him Babar and gave him the book. And I think they were just so stunned that a complete stranger who was 21 years old did that. Obviously, they thanked me for the book. And he said, you know, what are you doing after you graduate? I said, I have no idea. He said, well, you graduated already. I said, that's right. So I was another desperate undergraduate. So, you know, he sort of took me under his wing and introduced me to one or two people, one

• 9:25Speaker 00

  of whom was Bill Donaldson at Donaldson-Lufkin General Rent. You know, so I went down for an interview and I'd only had one other interview in my life in the real world, you know, outside of a university. I was waiting in the lobby and there were these, you know, sort of great looking young people, men and women, running through the lobby. They were all excited about what they were doing. And so I went in for my interview with the head of the firm. And he said, why do you want to work here? And I said, I don't even know what you do here. But the people who are a little bit older than me seem so excited that I want to do what they're doing. And he said, that's a good enough reason. So,

• 10:08Speaker 00

  you know, he sent me around to meet his partners. And then at the end of the day, he asked me what I thought. And I said, what I thought is irrelevant. This is what they thought. I said, they think you're crazy, wasting their time with me. I have no qualifications. So he started laughing. And he said, well, thanks for coming. I'll give you a call. And he called a few days later and offered me a job. That's how I got into the investment business, knowing nothing. You know, I was scheduled at an unknown time in the future to go into the Army Reserve. So this wasn't meant to be a full career. It was probably going to be six months to a year before I was called up. And they gave me an office and a secretary.

• 10:51Speaker 00

  And unfortunately, then somebody stopped by and gave me something to do, which was almost a completely hopeless thing. I didn't even know there was something called stock. I knew there were bonds because in my era, if you were in public school, you bought savings bonds, right? It's like just saving money. And those were US government bonds. You know, I didn't know there were any other securities. Once somebody explained what a stock was, they forgot to explain there are other things, you know, like corporate debt and subordinated debt and preferred stock and convertible preferred stock and convertible subordinated debt and all the other warrants and all these other things that I'd never heard of.

• 11:35Speaker 00

  And so there I was. They gave me an annual report for something called a company called Genesco. And it had all of those things. And I had never seen an annual report. I didn't know there were annual reports. And so I just sat at my desk and it was one of those OMG moments where I went, what in the world have I gotten myself into? And so it was six months of these awful situations where, you know, basically it wasn't a culture where you could ask people. And so you were really, you were like a student who was going to class unprepared and didn't want to be called on. And so whenever the teacher was looking your way,

• 12:18Speaker 00

  you'd sort of duck under your desk or made pretend your papers fell on the floor. Don't make eye contact. No eye contact. And so it was really six unbelievable months. And then I was called up for the infantry. So we had an exit lunch, which was sort of astonishing that. You know, the head of the firm would take the time with me. I was like a nobody. And so we went to the little cafeteria. Bill said, how did you enjoy your time here? I said, well, I said, this was pretty good, but you didn't get anything from me. And I feel really bad about that. I said, I think you wasted your money. I said, why, why, why did you hire me? I had no capability. And he said, well, I have a, I have a hunch.

• 13:03Speaker 00

  I said, what's your hunch? He said, I think you're going to end up as the head of my firm one day. At which point I was just sitting there completely stunned. And I said, how could you say that? I said, I don't know anything. He said, I just have a feeling that's why I hired you. So this was 1969 and it's not in my book, but in 1982, Dick Generec, who was the third name, called me over and asked me to be president of DLJ. So it was one of these Weird moments. Weird moments. I turned him down because I didn't think I was old enough yet or capable to handle that level of responsibility.

• 13:45Speaker 00

  So anyhow, I, after the army, I went back to Harvard Business School. I had to learn something. I just couldn't show up at places knowing nothing.

• 13:53Shane Parrish?

  But you wanted to drop out. You said Harvard had one thing to teach you and they just kept teaching it over and over.

• 13:58Speaker 00

  That was different. I, I thought if I got in, which I did, that, you know, I'd be fine if I went back into the real world doing something. And I found it pretty boring because it was during the Vietnam War when business was unbelievably unpopular. And all the smart kids basically went to the best law schools, whether it was Harvard or Yale, or they went to Harvard Medical. So I was one of the few people who went to business school in, in the group of people that I knew. And so it was for the first time in my life. I wasn't around people who were a lot smarter than me. I always had people smarter than me.

• 14:39Speaker 00

  In high school, at Harvard Business School, that wasn't the case because all those smart people were somewhere else. And so I thought it was odd, first time in my life. And I think it was just because the smart people went somewhere else. And I found the curriculum was sort of outmoded and the teaching wasn't very good. And, you know, I sort of thought it was boring. After a while, I got the joke, which was every course they were taking was teaching the same thing. They said it had different names, you know, strategy, production, human relations, marketing. But it was all the same thing, which is that every piece of any integrated system has to be coordinated or else the system itself doesn't function. Right?

• 15:23Speaker 00

  So by the time I got to December, I mean, this was like unbelievably uninteresting.

• 15:30Shane Parrish?

  Right.

• 15:30Speaker 00

  Plus, it's cold up in Boston and I wasn't used to that level of cold. And it was wind that would come across the river and it was freezing and, you know, sort of lonely. And what was I doing? So I wanted to drop out, you know, go back to New York and do something. And, you know, so I wrote a letter to Dick Generette and told him, you know, I was thinking about dropping out. Would you like me to come back to the firm, which was probably hopeless anyhow, since I didn't know what I was doing the first time? And he wrote me this six-page letter, one of the loveliest things anybody's ever done, talking about how he wanted to drop out of Harvard Business School in the first year in December. He didn't think it was very interesting intellectually and he was going to transfer

• 16:15Speaker 00

  to the economics department at Harvard and get a PhD. But he didn't and I shouldn't leave. I should sort of gut it through. And he said, this is the right thing and don't drop out. So I didn't realize it was that suggestible. And I sort of finished this letter and I said, well, I guess I shouldn't drop out. And that's how I finished.

• 16:36Shane Parrish?

  And you went to work for Lehman Brothers?

• 16:38Speaker 00

  I went to work at Lehman, which was fantastic.

• 16:41Shane Parrish?

  Earned your stripes.

• 16:42Speaker 00

  Oh, my goodness. Either earned them or had them tattooed on me, I'm not sure. But in any case, it was a very interesting group of people. There were very few investment banking firms back then that really had corporate finance and probably six or eight of them. Lehman was one and Lehman was right near the top along with. Morgan Stanley was a little more grand and Goldman had a little more in the way of number of clients and Lehman was probably number three or something, but it was three out of a world. So this was like a wonderful opportunity to learn and the people at the firm were real characters. It's before the endless line of business school graduates.

• 17:26Speaker 00

  I mean, to get a job at a place like Lehman, you're either an ex CIA agent or somebody who was working, you know, sort of an oil rig who was smart. And it was like a melange of interesting people. And it was very small, corporate finance. We had 30 partners and 30 associates. There weren't none of these armies of people preparing work for other people to give to other people. There were just partners and non-partners. And so the ability to learn from somebody who allegedly knew what they were doing was really high. It was a very intensive kind of learning experience where you were given a lot of

• 18:10Speaker 00

  room because there was no one else there. And we had a huge client base. And so I really enjoyed it.

• 18:17Shane Parrish?

  And you had to do a lot of those calculations by hand and a lot of running around, whereas today it's a lot easier to get information. How do you think that changes how you learn the craft of banking?

• 18:30Speaker 00

  We were almost like in a guild from the Middle Ages. There were no calculators. This is my lifetime and I think I'm young. I mean, you had slide rules. You had almost no databases. If you did a project where you needed stock price endings for the month or a week, you went to the basement and they had a stack of newspapers spread out by year for like 100 years. And you just open newspapers and you ended up being covered by newsprint. It was very excruciating work. On the other hand, it was real foundational building blocks because you had to fight for

• 19:13Speaker 00

  every bit of learning. It didn't just happen. Like now, people who work at our firm, who are infinitely brighter than me, they just hit a button and the whole thing comes out. So this is a whole different type of learning.

• 19:28Shane Parrish?

  Do you think it changes the understanding and how you apply that too?

• 19:32Speaker 00

  I think it probably makes you appreciate data less. Someone who was trained in my era, you know, every slight nuance in a number is multiplied because you had to fight to produce any number. So you felt everything viscerally. And now you can just look at it on a page and see some differences. But somehow that's different than going through the process of creating the base data. Because it was much easier to use your mind to search through that. Because you completely understood where every number came from as it was being produced.

• 20:14Speaker 00

  That's different than having it instantaneously produced.

• 20:18Shane Parrish?

  It's applicable.

• 20:18Speaker 00

  So I can't tell you the full differences, but I know it's different.

• 20:21Shane Parrish?

  That's really interesting. You left Lehman after the acquisition by American Express.

• 20:26Speaker 00

  I sold it.

• 20:27Shane Parrish?

  Yeah.

• 20:27Speaker 00

  To American Express.

• 20:28Shane Parrish?

  And then that was because you were running into trouble, right? You had to sell.

• 20:33Speaker 00

  The firm ran into trouble because there was people in the trading department exceeded limits on certain type of security and it ended up that interest rates went the wrong way and you know, we lost doubly on the trade and the impact of that on a mark to market basis would have gotten close to wiping out the entire firm's equity. And the way financial firms work is that if you have no equity, And people have lent you money to support your balance sheet. And they realize there's nothing underneath them. Then they panic and call their loans. And everyone calls them at the same time, more or less, then the firm collapses. And so that's what we were facing.

• 21:14Speaker 00

  So it's important that you either bring in additional capital very quickly before anybody knows you have that kind of severe problem. Or you have to end up, you know, selling the firm on sort of almost a fire sale basis. So that the acquiring institution, which is larger, basically provides the same function as putting equity in. They're guaranteeing the rest of your balance sheet. So that was the position we found ourselves in. And I sold the firm to American Express.

• 21:45Shane Parrish?

  And then you started with Pete Peterson. You started where we are today.

• 21:49Speaker 00

  Yeah, it took a year to get out. That's a, that's a long story. But, you know, then we started Blackstone in officially October 1st, 1985.

• 21:58Shane Parrish?

  What was that like? I remember reading in the book and you had an empty office. You figured because of your reputations, both of you, the business wouldn't be as hard to drum up as it was.

• 22:11Speaker 00

  I didn't think it would be hard at all because we were so busy all the time. That why should it make a difference if the same two people were at one address versus another? It was same people with the same capability and brain and ability to understand what was going on. I thought it was like a lot of misguided entrepreneurs. I thought it would be easy. Guess what?

• 22:37Shane Parrish?

  All those lessons from Coach Armstrong came in handy.

• 22:40Speaker 00

  Oh, my God. It was, it was horrible. I mean, nobody wanted to hire us.

• 22:44Shane Parrish?

  Why did it make a difference? Have you ever thought about like, what was the actual cause of that?

• 22:49Speaker 00

  Yes, of course. I thought about it all the time. I thought about it every day. The difference was that there were no M and A boutiques that existed when we set up business. It was all just the big firms and there were a relatively few of them. So it was in effect, you know, like a bit of a cartel. But from the user, which were corporations, there was enormous security in dealing with, you know, sort of a. Like a Morgan Stanley Goldman Sachs Solomon Brothers, First Boston, because they had, you know, 100 years of history.

• 23:28Speaker 00

  They had prestige, they had other businesses besides M and A that the organization might want to use. And they had global access. And so why make a change for two guys who used to be at one of those places? I sort of in my own mind, thought we were still like doing equivalent work. Because I mistook the fact that, you know, when you leave an established place, apparently that changes people's views of you. Not in terms of your capability, but maybe it's not you. Maybe it's just the firm where you're working. But for your own ego driven reasons, you think it's you working at the firm that creates the business.

• 24:13Speaker 00

  Well, I learned was mostly the firm. That's what corporations were looking towards. And so we found ourselves out there on the high wire with no model for corporations to hire two people, you know, with some made up name to handle their most sensitive issues. Even though they turned to those two people for the same type of sensitive work. They just assumed that if you weren't domiciled someplace. So we, without really understanding it, we didn't realize we were establishing a new paradigm in finance, which we were, unfortunately. And, you know, it took a while.

• 24:56Speaker 00

  I remember when we got our first assignment, it was from Squibb, which was a pharmaceutical company for $50,000, which was less than the smallest legal bill I had ever gotten on a transaction. But $50,000, we started with $400,000 total capital, 200 from each of us. And when you're an entrepreneur and you start something, the first day you start losing money because you're paying the rent. And, you know, if you need furniture, you either buy it or you rent it. So you're losing more money. And at that point, you needed telephones, landlines, because they didn't have cell phones then. So now you're paying the phone company. And then you have the insurance and you couldn't replicate anything without a Xerox machine.

• 25:41Speaker 00

  And they had rent. Then you realize, if you don't get some revenue in here, this rent's gonna eat you to death. This really focuses the mind. As you can tell by my voice and my recollection, I have no trouble recreating the feelings of complete fear of failure.

• 26:05Shane Parrish?

  Now, at the same time, in your personal life, you're trying to raise some kids. Is this pre or post divorce?

• 26:11Speaker 00

  That's pre.

• 26:12Shane Parrish?

  Pre divorce. And so how did you harmonize that sort of the struggle and busy life of building what would go on to become one of the world's biggest businesses and a family and kids?

• 26:25Speaker 00

  On one level, it's a little easier because you're not so busy. Right? Because you don't have any business. So you have more time for your family. On the other hand, the sense of impending doom is so refined that it's hard to be emotionally present when you're worried about completely wiping out financially. So at the very beginning, it's not hard from a time commitment perspective. But as you start getting going and you don't have a big staff and you're trying to be successful, it becomes a very all-consuming type thing. Most entrepreneurial experiences are not leisure time based.

• 27:05Speaker 00

  I mean, to become successful, particularly with a new concept where you have exceptional competition, you don't survive, let alone thrive, without pouring your heart into it.

• 27:19Shane Parrish?

  One of the first deals you guys did was Edgecom, right? One of the first private equity deals you did.

• 27:24Speaker 00

  That was after, you know, we started in the advisory business. Then we raised money, which was very, very hard.

• 27:32Shane Parrish?

  The first fund was a billion, right?

• 27:33Speaker 00

  First fund's aspiration was a billion. We raised 850. And then went back a year later, got another hundred for money in the firm. So I looked at it, we sort of with two people with no investment capability, raised nine hundred and fifty million dollars when I think the biggest fund in the world was like a billion, two of people who were really competent and experienced.

• 27:55Shane Parrish?

  And that was based on your track record outside of Pakistan then?

• 27:58Speaker 00

  It was based on our, yeah, our track record as human beings.

• 28:02Shane Parrish?

  Yeah.

• 28:02Speaker 00

  They have a name for that in the banking business. They're called character loans. So it's just basically a bet on Peterson, my partner and me as people who have prevailed in a lot of different situations. So, you know, I remember each one of the investors because we were turned down seventeen times for every one yes. And those are live presentations. Those are people looking at you saying, like in Gladiator, the emperor puts his hand up, the thumbs in the air and he just puts it down and you're looking at it.

• 28:42Speaker 00

  And so we were rejected so many times that, you know, that was almost as bad as no business in the advisory business. So, yeah, we finally managed to raise all the money, had our final legal papers in one day before the Black Monday crash in nineteen eighty seven. If we would have waited, I think the thing just would have all fallen apart. You know, I have a good sense of timing. I was just so nervous that the person who was working with me, we had one employee, a woman we had hired from Goldman Sachs and I'd sort of, she was working on the closing and, you know, I'd go into her office every ten minutes.

• 29:21Speaker 00

  I'm sure I was beyond annoying and she subsequently quit investment banking and became a psychologist, got a PhD doing therapy. So I guess, you know, that was, gives you some idea of the intensity of experience.

• 29:39Shane Parrish?

  One of the first investments under that fund, EdgeCom, went south and you decided to pay back the investors and the bank.

• 29:47Speaker 00

  Yeah, the deal went bad because I was inexperienced and I made a bad call in terms of proceeding with the partner who had originated the deal at the firm. And one of the other partners, he thought the deal was terrible and, you know, we'd go bankrupt and I evaluated it and, you know, I didn't deserve a C or a D, I deserved an F and I went with the first partner. And the thing got in trouble and, you know, then I was really concerned because it was so early in the firm's history and, you know, so we put more money in to try and save the deal. Then I realized, oh my gosh, we're going to lose the new money as well as the old money.

• 30:30Speaker 00

  And we managed to do some things to preserve that second capital that was in. But, you know, we never had in our whole first fund ever lost any money for any bank. And, you know, we've almost never in the firm's history lost money for any bank. So if you ever had something bad happen, you would absorb that pain as the equity.

• 30:56Shane Parrish?

  Where does that come from? That seems uncommon, that you would, you would take the hit when you don't have to. In some cases, the way that you structure an entity, it'd be non-recourse to you, but you would make sure that it would be paid.

• 31:07Speaker 00

  It's sort of like a moral obligation. Somebody trusted you. And if that trust was misplaced, I always felt we should wear it, not the person who trusted us or me. They were just doing what I asked. And so this is my problem, not theirs.

• 31:30Shane Parrish?

  What were some of the, in the immediate aftermath of realizing that you had made a mistake? What were some of the structural changes that you implemented?

• 31:38Speaker 00

  We made some huge structural changes, which basically has helped make the firm what it is today. And I realized I wasn't some kind of investment genius. Would have been nice if that was the case, but you know, it wasn't. And so I realized the best way, I thought, to make decisions, which was to get all the partners together around a table. When any proposal comes in, make sure the proposal is written up and all the risks are laid out with what the team thought the outcome of those risks would be if the risks materialized. And then have each of the people around the table, in effect, attack that thesis and

• 32:18Speaker 00

  look at each of those risks and any other risks that they thought, and give their own view of where they thought things would come out. And if you go around a whole table like that, instead of just having the one great person interrogate the team, you'll find that everybody at that table is pretty smart, or else they shouldn't be at the table. And you'll learn more about the risks than one person, you know, doing it with everybody else as an unpaid audience. They write it up, they come back, they send us the stuff in writing, you know, hopefully two days before we have a meeting, so we can read it and absorb it.

• 33:03Speaker 00

  And nobody has a chance to blow something by us with flip charts or, you know, people in finance are good talkers. And so they'll con you, not because they think they're doing something wrong. They think they're doing something right and they're just trying to-

• 33:18Shane Parrish?

  They con themselves on this.

• 33:19Speaker 00

  Yes, they con themselves. And so our job is to protect our investors and protect the firm. And what that does, by the time we have two or three meetings on the same thing, we really understand what those risks are. And I believe the most important decision is to not lose money. Some people care about the upside, they don't worry much about the downside if they think the upside is great. I like to start in the reverse, sort of like a doctor, you know, do no harm. So if you lose a lot of money, then you have to have a really great deal next to make it up. You're better off never losing.

• 33:59Speaker 00

  And then if you have the same upside somebody else does, then you do much better over time. So that was the theory of the case, and that's how we operate still. Today, it's 34 years later, and that system is great because what happens is the people on the team don't feel the weight of a decision because they're not making the decision. Everybody at the table knows what those two or three key drivers are. And usually, in about 90% of the cases, if something goes wrong with the investment, it's about those risk factors. And we got them wrong. The team didn't get them wrong. We all got it wrong.

• 34:44Speaker 00

  And so if that's the case, and the outcome is suboptimal, the team doesn't get blamed. So this kind of intellectually rigorous culture that comes at everything basically frees everybody up. It's a protective system, so it's comfortable to work there at the firm because it's not somebody's fault if it doesn't go well. We missed it.

• 35:09Shane Parrish?

  How often are those three or four key drivers related to the nature of the business versus the structure of the deal?

• 35:17Speaker 00

  Of the structure of the deal, you learn how to protect capital pretty easily. That's not so hard. The first rule is never meet a maturity. So if you're borrowing money, you can almost always pay the interest. In almost every case, you analyze it and you see how bad, you know, the company performed in previous recessions, and then you take a discount from that, and you'll pay your interest. Where you get in massive trouble is if during that kind of economic period, you basically have to refinance your debt. And then people look at how miserable the company's doing, and they say, well, it's good that you want to refinance your debt. I don't want to lend you money now. And then you're done.

• 35:59Shane Parrish?

  I mean, you do make mistakes occasionally. What do you do after as a team or an organization to not only have that team learn, but how do you disseminate that information all over the world so that you don't end up?

• 36:10Speaker 00

  Well, we have weekly meetings with each of our groups. And when something goes wrong, we can talk about what we missed. And, you know, we'll talk in different groups. We'll talk among the partners and say, well, how did we miss that? And is there something wrong with our process? Or did somebody not tell us something was going wrong? Do we not have enough of an early warning system? We basically try and do a diagnostic of everything that doesn't work out, you know, the way it should. And running a great organization is an exercise in lifetime learning

• 36:51Speaker 00

  of things that didn't work out so you can change the process. The objective isn't to blame anybody. It's to develop new rules so you don't visit the same mistake twice.

• 37:04Shane Parrish?

  You said in your book, "The best executives are made, not born." How do you go about making executives?

• 37:10Speaker 00

  Well, you train them and you coach them. And you have them discuss with you difficult situations where they're not sure where to go. Because sometimes being executives has to do with making the best bad choice that you can. You have a situation that has to be resolved. There are two or three different ways to do it. Nobody likes to do that in isolation. And you don't want them to. Because the objective is to mobilize experience and judgment to help people. So once they've been through that, of course, then they've learned some stuff. That's why when you're older, you're usually a better executive than, you know, when you're in your 30s.

• 37:55Speaker 00

  When you're in your 30s, if I remember correctly, you really think you're very smart. And I think I was the smartest at 32 or 33. I was really smart. And then I realized perhaps I wasn't so smart at all as I kept looking at things that I learned as I got older.

• 38:12Shane Parrish?

  You have a grading system for people that came out in the book, which was, I think you just talked about seven, eight, nine, and 10. Can you sort of walk us through the differences between a seven, eight, nine, and 10? And then how you go about spotting 10s when you're trying to attract talent?

• 38:28Speaker 00

  Yeah, I'll start in reverse if I could, because that's the most fun. You know, trying to find somebody who's a 10. And there aren't that many 10s. A 10 can do just about anything. It's sort of like a LeBron or a Steph Curry, you know, or Michael Jordan. Why are they 10s? Because they can score at will. They're great ball handlers. They get great rebounds. They can see a whole court. They can pass the ball for assists. There is no facet of the game they can't do as well or better than anyone else. And people who are in that position create championships. So I was giving you a sports analogy, and it's the same in the business world.

• 39:12Speaker 00

  There are just some people who have that sixth sense of what's going on in their area. They can sense danger. They can see opportunity. They know how to hire people. They inspire loyalty. They tend to be really nice people as a rule. And they can build enormous businesses where there's none, where they can take an existing business and dramatically accelerate its growth. So that's a 10. They can play all positions at the top level. A nine is like really good person. They can execute anything. They're clever. They're hardworking. They're reliable.

• 39:54Speaker 00

  You can put them in charge of something where you describe the situation and they could pretty much bring it home without coaching. And so nines are great, but nines can't do what 10s can do, right? They're not franchise determinative, like a 10. And below nine, you have eights who do what they're told. And then sevens you don't want. And there are no numbers below that.

• 40:23Shane Parrish?

  What do you do when you find yourself with sevens? Do you try to develop them? At what point do you decide that, okay, we've put enough into this and we have to sort of cut bait here?

• 40:33Speaker 00

  It's always a tough decision because the individual in that zone is serviceable, but they need supervision and they're not going to develop. After you make a decision that you've tried to help the person develop, they won't develop beyond their capability range. And in certain functions, they may have a place, but not many of them because, you know, we're in a high-performance area. It's just like a sports team. I mean, you can be the Patriots or you can be the Jets, right? So the Jets have a bunch of sevens and the Patriots have a quarterback who's a 10. They've got some receivers who are nine. They have a line, you know, that's probably eight and a half to nine.

• 41:18Speaker 00

  They win, right? So you know what the outcome is if you want to staff with sevens. And, you know, we have a very detailed evaluative process. And if somebody really needs to have that spot, who can play better than, you know, we try and help the person, you know, find a job somewhere else. You never terminate somebody because it's not fair. In other words, they're there because you asked them to be.

• 41:48Shane Parrish?

  Right.

• 41:48Speaker 00

  And so the mistake is yours, right? It's interesting that some people like that who are sevens at our place could be an eight to nine in a different business area because we don't hire people who are not capable. They just might not be as good for us. And so, so if you help them get another position and their life works out well, then ironically, they're sort of grateful because they know they're a seven.

• 42:18Shane Parrish?

  What are some of the things that you know now about being CEO that you didn't know when you started?

• 42:23Speaker 00

  Oh, my God. You don't have enough time for this interview because I was just terrible when I started out and I was sort of treating people like they were deals. And in deals, they're mostly a zero-sum game.

• 42:36Shane Parrish?

  You mean you're a transactional?

• 42:37Speaker 00

  If you're negotiating something and you get more money for your team, that means the other side gets less. So my biggest fall short, because I really was more of a deal person.

• 42:53Speaker 00

  And not really trained as a manager. You know, sometimes you'd have problems with with people. You knew what the right answer was. But if you went ahead and implemented that, you could blow up a whole part of your business because other people becomes destabilized. So I learned that that figuring out what to do wasn't hard, but how to do it? And what kind of timeframe to have? And what sequencing to have was a learned behavior. That's good if you, you know, sort of have a partner or someone you can talk to where you can describe a situation and say, how would you handle it?

• 43:37Speaker 00

  You're older, you're more experienced here. And then they'll usually say, well, what were you thinking of doing? And you'll tell them and they'll say, nope, that that's not the right way to do it. You're jamming this thing. You're going to alienate not just that person, but you know, a bunch of other people. Don't do that. Try it this way. It's a learning experience. And after you have that coaching in that situation, you then, when you see a situation like that again, you know a lot better how to handle it than the first time.

• 44:08Shane Parrish?

  What are some of the other lessons that stand out? That you wish you could go back and tell your your younger self right now?

• 44:14Speaker 00

  Oh, my God.

• 44:15Shane Parrish?

  About running a company?

• 44:16Speaker 00

  Never, never compromise when you're hiring people. Good enough is not good. And people need to be trained. You can't assume they know things just because they tell you they do. And so the whole onboarding, quality control, psychological comfort of knowing what you're doing is is axiomatic. And when you start something, you just assume because you know it and they say they know it. There's not any reason to push that further. People are sometimes delusional about their own capabilities.

• 44:52Shane Parrish?

  Are there ways of getting that truth out of people?

• 44:55Speaker 00

  There are ways if you know them well.

• 44:58Shane Parrish?

  Right.

• 44:59Speaker 00

  If you don't know them at all.

• 45:01Shane Parrish?

  It's really hard.

• 45:01Speaker 00

  It's hard. And and sometimes bad apples just get passed around because the legal system says you can't tell the truth about them.

• 45:11Shane Parrish?

  And internally, how do you set up a culture where you can tell people the truth and give them the information and feedback?

• 45:17Speaker 00

  Oh, that's easy. You know, you just declare that's what we're doing. And, you know, we set up a 360 degree review. You'd have, you know, sort of upward reviews, peer reviews, and downward reviews. So if you have 20 people commenting on your capabilities, we had roughly 25 different categories that people were reviewed on. And this was all done anonymously. So you've got so many observation points that if one person didn't like somebody, their one dislike was overwhelmed by 24 really like them.

• 45:57Speaker 00

  So if everything's done in that kind of mechanical, anonymous way, you don't have trouble figuring out how good people are.

• 46:08Shane Parrish?

  Switching gears a little bit, one of the things you said in the book that struck me, and I've been thinking about it and wondering if you can expand on it, is you said it's as easy to do something big as it is to do something small. Can you expand on that?

• 46:21Speaker 00

  Yeah, sure. You know, you only have one shot to do something. And if you're focusing on doing something with your life, if you make a choice, that cuts off other choices. So you ought to wait until you find something that's really worthy of the effort. Because you're going to be making a heroic effort in any case. You should find a really big idea addressing a really big opportunity. Because then if you win, you win huge. But you also can excite other people to go on the journey with you. If you have some very small idea, who's going to really join you for that?

• 47:03Speaker 00

  There's not that much room at the end to compensate people. But if you have a big vision with something that looks like it's pretty much a sure thing, because entrepreneurs don't really like taking risks. People who write about them and report on them think they're taking risk. But the person who's actually betting their life really thinks it's going to work. Or else, why would you bet your life? Having a vision to do something unique in a huge field where all the trends are going your way. That's where you should spend your time because you win on every level. Easier to recruit people. The success is really big.

• 47:46Speaker 00

  You can keep growing within that field because the field is huge. And if you catch a wave or a cycle, I mean, this is really, that's how we built the firm.

• 47:56Shane Parrish?

  I want to talk about the financial crisis and you as one of the largest real estate holders in the world. And not only that, sort of like today and, and interest rates a little bit. But you also said in the book, and this struck me as really interesting and counterintuitive. You said worrying is liberating. Can you walk me through your thinking on that?

• 48:17Speaker 00

  If you are constantly worried about what can go wrong and you sort of have a pretty good idea of what it would be. It enables you not to do things that get yourself into peril. And it enables you to price things in a better way. And once you've figured out the correct action step, then life is good.

• 48:39Shane Parrish?

  Does that transfer into your personal life as well? Or is it just a business, in the business sense of worrying about what could go wrong?

• 48:45Speaker 00

  Personal life is different. That's more foundational. In other words, if you're with the right person or you're doing something that, that you love, you don't have to worry about the downside. Those are choices that if you make them wrong, you, you, you find you can't fix them.

• 49:03Shane Parrish?

  Can we dive into your divorce here for a second on getting that wrong? What are some of the lessons you learned from your first marriage?

• 49:11Speaker 00

  That's interesting. Well, you, you learn that people change over time and that objectives could be different. And personalities change one way or another. And, you know, it's, it's hard when you're trying to match two people for 60 years. I mean, if you think about it, that's an almost impossible equation to do in your twenties. But I think it's easier to make good choices when you're older and you have a better sense of yourself. You know, I got married when I was 24. Now I realize I was pretty young. I thought it was pretty old. And then so, you know, you go through changes and that's not surprising.

• 49:50Shane Parrish?

  I appreciate your willingness to discuss that. I want to talk about the financial crisis. So the 2008, you saw this coming. But not only did you see it coming, what was really interesting to me at the time, and I mean, I was reminded of it reading your book, is you also did one of the largest real estate deals in history leading up to it.

• 50:09Speaker 00

  Yeah.

• 50:10Shane Parrish?

  Can you walk me through some of your thinking, not only in doing a deal, your inputs into how the environment was changing and evolving? And then your sort of role through the crisis all the way up to, as you detail in the book, talking to Hank Paulson and...

• 50:25Speaker 00

  Well, yeah, you could sort of feel that things were getting pretty hot. I remember going to one sort of small conference with some of the biggest pension funds in the world. And, you know, I was on a panel with another guy from private equity who's quite a good investor. And, you know, two of the biggest corporations in the world. And the moderator was talking about how private equity was so competitive compared to one of these companies in terms of buying assets because our cost of capital was so much lower. And they were comparing us with a triple A company.

• 51:06Speaker 00

  So how could our cost of capital be lower than a triple A? And I was sitting there going, somebody just asked that question as if it's reality. And it's clearly can't be true. And so there were like crazy things that were going on. And you can usually identify these types of situations that investors who basically lend you money decide they don't like any cash interest back. Usually people lend you money to... You know, you pay interest to them. But you know, you started developing securities where you didn't have to pay interest for five years. And then you could pay it in more bonds if you didn't have any cash.

• 51:49Speaker 00

  And so, you know, I had a pretty good sense that something bad was gonna happen. And I didn't know what, but I knew something. And it wasn't that far away. And because these periods of excess start building and that building accelerates. It's almost like you can just see it in front of you, almost like sort of some kind of mountain. And there it is. And so, we happened to buy one or two large things in the face of that. But it wasn't without knowledge that those bad things were gonna happen. And we bought it. One was Hilton Hotel Group and the other was something called Equity Office Properties,

• 52:32Speaker 00

  EOP, which was the largest office building group in the world. And we did each of them for a particular reason. The assemblage of assets in EOP was like unrivaled. So we bought and sold $70 billion of properties in one month. The most anybody ever had sold in a year was like bought and sold 10. So this was like a complete out of body experience. We just sold the last property in the last month or two. We made 3.2x profit on that 10 billion. If we had held all of it, we probably would have been buried.

• 53:15Speaker 00

  So we had a way of making it conservative. And in Hilton, we knew there were, we were running like four separate headquarters and they hadn't expanded outside the United States in 20 years. And there was huge demand to do that. And you could do it in that type of business, putting up no capital. So we knew there was $500 million of savings by just consolidating the operations. And then there was another 500 million of profit. We didn't have to invest anything for it to get. So we had a billion dollars in our pocket the day we bought the asset. And everybody thought we paid a high price. And you know, the company did well for

• 53:57Speaker 00

  You know, about a year and a quarter before the financial crisis and then it went down, but it was always safe because we had that extra billion. And, you know, so we didn't have any concern about that. People just looked at us and said, what are they doing? And the answer is, we knew exactly what we were doing. And that deal turned out to be the biggest profit in private equity history. And I just read some articles somebody wrote, which makes you wonder, who said, we were completely irresponsible doing that, because journalists can say anything they feel like. But that was completely untrue. That's why we made $12 billion. We knew exactly what we were doing.

• 54:40Shane Parrish?

  What was it like on Wall Street, running one of the largest asset management companies in the world during the financial crisis?

• 54:48Speaker 00

  Well, that was very interesting intellectually, right? Because all of a sudden, everything was going down. And that was part of the massive deleveraging in the financial markets. And the reason things go down is if everybody's deleveraging, which means everybody's selling, and there's hardly anybody buying, the law of supply and demand will just collapse prices. And if you believe that a price every day is the inherent value of something, you can really get freaked out. If you're people like us, who apparently have a stunted emotional life, you just look at it and say, geez, they're like four sellers for every buyer.

• 55:33Speaker 00

  So that means that all financial assets are basically going to collapse. But so what? You know, that's just temporary. And those will all turn around when the financial system normalizes, which is what happened. But the average stock of a financial company, bank, money manager, didn't matter, during the financial crisis, went down 85%. So if you've ever been involved with something that went down 85%, you would not be a particularly happy camper. Blackstone's always been an outperformer, so we went down 90%.

• 56:10Shane Parrish?

  You were kind of like $3 or something.

• 56:12Speaker 00

  $3.55. And the other day, we were 54. As my brother said to me, he said, Steve, you never seemed to be very concerned about it. I said, I wasn't. We had gone public. We had billions of dollars of cash. There was nothing we could do to stop the global deleveraging. I didn't believe it was anything that had to do with us in particular. And I was quite sure we could, without any risk, survive through this awful period. And so, you know, you can't get emotionally tied up in it because you didn't have anything to do with it. And we got through that period. And since

• 56:54Speaker 00

  that period, the regulators basically shrunk permanently the financial system to increase the equity to total asset ratio of the major financial institutions, whether those were banks or insurance companies. So finance, total assets were shrinking, one, because of losses. But secondly, the only way you can increase your equity to total assets, you either earn money and keep it and build up your equity, or you do an equity offering. Nobody wanted to buy equity in these miserable companies. Or you shrink the size of the company, and then the exact same equity is a bigger

• 57:35Speaker 00

  percent. So everybody was shrinking. At Plaxton, we ended up growing six times in 11 years. Six times. So we were completely counter indicator. And that's taken our market value up from, I guess it was $4 billion or something at the bottom, to 60. So 60 is a lot higher than 4. But we still run the company in the exact same way, with the same values. We've just become more popular, because the type of investing we do makes about double the stock market. So if you do that for decades, eventually, people will discover you.

• 58:19Speaker 00

  And say, would I rather earn double or half? And it takes a decade or two to convince them that double is better because they think it's somehow an accident, like a magic trick, which it's not. So then they say, okay, I give up. I'm going to join this party. These are all people very good to have at a party. They have lots and lots and lots and lots of money and they give it to us. And we give them, you know, those, those type of returns and everybody's happy.

• 58:45Shane Parrish?

  When you think about running the company, how much of it do you think of on a deal basis? This might make sense, but we want to save some dry powder and be opportunistic. Like, how do you, how do you factor?

• 58:57Speaker 00

  Well, the way you, you look at it is, is what you're doing sound and safe. And is that going to work? And when you can find things like that, you do them. Whether you do them at the bottom of a cycle or the middle of a cycle or nearer the top of the cycle. You always have to know where you are in the cycle. So if you're near the top, this thing's got to really, it's got a lot to prove to deploy that money. It's got to have a, just a rip roaring, wonderful set of momentum thesis. So it'll power through a downturn. And the price creation net of other things, you know, has to be safe by historic standards, not the standard of the day.

• 59:40Speaker 00

  You know, we, we always look at almost every asset class in terms of its cyclicality. Where is it? And what burden does that place on you to be more conservative than at a different stage?

• 59:52Shane Parrish?

  When you're looking at things through a historical lens, how do you factor in things that might have not have happened before or infrequently, such as like negative interest rates?

• 1:00:01Speaker 00

  I never worried about negative interest rates, other than the fact we're there. And I think it's like a terrible thing. But if you think a, a country or a geographic area is going to slow.

• 1:00:15Speaker 00

  Then you know interest rates are going to be lower. You don't know how much lower, but you know where they're going. Sometimes just a general direction is important to avoid messes.

• 1:00:26Shane Parrish?

  How do you see real estate in the US playing out over the next five years? Commercial property in the sense of not a lot of dry powder from a monetary perspective?

• 1:00:38Speaker 00

  Well, real estate is a supply and demand type of business. And the place you get in trouble typically is when there's a lot of supply coming in, either in a geographic area or in asset class or both. So the lovely thing about real estate, it's the slowest moving asset class you could ever find because supply takes around three years to manifest itself. And 100% of supply is visible because you can't build anything without filing for permits. And those permits get published. So you know what 100% of supply is.

• 1:01:17Speaker 00

  In terms of demand for rentals and other types of units, those get produced every month. And so unlike investing in a company that makes semiconductors where you could wake up one day and find out that somebody secretly has been developing something that's 10 times faster than your semiconductor, so you're basically been put out of business. You don't even know what's happening. In real estate, you got three years to think about it, at least. Very slow cycles. And your job is if you're in one of those bad areas where everybody's optimistic and they're piling on supply, you sell yours to people and you're gone. That's what you do. It's pretty simple.

• 1:02:00Speaker 00

  And those rules of supply and demand almost always end up taking people down who were optimists.

• 1:02:08Shane Parrish?

  I think that's a good place to end it. Thank you so much for taking the time.

• 1:02:11Speaker 00

  Okay. Great to see you.

• 1:02:20Shane Parrish?

  The Knowledge Project is produced in collaboration with Jason Oberholzer and the team at Charts and Leisure. You can find show notes on this episode, as well as every other episode, at fs.blog/podcast. If you find this episode valuable, share it on social media and leave a review. To support the podcast, go to fs.blog/membership and join our learning community. You'll get hand-edited transcripts of all the podcasts and so much more. Thank you for listening.