#69 Stephen Schwarzman: What It Takes
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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. 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.com. Farnham Street puts together a weekly newsletter that I think you'll love. 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.com.

Today I'm speaking with Stephen Schwartzman, 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. ♪♪

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I'm so happy to be sitting down here with you today. Thank you for taking the time to do an interview. It's my pleasure. I'm wondering what the biggest lessons you learned from your parents were growing up. 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. Is that how you are with your kids today? 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. 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... Yeah, I had a track coach in high school who was a remarkable person. And he won 186 dual meets and lost four races.

One of the most amazing records ever. 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 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 stuff.

Middle distance and 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. 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 look forward to actual track meets and

because it was so easy. 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 love to just play our hearts out for him. 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? He'd obviously seen it before. And, uh,

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 further.

you could do that as a result of the entire approach that he took with you as a person and as an athlete. Were any of those four losses while you were there? No. 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. When I went to Yale, unlike high school where everybody gets out at the same time,

And 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 person.

So I said, you know, I'd rather take my energy and put it into learning at college. And that was a great choice. Was there a moment when you realized you were more competitive than most people? 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. 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 guys started in investment banking, what the lessons were that you took away before you went to Harvard and came back and started over again? 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, Luff, and Jenneret, 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 grownup. 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 look like a model family at a reunion.

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, you know,

obviously 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 of whom was Bill Donaldson at Donaldson, Lufkin, Jenneret. 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, you know, he sent me around to meet his partners and

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 we 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. 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 U.S. government bonds. You know, I didn't know there were any other securities. Once somebody explained what a stock was, they forgot to explain their 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. 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 is

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, you'd sort of duck under your desk or made pretend your papers fell on the floor. You 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 did you hire me? I had no capability. And he said, well, I have a hunch.

I said, "What's your hunch?" He said, "I think you're gonna 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 Jennerett, who was the third name, called me over and asked me to be president of DLJ. So it was one of these things.

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. So anyhow, 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. But you wanted to drop out. You said Harvard had one thing to teach you and they just kept teaching it over and over. Well, that was different. I thought if I got in...

which I did, that 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 and

and the group of people that I knew. And so 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. 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...

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? So by the time I got to December, I mean, this was like

unbelievably uninteresting. 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 Jenneret 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 thing 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 to the economics department at Harvard and get a PhD. But he didn't, and I shouldn't leave. I should...

And you went to work for Lehman Brothers?

Earning your stripes. 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.

I mean, to get a job at a place like Lehman, you were 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 were none of these armies of people preparing work for other people to give to other people.

They 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 process.

kind of learning experience where you were given a lot of room because there was no one else there. And we had a huge client base and so I really enjoyed it. 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? 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 opened 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 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. You think it changes the understanding and how you apply that to you? 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. That's different than having it instantaneously produced. So I can't tell you the full differences, but I know it's different. That's really interesting. You left Lehman after the acquisition by American Express. I sold it to American Express. And then that was because you were running into trouble, right? 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 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. 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.

And then you started with Pete Peterson. You started where we are today. Yeah, it took a year to get out. That's a long story. But, you know, then we started Blackstone in officially October 1st, 1985. 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. 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 the 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? All those lessons from Coach Armstrong came in handy. Oh, my God. It was horrible. I mean, nobody wanted to hire us. Why did it make a difference? Have you ever thought about, like, what was the actual cause of that? Yes, of course.

I thought about it all the time. I thought about it every day. The difference was that there were no M&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 Morgan Stanley, Goldman Sachs, Salomon Brothers, First Boston, because they had, you know, 100 years of history. They had prestige. They had other businesses besides M&A that the organization might want to use. And they had global access issues.

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. Well, I learned it 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. 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

the smallest legal bill I had ever gotten on a transaction. But $50,000, we started with $400,000 total capital, $200,000 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. And they had rent. Then you realize if you don't get some revenue in here, this rent's going to eat you to death. This really focuses the mind. As you can tell by my voice and my recollection, I have no trouble recreating things.

the feelings of complete fear of failure. Now, at the same time in your personal life, you're trying to raise some kids. Is this pre or post-divorce? That's pre. 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? 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 of thing. Most entrepreneurial experiences are

are not leisure time based. 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. One of the first deals you guys did was Edgecombe, right? One of the first private equity deals you did. That was after we started in the advisory business. Then we raised money, which was very, very hard. The first fund was a billion, right? First fund's aspiration was a billion. We raised $850,000.

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 $950 million when I think the biggest fund in the world was like a billion two of people who were really competent and experienced. And that was based on your track record outside of Blackstone. It was based on our, yeah, our track record as human beings. Yeah.

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...

And I remember each one of the investors because we were turned down 17 times for every one yes. And those are live presentations. Those are people looking at you saying, like in Gladiator, the emperor said,

puts his hand up and the thumbs in the air and he just puts it down and you're looking at it. 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 1987. If we would have waited, I think the thing just would have all fallen apart. You know, I have a good sense of...

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 she was working on the closing. And, you know, I'd go into her office every 10 minutes. 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 gives you some idea of the intensity of it.

of the experience. One of the first investments out of that fund, Edgecombe, went south and you decided to pay back the investors and the bank. 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 said he thought the deal was terrible and we'd go bankrupt. And

I evaluated it and 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 then I was really concerned because it was so early in the firm's history. And 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. And we managed to do some things to preserve that second

capital that was in. But we never had, in our whole first fund, ever lost any money for any bank. And 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. Where does that come from that seems uncommon, that 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. 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.

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

would be if the risks materialized and then have each of the people around the table, in effect, attack that thesis and 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. 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 con themselves on this. 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. 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. And so if that's the case and the outcome is suboptimal, the team doesn't get blame. So this kind of intellectually rigorous culture that comes at everything is

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

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

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 when you're in your 30s. When you're in your 30s, if I remember correctly, you really think you're very smart. 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. You have a grading system for people that came out in the book, which was, I think you just talked about 7, 8, 9, and 10. Can you sort of walk us through the differences between 7, 8, 9, and 10? And then how you go about spotting 10s when you're trying to attract talent? 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. There are just some

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 9 is like a really good person. They can execute anything. They're clever. They're hardworking. They're reliable. You can put them in charge of something where you describe the situation and they can pretty much bring it home without coaching. And so 9s are great, but 9s can't do what 10s can do, right? They're not franchise players.

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. 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? It's always a tough decision because the individual in that position

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 fundings,

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 eights.

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. They win, right? So you know what the outcome is if you want to staff with sevens and eights.

You know, we have a very detailed evaluative process. And if somebody really needs to have that spot who can play better, then, 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. Right. And so the mistake is yours, right? Yeah.

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 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. What are some of the things that you know now about being CEO that you didn't know when you started? 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 deals. They're mostly a zero-sum game.

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 and not really trained as a manager was,

You know, sometimes you'd have problems 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 become destabilized. So I learned 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? You're older, you're more experienced here. And 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 thing.

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. What are some of the other lessons that stand out?

that you wish you could go back and tell your younger self right now? Oh my God. About running a company. 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 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.

Are there ways of getting that truth out of people? There are ways if you know them well. Right. If you don't know them at all... It's really hard. It's hard. And sometimes bad apples just get passed around because the legal system says you can't tell the truth about them. And internally, how do you set up a culture where you can tell people the truth and give them the information and feedback? Oh, that's easy.

You just declare that's what we're doing. And we set up a 360 degree review. You'd have 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. So if everything's done in that kind of mechanical, anonymous way, you don't have trouble figuring out how good...

people are. 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 I'm 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? 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 a

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? 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 risk. 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. 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 how we built the firm. 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 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? 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. 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? Personal life is different. That's more foundational.

In other words, if you're with the right person or you're doing something that you love, you don't have to worry about the downside. Those are choices that if you make them wrong, you find you can't fix them. Can we dive into your divorce here for a second on getting that wrong? What are some of the lessons you learned from divorce?

your first marriage. That's interesting. Well, you learn that people change over time and that objectives could be different and personalities change one way or another. And 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 20s. 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 so, you know, you go through changes and that's not surprising. I appreciate your willingness to discuss that. I want to talk about the financial crisis. So in 2008, you saw this coming.

But not only did you see it coming, what was really interesting to me at the time, and 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. 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 role through the crisis all the way up to, as you detail in the book, talking to Hank Paulson and...

Well, yeah, you could sort of feel that things were getting pretty...

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 AAA company. So how could our cost of capital be lower than a AAA? 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. And so, you know, I had a pretty good sense that something bad was going to happen. And I didn't know what, but I knew

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 going to happen. And we bought it. One was Hilton Hotel Group, and the other was something called Equity Office Properties, EOP, which is 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

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 3.2 times profit on that 10 billion. If we had held all of it,

we probably would have been buried. So we had a way of making it conservative. And in Hilton, we knew there were, they 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 Hilton.

the operations. And then there was another 500 million of profit we didn't have to invest anything for 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

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 about

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. What was it like on Wall Street running one of the largest asset management companies in the world during the financial crisis? 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. 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 Kemper. Blackstone's always been an outperformer. So we went down 90%.

You were down to like $3 or something. $3.55. And the other day we were 54. As my brother said to me, he said, Steve, you never seem 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 that period, the regulators basically shrunk completely.

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

of the company and then the exact same equity is a bigger 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 four. 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 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 is 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 those type of returns and everybody's happy. 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 factor? Well, the way you look at it 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 near 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 a really, it's got a lot to prove to deploy that money. It's got to have 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.

You know, 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? When you're looking at things through a historical lens, how do you factor in things that might not have happened before or infrequently, such as negative interest rates? 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 country or a geographic area is going to slow, 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. How do you see real estate in the U.S. playing out over the next five years, commercial property?

in the sense of not a lot of dry powder from a monetary perspective. 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 an 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. 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's

secretly has been developing something that's 10 times faster than your semiconductors. 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. And those rules of supply and demand almost always end up taking people down who are optimists. I think that's a good place to end it. Thank you so much for taking the time. Okay.

Great to see you.

Thank you for listening.

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