#69 Stephen Schwarzman: What It Takes

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.

It's my pleasure.

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.

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 at something of their choice. And I want them to be happy. And I think they both are.

Yeah, I had a track coach in high school who was a remarkable person. He won 186 dual meets and lost four. One of the most amazing records ever. He had Olympians and he was in 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 sprinters got a certain kind of workout and middle distance and 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 really intense training, we all looked forward to actual track meets because it was so easy. We didn't have to work nearly as hard. And he had a sense of what it took to motivate adolescents. And we all loved to just play our hearts out for him.

He'd obviously seen it before. And 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 could do that as a result of the entire approach that he took with you as a person and as an athlete.

No.

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 are 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, I'd rather take my energy and put it into learning at college and that was a great choice.

No, I've always been like that. As a kid, I loved athletics. It didn't matter what the sport was. I 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, whether it's capture the flag, I always just loved being ahead. Just like letting your body do what it could, and the farther you could push it, the faster you went and I found that very pleasant, actually.

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 & Jenrette, which was sold years later to Credit Suisse First Boston. And 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. It was like a husband and wife and two kids, a nuclear family. And I looked at that and I said, 'Geez, that's like an 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. And obviously they thanked me for the book, and he said, 'What are you doing after you graduate?' I said, 'I have no idea.' He said, 'Well, you're graduated already.' I said, 'That's right.' So I was another desperate undergraduate. So 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 & Jenrette. So I went down for an interview, and I'd only had one other interview in my life in the real world outside of a university. I was waiting in the lobby and there were these great-looking young people, men and women, running through the lobby. They were all excited about what they were doing. 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 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 think is relevant? That's just what they thought. 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. I was scheduled at an unknown time in the future to go into the army reserves. 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. Those were US government bonds. I didn't know there were any other securities. Once somebody explained what a stock was, they forgot to explain there are other things, like corporate debt, 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 have I gotten myself into?' And so it was six months of these awful situations where basically it wasn't a culture where you could ask people. And so you were like a student who was going to class unprepared and didn't want to be called on. So whenever the teacher was looking your way, you'd sort of duck under your desk or pretend your papers fell on the floor.

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 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, this was pretty good, but you didn't get anything from me. And I feel really bad about that. I think you wasted your money. 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 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 can you say that? 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 Jenrette, who was the third name, called me over and asked me to be president of DLJ. So it was one of these 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.

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 in the group of people that I knew. And so it was 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 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, 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? And so by the time I got to December, this was unbelievably uninteresting. Plus it's cold up in Boston and I wasn't used to that level of cold and wind that would come across the river and it was freezing and sort of lonely and what was I doing? So I wanted to drop out, go back to New York and do something. So I wrote a letter to Dick Jenrette and told him 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 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 I was that suggestible and I sort of finished his letter and I said, well, I guess I shouldn't drop out. That's how I finished.

I went to work at Lehman which was fantastic. Earned 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 either had ex-CIA agent or somebody who was working on 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. 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 room because there was no one else there and we had a huge client base and so I really enjoyed it.

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. You had slide rules. You had almost no databases. If you did a project where you needed stock price endings for the month or week, you went to the basement and they had a stack of newspapers spread out by year for like a hundred 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 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.

I think it probably makes you appreciate data less. Someone who is trained in my era, 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. And 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. I can't tell you the full differences, but I know it's different.

I sold it to American Express.

The firm ran into trouble because there were 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 then 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. 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 selling the firm on almost a fire sale basis. So 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.

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

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?

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

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 an effective, like a bit of a cartel. But from the user, which were corporations, there was enormous security in dealing with a Morgan Stanley, Goldman Sachs, Salomon Brothers, First Boston, because they had a hundred 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, 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 doing equivalent work because I mistook the fact that 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 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 without really understanding it, we didn't realize we were establishing a new paradigm in finance, which we were. Unfortunately, it took a while. I remember when we got our first assignment, it was from Squibb, 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, $200,000 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 if you need furniture, you either buy it or 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. It 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.

That's pre.

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

That was after, we started in the advisory business, then we raised money, which was very, very hard. The first fund's aspiration was a billion. We raised $850 million. And then went back a year later, got another $100 million for money in the firm. So I look 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.

It was based on our track record as human beings. 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 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 puts his hand up and the thumb's in the air and he just puts it down and you're looking at it. And so, we were rejected so many times that it 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. 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'd hired from Goldman Sachs, and she was working on the closing. And 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 that gives you some idea of the intensity of the experience.

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 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.

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.

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 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 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 doing it with everybody else as an unpaid audience. They write it up. They come back. They send us the stuff in writing, 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. 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 get

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, 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 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.