#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.

Oh, the structure of the deal you learn how to protect capital pretty easily. That's not so hard. And 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.

Well, we have weekly meetings with each of our groups, and when something goes wrong, we can talk about what we missed. And different groups will 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 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.

Well, you would 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 someone who's 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.

Yeah, I'll start in reverse if I could because that's the most fun. It's 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, 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. And 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 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. Or 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 a really good person. They can execute anything. They're clever. They're hard working. They're reliable. You can put them in charge of something where you describe the situation and then they can 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.

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 we're in a high performance area. This is just like a sports team. I mean you could 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 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 we have a very detailed evaluative process, and if somebody really needs to have that spot who can play better, we try and help the person 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.

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 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.

Oh my god, you don't have enough time for this energy because I was just terrible when I started out. I was sort of treating people like they were deals, and deals are 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 shortfall was because I really was more of a deal person and not really trained as a manager. 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 time frame to have and what sequencing to have was a learned behavior. That's good if you 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.' And then they'll usually say, 'Well, what were you thinking of doing?' And then you'll tell them and they'll say, 'Nope, that's not the right way to do it. You're jamming this thing. You're going to alienate not just that person but 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, when you see a situation like that again, you know a lot better how to handle it than the first time.

God.

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.

There are ways if you know them well.

If you don't know them at all

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

Oh, that's easy. You just declare that's what we're doing. And we set up a 360 degree review. You have 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 is all done anonymously. So you got so many observation points that if one person didn't like somebody, their one dislike was overwhelmed by 24 who really liked them. So if everything's done in that kind of mechanical anonymous way, you don't have trouble figuring out how good people are.

Yeah, sure. 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? 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... So we built the firm.

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 figured out the correct action step, then life is good.

Yeah, my 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.

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. I got married when I was 24. Now I realize I was pretty young. I thought it was pretty old. And so, you go through changes and that's not surprising.

Yeah.

Well, you could sort of feel that things were getting pretty hot. I remember going to one small conference with some of the biggest pension funds in the world, and I was on a panel with another guy from private equity, who's quite a good investor, and two of the biggest corporations in the world. 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. 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 clearly can't be true. And so, there were crazy things going on. You can usually identify these types of situations when investors who lend you money decide they don't like any cash interest back. Usually, people lend you money to pay interest to them. But you start developing securities where you didn't have to pay interest for 5 years, and then you could pay it in more bonds, uh...

If you didn't have any cash. And so, I had a pretty good sense that something bad was going to happen. I didn't know what, but I knew something, and it wasn't that far away. Because these periods of excess start building and then that building accelerates. It's almost like you can just see it in front of you, like some kind of mountain. 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. One was Hilton Hotel Group and the other was Equity Office Properties, EOP, the largest office building group in the world. We did each for a particular reason. The assemblage of assets in EOP was unrivaled. So we bought and sold 70 billion dollars of properties in one month. The most anybody ever had sold in a year was like 10. So this was a complete out-of-body experience. We 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. In Hilton, we knew they were running four separate headquarters and hadn't expanded outside the US in 20 years. There was huge demand to do that, and you could do it putting up no capital. So we knew there was 500 million dollars of savings by consolidating operations and another 500 million of profit we didn't have to invest anything 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. The company did well for 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. 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. That deal turned out to be the biggest profit in private equity history. 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 dollars. We knew exactly what we were doing.

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, there are like four sellers for every buyer.' So that means that all financial assets are basically going to collapse, but so what? 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%.

$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 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 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 percent. So everybody was shrinking. At Blackstone, 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 of money and they give it to us and we give them those type of returns and everybody's happy.

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, in 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 have a lot to prove to deploy that money. It's got to have a rip-roaring wonderful set of momentum thesis so it'll power through a downturn. And the price creation net of other things has to be safe by historic standards, not the standard of the day. 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.

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 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.

Real estate is a supply and demand type of business. 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. The lovely thing about real estate, it's the slowest moving asset class you could ever find because supply takes around 3 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. 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 put out of business without even knowing it's happening. In real estate, you got 3 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.

Okay. Great to see you.