How to Invest by David Rubenstein
What separates a great investor from an average investor. Is it an early affinity for markets. I put a satellite dish on top of the dorm room so I would have access to real time stock quotes an unconventional path. What I really want to do is ski.
So I left Wharton and I went up to Maine and became ski on a never ending thirst for knowledge. It is a constant education each and every day an acute attention to detail. I was down there for three weeks and met every tenant. I was counting the car traffic. I was learning the business. A willingness to take a risk. If you want to produce return you have to be willing to take risks or the ability to recognize a mistake and move on.
I don't mind a 90 percent chance probability of failure if there's a 10 percent chance of changing the one in how to invest. I hope to provide a glimpse into the thoughts and practices of the world's great investors and hopefully inspire a new generation of professional investors in my pursuit of identifying the traits and skills of a great investor. I first looked into their backgrounds. I found many were raised in blue collar or middle class families. Rarely were they from fabulously wealthy
families or families where there was a history of investing professionally but their path to a career in investing varied. Some like Ron Baron the mutual fund manager and investor with more than 50 billion dollars under management started investing as a teenager. If my bar mitzvah was interest the stock market cause had friends of mine who had been given stock from the grandparents who were prosperous and Eastman Kodak and Polaroid. I said I want to do that. And my father said we can't invest in stocks. We've never done that in family. And in fact one of the ideas behind my
business is the idea was I wanted to be able to have people like my parents be able to invest in the stock market. So I saw that. And then he said well I had a thousand dollars at the time. And he said well if you show me why you want to invest in a company and you put all your money into one company then and show me why then I'll let you do that.
An open account for you. And so you did research go to this brokerage firm and I would say it was called McDonald and Company here in Cleveland. And they were right by Asbury Park High School. So I'd go there after school sports and
girls and stocks and we'd go there after school. And all these guys called guys 40 50 years old was sitting there on these green chairs and looking in taped. It hardly moved. I think the New York Stock Exchange was 25 million shares a day and maybe American was a million or two managers a day to look at. I got a report on this Monmouth County National Bank and I start reading it.
And it was around the corner in where I lived in Alan Hurst outside of Asbury Park. And I told my father why I want to invest in it. And he let me invest. And the stock was ten dollars a share. One hundred shares.
And then the stock every day for the next six months seven months every day to this day the same it went up. And eighth it was who printed the 15 stocks and the Asbury Park Press. Nobody said the same. And then and then it got acquired at seventeen dollars a share.
So my thousand dollars became seventeen hundred. I said Man there's nothing to this. How can I do that. So I was interested. Hedge fund billionaire Ken Griffin also turned an early affinity for math and computers into an early career in stock trading. Let's talk about your background before
you started today. You're born in Florida. I was born in Daytona Beach. My father worked on the space program back in the 1960s but I spent my formative years in middle school and high school in Boca Raton Florida. And you were pretty good math student and I'm told a computer nerd as well. Is that fair or unfair.
Well I appreciate the compliment because to be a computer nerd has obviously turned out to be a pretty good place to be in life. And yes I was very interested in both mathematics and programming in high school. And it's defined my career and it has had a very important role in my life. So you went to Harvard College.
Most students there are taking courses that are athletics but you were maybe doing that but you were also trading securities. Is that true. That is true. I started up a small partnership my second year at Harvard to engage in convertible bond arbitrage which was a bit of a off the beaten path occupation for a kid in college. But I had a great fascination with markets and I had an opportunity to invest capital markets in my in my college days. And it was an incredible opportunity.
It was a really great learning experience. But in those days it wasn't common to be out to get stock prices instantly. You had to get a special terminal or special. I intended to let you get the stock quotes is that right. So it's what's amazing is you know I love the line.
People go well that's how we've always done it. And I can think back to the early days of sit it out. We're always did. It meant we used a fax machine which you and I of course have memories of in the fax machine was revolutionary in the nineteen. 80S real time stock prices were actually difficult to receive and I put a satellite dish on top of the dorm room so I would have access to real time stock quotes in managing the portfolio that I manage and where the Harvard people say interesting enough back in the 80s Harvard had a general prohibition on commercial activity in your dorm rooms. So I had to go to the building
superintendent to get an exception to put the satellite dish on that on the roof of the building. And fortunately he was willing to grant me that exception. But not every investor saw their future in finance early. Real estate titan Sam Zell and myself studied the law became lawyers and hated it. I was always a good enough academic to get from here to there.
So I want to go to law school. I got seven days but it didn't get very many days before that and that. And I basically used the four years of being an undergraduate to build a real estate business and build other businesses. And I just had a great time. So you were doing some real estate on the side while you were in college and then you went to university Michigan Law School and to please your mother or father you've said I'm going to go to law school.
But you weren't that interesting being a lawyer. No never. A matter of fact I ended up graduating and becoming a lawyer and I practiced for four days.
Four days. I didn't realize you practice that long. Four day four days. So then that morning of the fifth day I went to senior partner and as only a 24 year old could do.
I looked him. I said I just don't think this is a good use of my time. He said OK there's the door. Actually what he said is what are you going to do. And I said go back to doing deals like I did when I was in law school and in the real estate business in Arabic. And so he still wants to stay here and we'll do the legal work and we'll invest your deals.
And so that's what we did for a year. And then there's activist investor Nelson Peltz who didn't see the point in studying at all. What I really wanted to do is ski. So I left Wharton and I went up to Maine and became a housekeeper. What did your family say. NELSON We really wanted you to go to Wharton and be a good student.
You want to ski. I mean that's not what you're supposed to do. That's correct. They did say that. What did you do. You said I went. I.
My father was an amazing guy. He was unhappy that I left work and he was unhappy that I was a ski bum and he wasn't happy that I grew a beard. But I did all of those things and. The snow melted in late spring and came back and I had a summer job offered to me in Mountain and Argon to help them teach racing to young kids in Mt. Hood Oregon and I needed some money to get out there. I asked him if he'd give me a job on a truck 100 bucks a week. Two weeks.
That was all I needed. He said fine shave your beard off and. Do it. I said I would. It's only temporary. So I shave my beard off and after.
About a week on the job I started telling him things that I thought that were missed opportunities. And he set me up beautifully. He said why don't you stay here. And do what you want to do instead of going out to Mt. Hood aka. LT did. That's that's what they're also great investors like Paul Borland. One of the country's most successful endowment heads who came to investing after a completely different career.
I studied paper conservation restoring prints and drawings. I worked at the New York Historical Society for a while there. I then went to work at the Palace of Fine Arts in their conservation lab. And then I went to Los Angeles where I worked at the L.A.
County Museum. I did study. I did scientific work at the Getty. And then I set up my own conservation studio where I worked with contemporary artists like Sam Adams Russia's St.
Francis. And I was running my own business and I realized I needed to know a little bit about finance because I was working with very expensive works of art. I was running a studio and so I started taking a couple of business classes at UCLA.
And through that I got introduced to Yale School of Management and ended. And I but I got into Yale School of Management at the same time. I got offered a fellowship at the National Gallery of Art where you and I both serve the Weiser Fellow and I worked in the paper conservation lab there combining paper and paintings techniques for conservation on contemporary works of art. So you did that for a while then you went to Yale School of Management. My husband and I had been trying to have a child and it wasn't kind of works. It wasn't happening. So he said OK well let's go let's move to New Haven.
And of course that was instant. And my daughter was born after my first semester. So I took a break. And while when my daughter was probably two months old I went to David Swenson and knocked on the door and said hi. I want to learn about endowment because I'm going to work in a museum. And this is about David. David Lipton my resumé. There was no finance at all. And he took me in and I started filing and helping organize things.
And little by little I got projects to do. I remember he had me do a big research on soft dollars. That was one project I worked on. And little by little I became incorporated into the investment office. Coming up we hear about the extreme intelligence and attention to detail that it takes for success on Wall Street. One of the themes they root theme is is
we suffer from knowing the numbers. Another trait of great investors that shouldn't surprise you is they all tend to have a high degree of intelligence. Many excelled academically but true success as Mary Irda was the CEO of JP Morgan Asset and Wealth Management points out comes from training and continuing to educate oneself.
So training on Wall Street but specifically in wealth management is a is a very very long process. We we have twenty two hundred analysts starting today and they're going to be working through the summer. We have thirty six hundred analysts across J.P. Morgan Chase that will that will start at the very end in the September time period for their full time role. And we work very hard to go through in-depth training and then to work through which ones actually are good at stock investing which ones are good at emanate transactions which ones are good at helping people understand things in a more simplistic matter. That's a two to three year training program but that's pretty fast.
If you think 10000 hours is about what you need to master any subject. If someone comes in and has a regular you know eight hour a day job five days a week to take about five years to have a base level mastery on Wall Street it's more like 12 hours a day six days a week. That cuts you down to about two and a half years before you become mastered in something. Once they've got that under their belt they can then join a team. And if they've been successful going through the analyst program joining a team then the team will work through how that works. But it is a constant education each and every day. Every morning we start
with an 8:00 meeting and I call it like a mini university. And it's not just about what you've read in the newspapers as to what happened overnight. It's about understanding how all of those components fit together in a client's portfolio.
And then what might be right for you would be different than somebody else. And you're synthesizing all that information every morning and then you're going out in your figuring out how to apply it to each situation. Don Fitzpatrick the investment chief for George Soros is of a similar mindset to autos. For her the constant pursuit of new ideas and new voices keep her ahead of the game. So I read a lot in the morning skim through two or three different papers during my days a meeting with a lot of smart investors and smart people running companies. You learn a lot from there. I talked to peers but I think part of the trick of this big business is being able to really aggregate and assimilate information.
And one of the other tricks of this industry is is trying to find sources of information that are different than the other people who are in the business because you don't want to get crowd think. And I think that happens a lot in this business. Everyone's talking to the same people and a view becomes consensus that might not be really grounded as well as it should be in facts. Attention to detail. Also such great investors apart as described by two real estate legends Sam Zell and John Gray. You know one of Sam's favorite Sam isms is we suffer from knowing the numbers.
I think we've managed to keep throw to through the tulips for the last 50 years by never allowing ourselves to get swept up in the enthusiasm of whatever the current event might be. And I think by maintaining that level of discipline yeah we made mistakes. That's to be expected. But we've they've all been quote control level.
No one mistake was ever catastrophic. The first steel I worked on was a shopping center in Chesapeake Virginia. The great bridge shopping center. It was a six million dollar transaction. We borrowed force. It was a two million dollar equity check. And you would have thought I was buying the island of Manhattan. I mean I was down there for three weeks. I met every tenant.
I was counting the car traffic. I was learning the business. And it was an amazing experience because I was the chief bottle washer. I was the waiter. I was the maitre d because we were this tiny little business and I was learning it firsthand. And one of the most famous sayings in the real estate world is location location location meaning that the location is everything. And also you might say it's local local local because most people make in real estate investments kind of in the area. They know you've made investments all
over the world. How do you sitting in New York know about the value of real estate in Europe or Asia. How hard is up to build a global business. So I think the key to that is to have a global footprint to have hundreds of people all over the world. And it took us a long time to do it.
I mean we've been at this for 30 years. And you really need talented people on the ground. You need local people who know the markets. The one thing I'd say though that is advantageous about real estate is so many of the trends we're seeing particularly driven by technology are the same around the world.
So when we started buying warehouses back in 2010 and we noticed that there were these e-commerce tenants showing up and we started buying more in the US it wasn't a big leap of faith to say the same thing is going to happen in Canada. It's going to happen in the UK and continental Europe and across Asia. So my view is that if you have the skill set you can evaluate. Plus you travel a lot. Like you I'm on planes a lot. I no longer run the real estate business day to day.
My colleagues Ken Kaplan and Kathleen McCarthy have done an amazing job but they have teams around the world on the ground and we're local in those markets. And I think that's really important. You can not buy real estate in Mumbai the way we have flying in flying out of New York.
Next we look at how skilled investors evaluate risk. We are 100 percent confident every time we make the investment that is going to be a big company. We are wrong. A lot of the time. One of the easiest parts in life is to accept and follow conventional wisdom. But what great investors have found is that path doesn't lead to easy returns. Often the biggest wins come from going against the grain and taking a risk especially if you are a leading venture capital investor like Marc Andreessen or Evernote Coastline. Each Top End venture firm has its own
bar so it has its own set of criteria for a kind of whether she thinks a deal should be done or not. And then the top tier venture firms as a group have kind of a collective bar which is kind of is a top tier venture firm going to fund this company or not. And it's actually easier to answer that second question than it is the first question I get after you've been in the business for a while. You tend to have a sense of like OK this is going to get funded by a top venture capital firm or it's not. If it is going to get funded by a Top End venture capital firm and if my firm doesn't think it's a good idea you do wonder like who's right. Because maybe firms are quite smart. And so this is one of the regular
discussions that we have which is like OK if another one of these top and firms is interested in it that might be a very it might be a very positive substantive signal. If the other Top End firms have looked at it and I'll pass it that might be a substantive negative signal. That said some of the best deals in history have been passed on by a very large number of people. And one of the classic examples Uber was passed on by a very large number of venture capital firms. Uber was actually available to be invested in on the site called ángeles where literally anybody with a checkbook can invest.
And so every once in a while you get these outliers. And it's fundamentally a game of outliers like the money is made on the aberrations. And so I'd say you want to be generally open minded and humble about your conclusions about what all these different signals mean. Now famous economist Herb Stein once said if something can't keep going on forever it won't. In other words at some point things settle down.
Do you worry that because the economy might soften at some point of interest rates are raised or just because of the business cycle the wonderful world of venture capital will slow down a bit. And is that a worry for you. So it's a cyclical business for sure. It has a history of boom bust cycles. You know basically just like any other sector of the economy.
That said I guess I would say we we do not have a great track record in our industry at predicting these cycles. And I think most of what we think most of how we either perform or fail to perform is micro not macro which which is to say it's based on the success or failure of individual companies. And if you just look at the history of venture capital and startups many of the best companies have been formed during the hot periods but also many of the companies have been formed during the cold periods. Right. And there are pros and cons. Those periods. And so look it's possible there's another cyclical boom and bust cycle you know are planned for that cycle would be based basically be to just keep going keep working with existing companies help them through it keep investing in new companies all the way through and basically bet on these sort of micro level fundamental technological and economic changes that continue to happen.
Most of what we do is uncharted territory. I would say the one piece that works really well in our business is gold for high risk higher consequences. So most people in business. Reduce risk. Increase the probability of success which is reduce risk. What. At the expense of making the consequences of success relatively inconsequential. You might make two times your money or something. I for our business what works is I don't
mind a 90 percent chance probability of failure if there's a 10 percent chance of changing the one in that's very much the philosophy. It also goes way. It's it's the right way to make huge impact. It's not just venture capitalists taking
risks. Columbia's endowment head Kim Lu also says gains are not without calculated risks. I think the best investment advice I've ever received is the fact that we are in the business of taking risk. And so if you want to produce return you have to be willing to take risk and you have to be willing to analyze and mitigate that risk. The best you can. And to make sure that the return potential of an investment is equal to the risk. But you can't avoid risk. Now what do you think the most common mistake investors make.
Generally I think the most common mistakes is following the herd and just doing what everybody else is doing and not making sure that an investment is appropriate for your institution and making sure that the analysis that someone else is has done is not appropriate for you or is not congruent with the way you think about the world. I think there are a million ways to make money. I think there are a million strategies that can work. Not every investment is consistent with your strategy. And so I think there's a lot of herd mentality and that's a huge mistake that happens now. Sometimes risks don't pan out. And mistakes are made.
Now I might sit and stew over the loss for a decade or two but a truly great investor like Kleiner Perkins Chairman John Dorr has the ability to admit a mistake. Cut his losses and move on. When I first came to Silicon Valley I hung out at Stanford on the second floor of Margaret Jackson. All down that hall was Andy IBEX Shine who founded Sun Microsystems. John Hennessy who became president of
Stanford founded MIPS. Jim Clark of Silicon Graphics. What I didn't do is go down into the basement where Len Len and Sandy were starting Cisco. So that was a miss on my part. More recently I had the opportunity to invest in an electric vehicle company and the conventional wisdom was venture capitalists ought not to invest in electric vehicle companies not new car companies at all. There've been 400 new car companies in the nation's history. Every one of them. But one has gone bankrupt.
But I was still very attracted to the market and we had the choice of backing a brilliant car designer by the name of Henrik Fisker more ambitious slightly crazy entrepreneur by the name of being on musket test. Well we made the wrong decision. But Tesla did very very well and so did electric vehicles. So when I make a mistake I only think about it for the next 10 or 20 years. How long does it take for you to get over these things. Well I don't obsess on these but I won't ever forget.
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