Stephen Schwarzman: What It Takes – The Knowledge Project, Hosted by Shane Parrish

Check out The Knowledge Project Episode Page & Show Notes

Key Takeaways

  • “You have to make deposits during practice so you can withdraw them during game day” Stephen Schwarzman
  • Like the medical principle, “First, do no harm,” Stephen’s #1 investment principle is, “First, don’t lose money”
    • Avoiding losses leads to greater long-term wealth rather than constantly seeking the largest returns 
  • Discussing a topic with multiple minds is more illuminating than trying to understand it from your perspective alone
  • “Running a great organization is an exercise in lifetime learning of things that didn’t work out” –  Stephen Schwarzman
    • When a problem arises, look at it as an opportunity to improve your thinking process
  • “Never compromise when you’re hiring people. Good enough is not good.”Stephen Schwarzman
  • On choosing what to work on:
    • “You should find a really big idea addressing a really big opportunity. Then, if you win, you win huge.”Stephen Schwarzman
      • Big ideas will also excite and attract more supporters than small ideas

Books Mentioned

Intro

Lessons from Stephen’s Formative Years

  • From his parents:
    •  “I learned to always keep trying. I learned that you can’t look to anyone else for validation.” – Stephen Schwarzman
  • From his high school track coach, Jack Armstrong:
    • “You have to make deposits during practice so you can withdraw them during game day” Stephen Schwarzman
      • Stephen recalls his track practices being so demanding that the entire team looked forward to actual track meets because of how much easier they were

Learning on the Job

  • After graduating college, Stephen got linked up with one of the founders of an investment bank who took a liking to Stephen because of his charism
    • Stephen ended up getting hired by the firm, and because he didn’t have any financial knowledge, was forced to learn everything on the job
      • “I didn’t even know there was something called stock”Stephen Schwarzman

Harvard Business School

  • Eventually, Stephen made his way to business school
    • He found it VERY boring and wanted to drop out, but ultimately decided to stick it out
  • One of his issues: Every class was teaching the same thing, they just had different names
    • “It was all the same thing, which was that every piece of any integrated system has to be coordinated or else the system itself doesn’t function” – Stephen Schwarzman

Working at Lehman

  • After graduating from Harvard Business School, Stephen joined Lehman (this was at a time before investment banking became flooded with business school graduates)
    • “To get a job at a place like Lehman, you were either an ex-CIA agent or somebody who was working an oil rig who was very smart. It was a melange of interesting people.”Stephen Schwarzman
  • Now remember, this was before the internet
    • The process of grinding for data without it ingrained an intuitive feel for interpreting data patterns within Stephen

Founding Blackstone

  • Stephen went on to found Blackstone with Peter Peterson
    • When seeking initial funding, they got ~17 no’s for every yes, managing to finalize things the day before Black Monday
    • “For your own ego-driven reasons, you think it’s you working at the firm that creates the business. Well, I learned that it’s mostly the firm.” – Stephen Schwarzman
  • The mergers & acquisitions market before Blackstone operated like a cartel headed by the big banks, but customers didn’t mind, so no one complained
    • “We didn’t realize we were establishing a new paradigm in finance” – Stephen Schwarzman
  • “When you’re an entrepreneur and you start something, the first day you start losing money”Stephen Schwarzman
    • This constant sense of impending doom from all the bills only helped Stephen to focus his mind 

The Most Important Principle

  • Like the medical principle, “First, do no harm,” Stephen’s #1 investment principle is,”‘First, don’t lose money.
    • Avoiding losses leads to greater long-term wealth (compared to constantly seeking the largest returns)

Lessons in Business

  • Discussing a topic with multiple minds is more illuminating than trying to understand it from your perspective alone
  • “Running a great organization is an exercise in lifetime learning of things that didn’t work out” –  Stephen Schwarzman
    • When a problem arises, look at it as an opportunity to improve your thinking process

How are the best executives made?

  • “You train them, you coach them, and you have them discuss difficult situations with you where they’re not sure where to go” – Stephen Schwarzman
  • “The objective is to mobilize experience and judgement to help people” – Stephen Schwarzman 
    • “That way, when you’re older, you’re usually a better executive than you were in your 30’s”

Grading Potential Talent on a Ten-Point Scale

  • 10/10 – A ten is like getting Lebron James or Michael Jordan on your team
    • They can shift the course of your entire company
  • 9/10 –  Nines can do anything in their field, but they just can’t perform at the level of a ten
  • 8/10 – Eights just do what they’re told
  • 7/10 –  You don’t want sevens unless it’s absolutely necessary, and you shouldn’t even consider anyone below a seven
  • Notes:
    • Because a 7 at one company might be an 8 or 9 at another, it’s even more important to be selective in hiring
    • “Never compromise when you’re hiring people. Good enough is not good.”Stephen Schwarzman

Lessons Learned Working as a CEO

  • Working with people is complex – it requires a multidimensional approach
    • “Figuring out what to do isn’t hard, but how to do it, what kind of time frame to have, and what sequencing to have is a learned behavior” – Stephen Schwarzman
  • “People need to be trained. You can’t assume they know things just because they tell you they do.” – Stephen Schwarzman
    • “People are sometimes delusional about their own capabilities” 
  • It’s not hard to create a culture of learning, you just have to commit to it

Choosing What to Work On

  • Choosing the one thing you want to do with your life has the opportunity cost of losing all other possibilities
    • “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” – Stephen Schwarzman
  • “You should find a really big idea addressing a really big opportunity. Then, if you win, you win huge.”Stephen Schwarzman
    • Big ideas will also excite and attract more supporters than small ideas

A Side Point on Worrying

  • Stephen finds that a certain level of worrying and paranoia in his job keeps him on his toes
    • Perhaps for the better, Stephen doesn’t find that this worrying extends into his personal life

The 2008 Financial Crisis

  • Stephen saw the crisis coming by spotting many absurdities in the market, notably involving mortgages
  • Blackstone invested in Hilton Hotels and Equity Office right before the crash
    • They were criticized for it, but it ultimately returned the largest profit in private equity history
  • During the crisis, Blackstone’s stock price dropped 90%, yet Stephen was never rattled
    • He was confident in the company fundamentals, and since the crisis was beyond his control there, was no point in wasting emotional energy

Views on Real Estate 

  • Real estate is very much defined by supply and demand
    • People who fail in real estate fail to understand these basic principles
  • Real estate is the slowest moving asset class
    • Changes in supply take about three years to manifest
    • You have 100% transparency on supply because building permits are public information
    • Demand changes on a monthly basis
  • In real estate, you have 3 years to respond to changes in the field, rather than being put out of business overnight by new technologies
  • When you realize the market is in a bubble, simply sell your piece and make sure you’re gone
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