Last week, I came across a live discussion between Neil Shen (Founder of Venture Capital firm Sequoia Capital China and #1 on the Forbes Midas List in 2018, 2019, and 2020) and Stephen Schwarzman (Founder and CEO of private equity firm The Blackstone Group). In this wide-ranging conversation, these two giants of their respective fields discuss everything from China’s economy and the impact of COVID-19 to the core traits an entrepreneur should have and what to look for when hiring.
No recording, but I’m sharing my transcription for easy consumption.
In this section, the pair discuss principles for investing and life, and give advice to those starting their careers or businesses in uncertain times.
This is Part 4 of 4.
Part III: Why Culture is more important than Management
Part 4: Principles for Life and for Investing
Neil Shen: Well, that’s a very good suggestion how businesses [“seasons”] interested should talking to potential candidates. Obviously, the very reason you can make those decisions and make those calls when you interview them, is because you obviously come from a history of successful investments. So let’s get into that part of the conversation now.
So in the book, you mention one of your guiding principles is “Never lose money.” Can you elaborate on that? Are there any other investment principles you’d like to share with the audience, with the younger generation?
Stephen Schwarzman: Yeah, sure. “Don’t lose is money” is like this famous saying for a doctor, “Do no harm.” In other words, you don’t have somebody come into your office, do some things to him, and kill the patient, right? So, I’ve learned, from the third investment that we made, in the steel distribution business that went wrong, investors hate it when you lose money. If you don’t make so much on some things, it’s okay. That’s just a mistake. If you lose their money, they get astonishingly angry at you, and they’ll almost never give you more money. So you have to be very careful when you make a decision. That doesn’t mean you don’t take risk. But when you make any decision, you have to believe that you’re not taking risk.
And the reason you would believe that is either because you’re stupid in the first place, and you just sort of feel like believing that, or you’ve done the work to show where things can go wrong. And you’ve discussed it, and planned, to take those things that obviously can hurt any new business, any new organization, any new investment, and you’ve engineered those out.
I think it’s important that investments are not balanced — that the chance of losing money is equal to the chance of making money — that’s a ridiculous approach in my view, even if it’s a lot of money. I’m not in the venture business, like you are, where people do that all the time. And sometimes they do astonishingly well. What I’ve learned, is when you’re handling large amounts of money — like we have, over $500B of money that’s a huge amount of money for private investments, the biggest in the world, actually, at Blackstone with no other company close to our size — that our responsibility is always doing a great job for people. And using the process I talked about earlier, where we openly debate the basic assumptions of everything, enables us to, for the most part, to avoid loss
Before the financial crisis that we now have — we’ll see how we all come out of that — our last 700 investments, we only had had one bankruptcy. One catastrophic loss. And that’s a pretty amazing record, when you buy a lot of things, and you borrow a lot of money for each one. To only have one that collapsed out of 700 shows that you can do that.
Neil Shen: Absolutely. I think, I guess every single one of the 700 has some embedded downside risk, but somehow you analyze it and you manage it. That’s an amazing number and record. Other than “Never lose money,” any other investment principles? You pick one to share with the audience.
Stephen Schwarzman: Yeah. Go into industries that have growth. If you’re investing in something where that whole field is doing well, and is going to do better in the future than it is the day you invest in — in that kind of field — you will find your way to success. If you’re investing in something that you think is quite cheap, but has very little growth, then when something goes wrong, you don’t have a way to fight your way to success. So that would be the other thing I would say.
So for example, Neil, in the real estate business, we sold our large shopping centers and malls when we saw the internet coming in. In the Western world, that was a very smart thing, to not own those. And we took the money, new money, and bought warehouses. Now why did we buy warehouses? Because all the Internet sellers, whether they’re the Alibabas or JDs, doesn’t matter, they all need warehouse space for their goods to ship them to customers. And so warehouses, throughout the world, ended up being best asset class in real estate. Now, we were the largest purchaser of warehouses in the world over the last 10 years. So what we did is, we looked at the way the growth was going to be, where society was changing, got out of things that we thought weren’t going to work, and made huge commitments to the things we did.
Neil Shen: Yes. It’s a lot better to be in a growth industry. They enjoy the tailwinds. Instead of meeting the headwinds. So many young people in China are reading your book, not only for investment, but also for advice on their career life. So if you can only offer one suggestion to them, what would that be?
Stephen Schwarzman: I think one of the suggestions, particularly for younger people, is go into something that you love. What you find in life, is if you find something where you are a natural fit, your interests and your capabilities fit a certain type of activity, you can be really great at doing that. So one funny example, in our country, is we had a basketball player named Michael Jordan, who was probably the best basketball player who ever played. Remarkable athlete. His father died and he became very depressed. He quit basketball and tried to play another sport, called baseball. And Michael Jordan was a terrible baseball player. Here was the best person in a sport, who went into another sport and was mediocre.
How is that possible? They’re both athletic. But after a year and a half, he decided to go back and play basketball. And I was at his second game, he hadn’t played in almost two years, and he scored 40 points. In his second game. Which is an exceptionally high score. Because he was gifted. And each of us have something we like, that we’re better at than other things. And if you stick to where you have a gift, you’ll find that you’ll have a more successful life, you’ll be happier, and you’ll probably be much more successful.
So I think I’d like to ask you, what your number one career advice is for people, given the disruption in the economy today, in China.
I would say, whether there is disruption or not, I think the same rule actually applies. And you have said that so well. I think you need to be enthusiastic your job, and your career, and something you truly love. And in addition, I think you can choose an industry where there is a lot of exciting development, I would say, not only in the short term, but also in the medium-to-longer term. I think I would advise young college graduates to look at those criteria. Those are much more important than just compensation.
Neil Shen: For young entrepreneurs, which I know many of them are just starting a company, it is not an easy time. I would suggest them to focus on survival during this very [“significant?”] time. And I think the most important thing is, attend to your cash flows. Because that’s the only way you can make sure the company will survive. And also, like any startup, focus on product. I think the crisis will be over, and if you have a truly differentiated product, you’re going to come out as someone who is much stronger in the sector. And I just feel like you need to be resilient, in terms of, in markets like that, because many great companies actually have been built during special periods of time, like… (interrupted).
Stephen Schwarzman: But I told our younger people, that they’re actually quite lucky to be involved in our industry, which is the investment industry, at this stage, of really huge, economic dislocation. Because they’re going to learn to never trust anything that somebody tells them about what the future’s going to be.
As you said, make sure you have enough cash and cash flow so you don’t get in trouble. When young people start, they look at the world, they look at models, they build expectations, and they don’t always plan for everything going wrong. When I started — I first started in 1969, then I went to business school and came back and started again in 1972 at Lehman Brothers — there was no equity increase for 10 years in the United States. So I learned, equities don’t go up, automatically. And if they do, it’s a gift. And it may be temporary. So my whole career — because I learned at that time —
Neil Shen: Yup. Yup.
Stephen Schwarzman: — is not believe what everybody tells you. Always assume it can go wrong. Always protect the business.
Neil Shen: And prepare for the really [“long”] (interrupted)
Stephen Schwarzman: Right. And so what happens is, the young people now, who are starting out, and other people, who have businesses, will learn discipline and what academics call “risk control” in a way that will benefit them for the next 10, 20, or 30 years of their careers. And even though it’s tougher times now, they have to look at it as educational time, where they will learn rules that will help make them success.
Neil Shen: Great. Really enjoyed talking with you. We are running overtime — but I hope that you could actually come back to China soon, so that you can physically see the audience who will become big fans of your book.
Stephen Schwarzman: Well, I’d love to come back soon. I have the Schwarzman Scholars program at Tsinghua University. Right now, everybody is scattered around the world. From the foreign students’ perspective, everybody would like to come back. We all need to be safe. That’s the job of our governments, to help provide that safe environment. But it’ll be great to come back as soon as I can.
Neil Shen: Great. Thank you so much for your time. And stay safe!
This is Part 4 of 4.