#69 Stephen Schwarzman: What It Takes
Blackstone CEO Stephen Schwarzman discusses lessons from his high school coach, Jack Armstrong, and his parents, emphasizing internal validation and perseverance. He shares insights on building Blackstone, including rigorous risk assessment, hiring top talent, and learning from mistakes, alongside advice on making big life and business decisions.
Deep Dive Analysis
11 Topic Outline
Early Life Lessons: Parents and Track Coach
First Job in Investment Banking and Harvard Business School
Learning the Craft of Banking at Lehman Brothers
Founding Blackstone and Initial Struggles
Blackstone's Early Investments and the Edgecombe Mistake
Implementing a Rigorous Decision-Making Process
Developing Executives and Talent Assessment
Philosophy of Pursuing Big Opportunities
Navigating the 2008 Financial Crisis
Blackstone's Growth Post-Financial Crisis
Understanding Real Estate Cycles
5 Key Concepts
Do No Harm Investing
This principle, akin to a doctor's oath, emphasizes starting investment decisions by prioritizing the avoidance of losing money. The idea is that if you prevent losses, and then achieve the same upside as others, your long-term performance will be superior.
Talent Grading System (7, 8, 9, 10)
A framework for evaluating employees: 10s are top-tier, multi-faceted individuals who can do anything and create championships; 9s are highly capable, reliable executors who bring things home without much coaching; 8s do what they're told; and 7s are serviceable but require supervision and are not desired in a high-performance environment.
Worrying as Liberating
The idea that constantly worrying about what could go wrong, and having a good understanding of potential pitfalls, allows one to avoid perilous situations and price things more effectively. Once the correct action is determined, the worry subsides, leading to a sense of freedom.
Cross-Functional Coordination
The core lesson from Harvard Business School, applied to business, is that every part of an integrated system must be coordinated for the system to function effectively. This applies across different business functions like strategy, production, and marketing.
Character Loans
In the banking business, this refers to a loan or investment made based primarily on the reputation and past performance of the individuals involved, rather than a traditional track record of the new entity itself. It's a bet on the people's ability to prevail in various situations.
8 Questions Answered
He learned to always keep trying and not to look to anyone else for validation, as his parents never congratulated him on accomplishments, assuming it was what he was supposed to do.
He got his first job by accident after giving a book to a stranger at a reunion, who then introduced him to one of the founders of Donaldson, Lufkin & Jenrette, where he was hired despite admitting he didn't know what the firm did.
He found the curriculum outmoded and boring, feeling that every course taught the same core lesson about coordination, and he wasn't surrounded by people he perceived as smarter than him due to the Vietnam War's impact on business school enrollment.
The biggest challenge was attracting business, as corporations preferred established big firms with long histories and global access over a new M&A boutique with just two people, even if those people had strong reputations.
They try to help the person find a job elsewhere, acknowledging that the mistake of hiring them was the firm's, and that a 'seven' in their high-performance environment might be an 'eight' or 'nine' in a different business area.
It's crucial to find a really big idea addressing a huge opportunity, as it requires a heroic effort regardless of scale, and a big vision can excite and compensate others to join the journey.
He viewed it as a temporary collapse of prices due to massive global deleveraging, not a reflection of inherent value, and believed that financial assets would turn around when the system normalized.
They view real estate as a slow-moving, supply-and-demand-driven business where 100% of future supply is visible through permits, allowing them three years to react to market changes and sell assets in areas with excessive optimism and supply.
41 Actionable Insights
1. Prioritize Not Losing Money
When making decisions, prioritize not losing money, starting in reverse like a doctor’s ‘do no harm’ principle, because if you lose a lot, you need a really great deal to make it up, and never losing money leads to better long-term performance with the same upside.
2. Collaborative Risk Assessment
For critical decisions, gather all partners, ensure proposals detail all risks and their potential outcomes, then have each person at the table critically ‘attack’ the thesis and risks, as this collaborative approach uncovers more insights than a single interrogator.
3. Never Compromise on Hiring Quality
When hiring, never compromise on quality; ‘good enough’ is not sufficient, as high-performance organizations require exceptional talent.
4. Seek Internal Validation
Do things for internal satisfaction, not external validation, because if an accomplishment feels good or worthwhile to you, you must own that feeling yourself and not depend on others to affirm its value.
5. Always Keep Trying
Always keep trying in your endeavors, as persistence is a fundamental lesson learned from formative experiences.
6. Foster a Blame-Free Learning Culture
Cultivate an intellectually rigorous culture where teams are not blamed for suboptimal outcomes if the collective assessment of risk factors was incorrect, as this ‘protective system’ frees everyone up and encourages open participation.
7. Continuously Learn from Mistakes, Refine Process
View running an organization as a continuous exercise in learning from failures, focusing on developing new rules and changing processes to prevent repeating the same mistakes rather than assigning blame.
8. Pursue Big Ideas
When choosing a life’s endeavor, wait for a truly big idea that addresses a significant opportunity, as you’ll make a heroic effort regardless, and a large vision allows for huge wins and inspires others to join your journey.
9. Align Vision with Market Trends
Focus your efforts on a unique vision within a huge field where all trends are favorable, as this alignment makes it easier to recruit talent, ensures significant success, and allows for continuous growth by catching market waves.
10. Worry to Prevent Peril
Embrace worrying about potential downsides, as this constant vigilance helps you avoid perilous actions, price things more accurately, and once the correct action is determined, it leads to a better outcome.
11. Careful Foundational Life Choices
In your personal life, make foundational choices like who you are with or what you love doing very carefully, as getting these wrong can lead to unfixable problems, whereas getting them right eliminates the need to worry about downsides.
12. Intense Training for Performance
Engage in intense, limit-pushing training (‘make deposits’) so that you are well-prepared and can perform effortlessly (‘make withdrawals’) when it truly matters, such as on game day or in real-world challenges.
13. Push Past Pain Barriers
When facing a challenge, push through the barrier of pain to build endurance, enabling you to find an ’extra gear’ and compete effectively against strong opponents.
14. Embrace Foundational Learning
Engage in foundational, even ’excruciating’ work that requires fighting for every bit of learning, as this process builds a deeper, visceral understanding of data and processes compared to instantaneous, automated results.
15. Deeply Understand Data Origins
Strive to understand where every number and piece of data originates and how it’s produced, as this deep, visceral understanding allows you to appreciate its nuances more fully than merely viewing instantaneously generated results.
16. Act Swiftly in Distress
When facing severe financial problems, act very quickly to either secure additional capital discreetly or sell the firm on a fire-sale basis to a larger institution, as this prevents panic among lenders and avoids collapse.
17. Secure Revenue Quickly
As an entrepreneur, understand that expenses begin immediately, so focus intensely on securing revenue quickly to avoid being consumed by overhead costs and the fear of financial failure.
18. Dedicate Heart to Entrepreneurship
To succeed as an entrepreneur, especially with a new concept and strong competition, you must pour your heart into the venture, as it’s not a leisure-time activity and requires immense dedication to survive and thrive.
19. Own Misplaced Trust
If someone trusts you and that trust is misplaced, take full responsibility for the negative outcome, as it is your problem for asking them to trust you, not theirs for doing so.
20. Require Advance Written Proposals
Demand written proposals well in advance of meetings to allow for thorough review and absorption, preventing persuasive talkers from ‘conning’ you or themselves on risks, thereby protecting investors and the firm.
21. Avoid Losses for Better Returns
Prioritize avoiding losses, as consistently not losing money, even with the same upside potential as others, leads to significantly better performance over time compared to needing to make up for large losses.
22. Avoid Downturn Debt Refinancing
When borrowing money, ensure you can always pay the interest, even during recessions, and critically avoid situations where you would need to refinance debt during an economic downturn, as lenders will be unwilling to provide capital.
23. Coach Executives in Dilemmas
To develop executives, train and coach them by having them discuss difficult, ambiguous situations where they must make the ‘best bad choice,’ mobilizing collective experience and judgment to guide their learning and decision-making.
24. Ensure Thorough Training
Do not assume new hires know things just because they claim to; instead, provide thorough training, onboarding, and quality control to ensure their psychological comfort and actual competence in their roles.
25. Anonymous 360-Degree Reviews
To accurately assess employee performance and foster a culture of truth, implement anonymous 360-degree reviews (upward, peer, downward) across multiple categories, as numerous observation points will provide a clear picture of capabilities.
26. Frame Ventures as ‘Sure Things’
When pursuing entrepreneurial ventures, frame your big vision as a ‘sure thing’ to attract others, as entrepreneurs don’t like taking risks with their lives and need to believe in the high probability of success.
27. Invest Based on Sound Safety, Adjusted for Cycles
Invest in opportunities that are fundamentally sound and safe, but always know where you are in the economic cycle; if near the top, demand a strong momentum thesis and historic safety standards to ensure it can power through a downturn.
28. Monitor Real Estate Supply
In real estate, constantly monitor visible supply (via permits) and demand, and if you identify an area or asset class with excessive incoming supply, strategically sell your holdings to avoid being caught in a downturn.
29. Sell in Oversupplied Real Estate
When a real estate market is characterized by widespread optimism and a surge in supply, sell your properties, as the fundamental rules of supply and demand will likely lead to a downturn that impacts optimists.
30. Nurture Children’s Choices
When raising children, encourage them to do their best in endeavors of their own choice, prioritizing their happiness over specific achievements or external pressures.
31. Seek Enthusiastic Work Environments
When seeking a job, consider the enthusiasm of the people already working there, as their excitement about their work can be a good enough reason to pursue a similar path.
32. Avoid Non-Inquiring Cultures
Be wary of work cultures where asking questions is not encouraged, as this can hinder learning and lead to feelings of unpreparedness and isolation.
33. Decline If Unprepared
If offered a significant position, it’s acceptable to decline if you genuinely feel you are not yet old enough or capable enough to handle that level of responsibility, prioritizing readiness over immediate advancement.
34. Coordinate System Components
Ensure that every component of an integrated system is well-coordinated, as a lack of coordination will prevent the entire system from functioning effectively.
35. Consult Mentors Before Quitting
When contemplating a significant decision like dropping out of a program, seek advice from experienced mentors who can offer perspective and encourage you to ‘gut it through’ if they believe it’s the right long-term path.
36. Don’t Mistake Personal Capability for Firm’s Reputation
When leaving an established firm to start your own venture, recognize that clients often value the firm’s history, prestige, and services more than individual capabilities, so don’t mistake your past success at a large firm as solely your own.
37. Manage Financial Fear
Recognize that intense financial fear can make it difficult to be emotionally present in other areas of your life, highlighting the importance of managing this stress.
38. Beware Capability Delusion
Be aware that individuals can sometimes be delusional about their own capabilities, making it crucial not to solely rely on self-assessments when evaluating talent.
39. Marry When Older
Consider making major relationship commitments when you are older and have a better sense of yourself, as people and their objectives change over time, making it challenging to match two individuals for a lifetime when young.
40. Detached Market Collapse Perspective
During market collapses, maintain a detached perspective, recognizing that extreme imbalances between sellers and buyers are temporary and prices will normalize when the financial system recovers.
41. Detached from External Market Forces
Avoid getting emotionally tied to large-scale market movements or global economic forces that are beyond your control, as personal emotional investment is unhelpful when you didn’t cause the situation.
6 Key Quotes
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.
Stephen Schwarzman
You have to make deposits in training so that you can make withdrawals for game day.
Coach Jack Armstrong (quoted by Stephen Schwarzman)
It's as easy to do something big as it is to do something small.
Stephen Schwarzman
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.
Stephen Schwarzman
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?
Stephen Schwarzman
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? You know, that's just temporary.
Stephen Schwarzman
2 Protocols
Blackstone Investment Decision-Making Process
Stephen Schwarzman- Gather all partners around a table for any investment proposal.
- Ensure the proposal is written up, laying out all risks and the team's anticipated outcomes if those risks materialize.
- Distribute the written proposal to partners at least two days before the meeting to allow for reading and absorption.
- Have each partner at the table critically examine the thesis, attack it, and identify any additional risks.
- Discuss the proposal through two or three meetings to ensure a deep understanding of all risks.
- Focus on the most important decision: not losing money, by prioritizing downside protection over upside potential.
Blackstone Employee Evaluation Process
Stephen Schwarzman- Implement a 360-degree review system, including upward, peer, and downward reviews.
- Utilize approximately 25 different categories for review.
- Conduct all reviews anonymously to ensure honest feedback.
- Use the multitude of observation points to accurately assess employee capabilities, preventing individual biases from skewing evaluations.