David M. Rubenstein Interview – Lessons From the World’s Greatest Investors

Applico CEO Alex Moazed to discuss his new book How to Invest: Masters on the Craft. In David’s new book, he interviews the greatest investors in the world to discover the time-tested principles, hard-earned wisdom, and indispensable tools that guide their practice.

Me and David discuss a gamut of both personal and business topics including manufacturing in America, his philanthropic work around America history, today’s financial landscape, and the building blocks of great investors.

00:00 – Introductions
00:58 – Why is now the right time for How To Invest?
02:06 – Building blocks of great investors
03:29 – The number one thing great investors do
05:10 – Sneaking in Jimmy Carter’s office
06:57 – Managing vs investing
08:02 – Are you a good investor?
08:33 – Starting an investment firm in 2022
09:45 – How should the average investor build wealth?
10:53 – How did you pick who you interviewed?
12:05 – David’s favorite historical artifact
13:10 – Where did your love for America come from?
14:24 – I’ve given you a republic if you can keep it
15:49 – Missing on tech investments
16:27 – Is big tech damaging our democracy?
17:40 – The need to manage risk
19:00 – Why David doesn’t gamble on sports
19:16 – What is the riskiest thing you’ve done?
20:31 – Permanent capital funds
22:05 – Pros and cons of remote workforces
24:44 – Is the U.S. economy in trouble?
26:54 – The U.S. $31 trillion debt
28:49 – Manufacturing in the U.S.
31:19 – Passion for ESG investments
33:41 – Is it possible to have ESG investing in China?
35:57 – U.S. firms splitting with China
38:03 – Optimism for the United States
39:06 – Identifying talent at Carlyle
40:37 – The worst investments you have made?
41:15 – What did you learn from this book?
43:43 – the financial service world goes beyond investing
44:57 – Working for charity
45:45 – David’s rules for philanthropy
48:54 – Parting words and conclusion

#investing #ceointerview #investingforbeginners

A master class on investing featuring conversations with the biggest names in finance, from the legendary cofounder of The Carlyle Group, David M. Rubenstein.

What do the most successful investors have in common? David M. Rubenstein, cofounder of one of the world’s largest investment firms, has spent years interviewing the greatest investors in the world to discover the time-tested principles, hard-earned wisdom, and indispensable tools that guide their practice.

-How did Stan Druckenmiller short the British pound in one trade for a profit of $1 billion dollars?
-What made Sam Zell the smartest, toughest investor the world of real estate has ever seen?
-How did Mike Novogratz make $250 million off crypto in one year?
-How did Larry Fink build BlackRock from scratch into a firm that manages more than $10 trillion?
-How did Mary Callahan Erdoes rise to the top of J.P. Morgan’s wealth management division to manage more than $4 trillion for individuals and families all over the world?
-How did Seth Klarman perfect value investing to consistently deliver net returns of nearly 20 percent?

With unprecedented access to global leaders in finance, Rubenstein has assembled the most authoritative book of its kind. How to Invest reveals the thinking of the most successful investors in the world, many of whom rarely speak publicly. Whether you’re brand-new to investing or a seasoned professional, this book will transform the way you approach investing forever.

Interview transcript:

Alex Moazed:
Hello, I’m Alex Moazed and welcome to Winner Take All. We have a very special guest today. We have David Rubenstein. You may know him as a billionaire and co-founder and co-chairman of one of the top private equity firms in the world, the Carlyle Group. You may also know him as the chairman of a myriad of different institutions like the Kennedy Center for the Performing Arts, the Chairman of the Economic Club, Chairman of the Council on Foreign Relations and many other things. David’s written multiple best selling books and now he’s coming out with his latest book called How to Invest: Masters on the Craft. And he’s gone and interviewed between himself and the people that he’s interviewed for this book, you have a who’s who of the investing minds on the planet. So I’m really delighted to have you here with us, David, thank you so much for joining.

David M. Rubenstein:
My pleasure to be here. Thank you for having me.

Alex Moazed:
What gave you the inspiration to go and write this book, of all the things that you’ve done, you’ve interviewed people, you have your own shows and have many things on your mind. Why did you feel like this was the right time and the right topic?

David M. Rubenstein:
Well, I’ve spent 35 years in the investment world and principally in the private equity world, and I’ve gained some knowledge about private equity investing. I’ve also served on a lot of investment committees for a lot of large non-profit organizations and therefore see other investment professionals and their performance regularly. And so, I have a fair amount of experience in this and I thought because I had access to these people, I could interview them and maybe make it understandable to people that what made these people tick, what their secrets are. And the purpose of the book is not to make a reader Warren Buffet. That’s not realistic. What I was trying to do is, inspire younger people to consider investing as a career because I think it’s a good career. Secondly, I was trying to inspire people that have money but don’t really know how to manage it, to give them some lessons about what they might do if they’re going to pick a manager or if they’re going to do it directly. And that’s what I was trying to do.

Alex Moazed:
You break the book down into a few different sections. You have mainstream investments, alternative investments, and then cutting edge investments. And so you’re interviewing people like Larry Fink about fixed income, Sam Zell, about real estate, Dalio, about hedge funds and Orlando Bravo, about private equity and buyouts. And that doesn’t even do the list justice frankly, but it’s a phenomenal, very holistic set of individuals that you interviewed for this book and did so wonderfully. What were some of the commonalities that you started to piece together around what makes a great investor to your point earlier?

David M. Rubenstein:
They tend to come from blue collar or middle class families, not from very wealthy families. They tend to have been pretty good students. They tend to be pretty good in math. They tend to like to control things to make the final decision. They tend to be intellectual sponges and love to absorb information about even things that they may not be directly involved with. They love to read. They are people that are failed before in life in many different ways. They’ve made mistakes and they get over those mistakes relatively quickly and go into the next thing. And most importantly, they go against the conventional wisdom. They’ve learned that if the people say you should now invest in A, B and C, they will tend to go in X, Y, and Z. They love to go against conventional wisdom and that’s made them great. They’re willing to take chances that the average person is not willing to take.

Alex Moazed:
So I have a small excerpt here, which I’ll read, which really stuck with me and resonated with me. You say somebody reading this might say, “I want to be the next Sam Zell. What skillset would you tell young professionals they should have to be, to be the next Sam Zell?” And then he goes on to say, “I answer that by saying, Sam Zell is a professional opportunist. He’s an entrepreneur. As an entrepreneur, he has a lot of self confidence. Justified or not, I can’t tell you, but he has a lot of self confidence. Failure is not in his lexicon. Sometimes it doesn’t work out, but never fails. Sam sees problems and then sees solutions and in the same manner.” Where do you think on that journey and in your own journey, this concept of building that self confidence, you just said going against the grain, so easy to say, but how do you go about doing that?

David M. Rubenstein:
Well, you go against the grain because you have an idea that the market or the conventional wisdom is that certain things should be done and you just have your own intuition, your own gut saying you should do something different. The self confidence comes from having made some mistakes in the past and overcome them. Self confidence comes from basically being reasonably intelligent and having done your homework. So people who will succeed in life, in investing in other things generally have a fair amount of self confidence. Now, that’s different than cockiness. Sometimes people are overly cocky and arrogant and most of the people that I interviewed really don’t have that skill or trait. They tend to be, I’d say, humble. That’s because when you’re investing every day, you’re going to make a mistake or you could make a mistake, and so there’s a fair amount of humility in these people. They tend not to be cocky or overconfident.

Alex Moazed:
That makes sense. Also, segue to my next question which is, so why did you think it was a good idea to sneak into the President of the United States’ office in the middle of the night and rearrange the papers on his desk?

David M. Rubenstein:
Well, I didn’t quite rearrange it. What I did is this. I used to work until midnight at the White House every night, and therefore the staff secretary would’ve already put the memos on the president’s inbox for him to see at 6:00 in the morning. So what I would do is, I’d go into the President’s Oval office and put my memos on top of the President’s reading material for the next day. That has an advantage that he would read my stuff first, and if you read my stuff first, I would probably get a decision more quickly. So I wouldn’t say it’s a trick, but it was something that I did because I generally was working later than other people.

Alex Moazed:
And this was President Jimmy Carter, is that right?

David M. Rubenstein:
Correct. Yes.

Alex Moazed:
So I mean, I would say from what you were just saying before this right, self confidence, yes, I’d say that takes some self confidence. Going against the grain, check as well, right? I mean I think there’s probably little events like that which probably are evidence of these broader traits that you’re talking about, right?

David M. Rubenstein:
Yes. I mean, I had some self confidence because I knew what I was writing the memos about to the president and I had confidence that my views were probably ones that would make some sense for him. And so I didn’t think it would be a big problem if he read my memos first and I put my memos on top of the inbox. But after a while, some people figured out what I was doing and after I would go home, they’d put their memos on top of mine.

Alex Moazed:
That’s hilarious. So a lot of the people you interviewed, like let’s say Ray Dalio. I just saw your interview on CNBC where you were pointing out, Ray is still a Co-CIO but he’s just not CEO of Bridgewater anymore. And if you look at yourself and your career, which you talk about in the book as well, you are one of the best investors that’s out there, so are the people you interviewed, but you’re also an entrepreneur, you built a business around how to invest and how to institutionalize a thesis around investing. How would you say, when you’re thinking about both sides of the brain, are those different sides of the brain, someone who can both be a great investor but then also really build a business around investing?

David M. Rubenstein:
There are different skill sets as you mentioned. Some people are really good at managing and some people are really good at investing and it’s rare that somebody is great at both of them. Ray Dalio was really great at both. He built the biggest hedge fund in the world’s history and he also made it the most profitable hedge fund in the world’s history, and he also was the person who was the chief investment officer. So he built a big organization and he was a good investor as well, and that happens from time to time. There’s some people that are just really good investors and really good managers. Some people are great investors and bad managers, some people are good managers and bad investors.

Alex Moazed:
Where would you put yourself on that scale?

David M. Rubenstein:
As I say in the book, I’m not a great investor. I hang around a lot of great investors. I know a lot of great investors, but I wouldn’t say I’m a great investor. My job at Carlyle was to help build the firm, raise the money, and deal with other issues. I really wasn’t a great investor. I sat in thousands of investment committee meetings, gave my views. Sometimes they were ignored, sometimes they were listened to, but generally I would say I was more of a business builder than I was as an investor.

Alex Moazed:
Yeah, it’s fascinating. So I mean, when you were saying, when we started this off just a few minutes ago, one of the reasons or one of the two main reasons you wrote the book was to help inspire people to get into the world of investing. So if you’re looking at the state of the landscape today versus when you founded Carlyle, when Ray founded Bridgewater, do you think the environment is more ripe, less ripe to actually go and start your own investment firm? And you have some people that are newer on in their investment career in the book as well versus joining larger, more institutionalized firms?

David M. Rubenstein:
I think it’s very difficult to go out and build a Blackstone or Carlyle or KKR today. It could take many years to do that, and there’s already a lot of well established firms out there. So if you’re going to build a big business now in a given area, try to find an area where there aren’t a lot of competitors. Clearly some people come along like Orlando Bravo and built a really good firm, but it’s still a firm that’s small compared to KKR or Blackstone and so forth. To build a gigantic firm takes a long time and there’s much more competition than it was when I was doing this. Now I think if I were starting all over again, I would try to find something in a different area or specialize in something other than buyouts because I think there’s greater opportunity elsewhere.

Alex Moazed:
Then the other point you were mentioning was to help people understand and think about how to allocate money, how to choose a good manager versus trying to do things on their own and beating the market on their own is a very difficult proposition. What would you say to the folks that can’t necessarily allocate funds into these top tier firms that have high minimums? Where should they look?

David M. Rubenstein:
Well, I think for persons who don’t have that much money to allocate and are not really that adapted picking stocks or bonds, and nobody’s really going to beat the market averages generally, I would go into a market index fund. Some of the funds have very low fees. They basically track the S&P 500 or the Dow 100, and basically they are firms that are, or the Dow 30, they basically are tracking existing markets, and you say therefore you don’t have to worry. You’re going to be below the market or above the market, you’re going to beat the market, and the same is true in fixed income funds. Trying to beat the market is a fool’s err and generally, there are very few people that can do it and generally they are professional investors who do this full time. If you don’t have full time to devote to it, I would say probably an index fund makes the most sense for people don’t have large sums of cash.

Alex Moazed:
So Betsy Cohen, one of the people that you interviewed and you interviewed Betsy around SPACs, she had a great comment around her thoughts on MBAs, but you have to go read the book to figure out what that comment was. Her question back to you was, how did David think about his choice of investors for the book?

David M. Rubenstein:
Well, I looked to talk to people I knew and I knew a lot of people in the investment world. So generally people who I knew, who I thought would do an interview and do a good interview, who were willing to do it. Some people I know and just don’t like to do interviews, some people are just not great at opening up and doing an interview. I also wanted to have a cross section of the investment world and I also want to have a diversification of the people in it. So I didn’t want to have all white men who are 60 or 70 years old. I wanted to have women and minorities and people that are able to show people that the investment world is diversified a bit, not as much as it should be, and that younger people are now also coming into the market. So I tried to interview some younger people as well.

Alex Moazed:
Yeah. Love that, and you reference ESG a lot in the book, which I’m going to get to as well a little bit later here. What was one your favorite historical artifact that you’ve bought? You’re a big supporter of American history and the like.

David M. Rubenstein:
Well, I bought the only copy in private hands of the Magna Carta. There are 17 copies of the Magna Carta in the world, 15 in British institutions, one in the Australian Parliament, and Ross Perot had the only copy in private hands. He put it up for auction, I bought it and now I put it on permanent loan to the National Archives. So, that’s fairly unique. I do own about 10 copies, rare copies of the Declaration of Independence and I put them in display around the country and I own a few copies that Lincoln signed of the Emancipation Proclamation. So those three documents, I think, are three most important documents in our country’s history and I own copies of them and I put them on display where people can see.

Alex Moazed:
And I think, did you give one to Obama as well, of the Emancipation Proclamation? Is that right?

David M. Rubenstein:
I lent it to him for four years when he was President of the United States. He put it in the Oval office, but it wasn’t a gift to the government. I can do that at some point in the future perhaps, but it was a loan and he had it and I think he was very proud to have it on the Oval Office wall.

Alex Moazed:
Where do you say this, just this kind of love of America and history, what do you attribute that to? I think it’s so great to see and important.

David M. Rubenstein:
Well, I came from very modest circumstances, so my parents were not college or high school educated and I didn’t have a lot of money growing up and so I got lucky in my business career. And so I’m not sure this could have happened in some other country. So I want to give back to the country. Secondly, I worked in the White House for President Carter and when you work in the White House, you do get a sense of history. I’ve lived in Washington for the last 40 years or so, and so you get a sense of history by just living in this city. So for those reasons I’ve kind of thought maybe I can help the country a little bit by preserving some buildings, the Washington Monument or Lincoln Memorial or Jefferson Memorial, helping rehabilitate them or preserving documents with the idea that people might learn more about American history by visiting these things or seeing them. And the theory behind and represent democracy is that we have an informed citizenry, but so sadly we’re not as informed as we should be.
We don’t teach civics or history very much anymore in junior high school and high school. So in order to get the best democracy, we need to have citizens as informed as possible about our country, our [inaudible 00:14:21] history, its traditions. And that’s what I’ve been trying to do in a modest way.

Alex Moazed:
It also is something that educated citizenry… How do you have a proper republic, democratic republic without that, very difficult to actually have a properly functioning system, this beautiful system that was created now somewhat long ago for us to benefit from?

David M. Rubenstein:
Well, you’re right. When the country was created, Benjamin Franklin famously said to somebody, “Well I’ve given you a republic if you can keep it.” And many people didn’t think we could keep it. Thomas Jefferson thought the Constitution would last about 20 years or so. Obviously after 200 plus years it’s still operating with 27 amendments. So it’s amazing that this system is still operating, and it’s amazing when you think about it. The country today has 330 million people, half of them are women and there are large percentage of people who are the minorities, yet the constitution that we’re living under was basically drafted by a limited number of white Christian property owners and they’re all men. So we’ve got a group that today wouldn’t exist, notice that we had a constitutional convention today, we certainly wouldn’t have that group that delivered the constitutional conventions to us. On the other hand, they did a reasonably good job despite some of the flaws of the beginning, like slavery being allowed to continue.

Alex Moazed:
Well I mean what do you see different in today’s… If you look through the history of the country, and this also comes back to some of what you talk about in the book where you say, some of your biggest investment misses were actually today companies that are tech monopolies, right? Facebook and Amazon. You give a couple funny stories on how yeah, you could have been on that train and ultimately didn’t.

David M. Rubenstein:
I’ve made some big mistakes in my investment career. Facebook was one I could have invested when Mark was in the college and Jeff Bezos, I was there at the beginning and talked to him at the beginning and we did get some stock at the beginning for helping him, but we sold it right away because we didn’t think the company was going to go anywhere. So those are some big mistakes I made.

Alex Moazed:
So, I was just at this conference a couple weeks ago called the Nantucket Project and basically the whole focus of it was on social media being the smoking of our era and how it causes a lot of issues for just health and safety, strong mental aptitude, national security and a whole other factors. Do you think that the role of these tech monopolies as it relates to having that properly functioning democratic republic, do you think they need to be reigned in? Do you think they’re kind of divisiveness these algorithms, and the such are actually hurting that national conversation as we were saying is so important?

David M. Rubenstein:
Well that’s a complicated question. I don’t really use these social media devices, so I’m not an expert in it. My guess is that it’s given people more voice, but sometimes the people use these for let’s say not good purposes. So I don’t think I want to say that it’s not a good thing to have some of these social media devices, but I do think probably we could use them with… I wish people would use more constraint and restraint when they use them because clearly they can do a lot of damage if used improperly.

Alex Moazed:
I think one of the common themes that I saw almost across the board was from your interviewees talking about the need to manage risk. Zelle, Fink and others. How strongly did that resonate with you? How have you thought about that at Carlyle? Is that something that you would agree is kind of top at the list if you are going to be a top investor?

David M. Rubenstein:
Well the theory of investing is, you’re going to put money out and get more money back, and what you don’t want to do is lose what you have. And unfortunately in the private equity world, the venture capital world and all parts of the investor world, people do lose money from time to time. If somebody is an investor for more than a year or so, they will have lost money almost certainly. And it’s rare to not find somebody that hasn’t lost money.
So I think there is a sense of risk and you have to make a judgment when you’re making an investment. Is there a chance that I will make money on this or is there more of a chance that I’ll lose money and risk at all? And so you have to make judgments. It’s like when you go to Las Vegas, you’re gambling there you’re making a judgment that you’re going to win, but most likely you’re not going to win, if you stay there long enough. With investing, it’s not quite the same as gambling. You know what you’re doing, you’re doing homework and you can add value to the investment, but I think you have to recognize that sometimes the risks are greater than you foresaw and you might lose money.

Alex Moazed:
And you don’t do any sports gambling right?

David M. Rubenstein:
I don’t. I lost a bet as I mentioned in the book when I was in high school I think it was, or college, and I’ve decided then to never bet again on sports and it’s saved me a lot of anguish because I probably would be betting wrong all the time.

Alex Moazed:
What was the riskiest thing that you’ve done while building Carlyle? Was it an investment decision? Was it a matter of building the actual business itself? How do you think about risk over your career?

David M. Rubenstein:
Well, starting the firm was risky because there had never been a private equity firm in Washington. I didn’t really have any business relationship with my partners before we were coming together for the first time. We didn’t have any money to speak of and Washington wasn’t exactly considered the center of the capitalist world. Probably the biggest risk we took overall once we started building company is this, we decided to not do what had been done before, which is to have a buyout fund every four years, raise another one and basically be in the buyout business completely.
I decided that what we should do is try to build a series of funds and take advantage of our brand name and have just like Vanguard or Fidelity or Mutual or T.Rowe Price have many different funds in a fund family. We would do the same in private equity. We’d have a growth fund, a venture fund, a real estate fund, a debt fund, and then take advantage of our brand name. And then secondly, globalize it, build a fund in Europe, Asia, Middle East, Latin America, Japan. Now that was novel at the time. Obviously Blackstone, KKR, Apollo and others have done it. It was very risky at the time when we put a lot of money into it. It wasn’t clear it would work.

Alex Moazed:
Do you see a version of that happening today? I’ll give you one example. So I see some friends of mine are starting funds with the idea to say, “Hey, we don’t want to be restricted by a seven or 10 year time horizon. We want to have more permanent equity for a 20, 30 year time horizon.” As I understand it, something that maybe General Atlantic has kind of positioned themselves to do over the years. Is that what you were trying to get at back then? Is that something that you see becoming more in vogue if you have the track record to back it up? Are you bullish on that or are there other kind of investment these or structures that are more exciting to you these days?

David M. Rubenstein:
The traditional venture capital and private equity business model was you have a fund that would be 10 years in duration, more or less four of six years to invest and the rest to harvest. We and others have built funds that are basically designed the last 20 years, maybe 10 years to invest and 10 years to harvest. But there’s another thing even beyond that, which is called permanent capital and permanent capital, you raise it and you don’t actually have to return the capital, you keep investing it and just keep rolling over the investments and the profits and so forth. And we have some of those funds too. Clearly people in my business like permanent capital because you don’t have to go out and raise money all the time and fundraising takes a lot of time and energy and effort and costs. So I would say the business is probably going to move more and more to having more and more permanent capital vehicles in the business. Some firms only have permanent capital vehicle, but in our case we have some but not as much as other firms have.

Alex Moazed:
How did you see this kind of more hybrid remote work environment coming into the investing world across your interviewees? A few of them touched on this, a few didn’t, but what was your takeaway there?

David M. Rubenstein:
Well generally I’d say that doing the book during COVID was easier because I didn’t have to travel to see people. They were willing to do the interviews by Zoom and they didn’t consider it impolite to say I’m going to do it by Zoom, and in fact they were probably happy. But in the business world generally that we’re in, the private equity firms, the venture firms and the other financial service firms have not been able to get all their people to come back to work as readily as they would like. That’s because people are learning they can do a lot of what they do remotely. And so a lot of firms are now happy to get people to come back to work three days a week in physically or maybe even four days in some cases.
So I think it has changed the world dramatically and more and more people recognize that they can save time and money by working remotely and if you can do as good a job remotely, why not do it? But clearly I think there’s the downside to younger people. Younger people I think need mentoring and should get mentoring. It’s hard to mentor somebody by Zoom. So I think in the end, younger people are going to be handicapped if they don’t get back into the office and have mentoring done with people are there physically with them.

Alex Moazed:
Yeah, I completely agree. I remember some of the comments that Orlando Bravo was talking about where he would go for walks and basically be able to catch up with everyone in the office on an hour long walk and those little details, particularly to your point for the younger folks to get exposure, to get insight or get guidance, much harder to do in Zoom or Slack or it’s a different barrier to cross absolutely.

David M. Rubenstein:
Yes, for sure. So I think what you get when you have… Why do people go to have business lunches and dinners? Because when you do that you can bond with people, you can see their body reactions, you can talk about things that you have in common much more readily than you were doing something over Zoom. And that’s why business lunches and business dinners have been so popular for so many years. I think if you don’t do that in the end, I think you’re not going to have the full set of skills you need to be very good at this business or any business.

Alex Moazed:
So let’s go back to the US and what you see happening here both in the book and just conceptually, if you look at some of your statements just over the past month or so, people love to ask you questions and get your insights. They’ve asked you about the US going into a recession and I think you were saying that you don’t think the US is going into recession, saying inflation is not transitory, but we’re also not in a similar period, like we were in the 1970s. How do you feel about the state of the economy vis-a-vis kind of the global economy and how are you thinking about how to invest, given that context?

David M. Rubenstein:
Well the US economy’s in better shape than Europe, which is more or less in a recession, certainly the UK is. And we’re probably in better shape right now than China, which has had lockdowns that’s really hurt its economy. If you look at our dollar, it’s so strong now, that gives us a competitive advantage when we want to buy things from overseas and it’s also convinces people that they need to deal with the United States because the dollar is the only reserve currency. I think we don’t know whether we’re going to go on a recession yet or not. When the Fed has increased interest rates historically by as much of a percentage as it’s doing now we do go into what’s called a hard landing or a recession. Now though, it doesn’t look that clear about what will happen because the third quarter’s numbers will come out the end of October, but it looks as if the third quarter, we probably were growing about two and a half percent, certainly not negative, which we did the first two quarters.
So I don’t think we’re heading into a recession anytime soon. Now the Fed could say we want to get inflation down to 2% to do that, we’re going to have to jack up interest rates a lot more than we have already. I think there’s a consensus in the investment community that there’s no need to get inflation down to 2% while we had it at that rate for 25 years. The truth is, if you go back and look at economics textbooks, for most of our history, people would say that a norm was 3 or 4%. So if we considered three or 4% a norm, not 2%, I think we can avoid a recession by not jacking up interest rates too much. But it’s hard to say what the Fed will do.
J Powell used to work at Carlyle, but obviously I don’t have any special insights in what he’s going to do and he’s trying to figure out what makes the most sense right now. So they look at the data very carefully and figure out what they need to do. Currently, its expected that the Fed will increase interest rates by 75 basis points again in November and by 50 basis points in December. So 125 basis points. I certainly thought that the Fed might pause, and the inflation numbers look good, they might not increase by that much and if they look bad they might increase by more. So we just don’t know yet. We’re in a kind of wait and see mode right now.

Alex Moazed:
And things like our financial deficit and the like, is that kind of something that’s just too daunting to figure out how we ever really pay that down or bring that in line?

David M. Rubenstein:
Look, the debt of the United States is 31 trillion dollars. When my boss Jimmy Carter left the White House, the total debt was I think under a trillion dollars. Obviously we’d borrow a lot of money because of recessions and COVID and other things and tax cuts, and so we have enormous amount of debt. There are only limited ways you can deal with it. You can increase taxes, which we don’t want to do. You can cut spending, which we don’t want to do. You can declare a default, which we obviously are not going to do. You can go for bailout from the IMF, but that’s obviously not realistic. The only thing you really can do is you inflate your way out of it, and basically that’s essentially what we’ve been doing. We’re inflating our way out of this debt and that’s probably what we’re going to do over the next generation or so. So your children and my children are probably going to have to pay for this debt, but you and I are not likely to live long enough to see that debt go down the zero.

Alex Moazed:
All the more reason maybe to soften that 2%, right?

David M. Rubenstein:
Yes, because 2% is going to be very hard to do, very hard to get there. And again, we got there because we had very, very favorable economic conditions for quarter century and we were used to essentially knowing inflation. My children are in their 30s, don’t really know what inflation is because they haven’t really been around long enough to see what, inflation at 5, 6, 7% is. So they’re kind of worried about it more than somebody that’s been around a longer period of time, but I do think 3 or 4% inflation probably is tolerable for the general population and probably that’s where the Fed will, I suspect, wind up.

Alex Moazed:
Yeah. If they can get there without rattling everyone’s nerves, which seems to be everyone’s kind of concern and how to do that while managing expectations. Love that insight, and then I think… So I love going through indexes in books and fortunately your book has a really well done index. So one of the things, if we think about the health of the United States, the competitive of the United States, ESG I’m coming to, but before then is manufacturing. That’s actually one of the things I didn’t see as much reference to or discussion around in terms of that being an area of investment interest. Maybe it is and it just didn’t come through in the interviews, but as you think about priorities and what we need to do for this country to build back better and get back on its feet and all these kinds of things. How do you see the role of manufacturing and also how you’re thinking about investing and allocating investment dollars?

David M. Rubenstein:
Manufacturing has gone down dramatically in the United States in the last 25 years. Why is that? Because there were lower costs of production places. So China, Thailand, Korea, whatever country you might want to name, and as a result we had a relatively low inflation. If you bring in a manufacturing back in this country, presumably it costs more to do so and manufacture things here and cost more money, you’re probably going to have more inflation. Now, a certain level of it’s probably tolerable, but I think we should recognize that we have this globalization and we have this supply chain, where we’re getting products from all over the world because it basically was cheaper.
People love to go to Walmart and buy things at relatively low prices, but a large percentage of those things are made overseas. I’m not saying anything bad about Walmart, I think they’ve done a great job, but I just think that we should recognize that if we are going to manufacture more in the United States, it’s probably going to add some inflation. I do think it’s good for a country to be having a good manufacturing base though. For example, the CHIPS Act that was just passed by Congress, it’s likely to make it more realistic for American chip companies and foreign chip companies to manufacture chips here. And if we manufacture chips here, we’re not so dependent as we are now on chips being manufactured in Taiwan and China. Today, we manufacture relatively modest number of chips in the United States compared to what we had before and certainly compared to what Taiwan is doing and China’s doing.

Alex Moazed:
Right, and yeah, the rising dollar only further exacerbates being able to bring that back versus just continuing with the status quo. Absolutely. It also does somewhat dovetail though, right? If we can bring manufacturing back and do it with more high tech like the semiconductor and the CHIPS Act as a great example, could dovetail with something that you’re very passionate about, which is ESG. Could you just give us, how do you think about ESG? I think there’s a lot of different definitions around what it actually is and what it means.

David M. Rubenstein:
So for those who may not be that familiar with it, historically when you’re investing, you’re trying to get the highest rate of return, you can legally, risk adjusted. So in other words, without undue risk yet a high rate of return and therefore you could look at anything that might be real realistic for you to invest in. ESG is basically an effort to try to say, we should invest in companies that have good environmental practices, that have good social practices and good governance practices. Social means, let’s say diversity, governance means a really good corporate structure and then a fair one for investors and so forth. So many people believe that if you have good ESG performance and metrics, you’re likely to get a better rate of return than if you are not. Then people debate that, somebody in the book that I interviewed has an ESG related firm.
He invests only in good ESG companies that have good performance and he is done very well doing that, and that’s David Blood who’s teamed up with Al Gore to create a company in that area. The market is now beating that effort back a bit because of what happened in Ukraine, and now, Germany and other countries in Europe are so dependent on imports from countries other than Russia for their energy that people in Europe are beginning to say, “Wait a second, maybe we went too strong in worrying about ESG, let’s worry about our energy, heating our houses.” And so there’s been a bit of a pushback and also in this country, people saying that we are not producing as much energy as we can because we’re too concerned about the environmental impacts of producing oil and gas. So whatever your point of view is on this, it’s clear there’s some pushback to the ESG mantra and some people believe that in the end we shouldn’t worry so much about ESG as worrying about other things.
My own view is that ESG is very important and we shouldn’t worry about it ESG only, but we should recognize that it’s better to worry about ESG factors because in the end, I think more and more younger people are going to want to work at companies with good ESG metrics. They’re going to want to buy from companies that have good ESG metrics, and I think increasingly large institutional investors around the world want to invest in those kind of companies. And if they do that, those companies are probably going to rise in value and do better than companies that have bad ESG performance.

Alex Moazed:
And then how does that line up with what we were just talking about around globalization? If you look at China as I think 27% of the world’s pollution creation, I think the US is number two at like 11%, something like that. I may be a little off on the exact numbers, but in terms of saying… Well, there’s just an article out about how all these Chinese tech startups are so reliant on US capital markets to go public and have exits and realize their earnings. How do you see those ESG standards and investors being able to not just apply them here, but also abroad, particularly in places more, much more difficult to police these things like China?

David M. Rubenstein:
Well, I don’t think China and India, which are the largest polluters other than the United States in the world in terms of producing carbon, they’re as focused on ESG as they are on subsistence, keeping their population fed and housed and making sure the people are above the poverty line. So I think those are higher considerations to people in China and India that are running the governments.
So I think ESG is much less of a concern there than it is in the United States or in Western Europe, and that probably is going to be true for some time. I think if you’re going to invest in China, you have to get comfortable with lower ESG standards than if you invest in United States or Western Europe. And if you’re not comfortable with those lower standards or lower metrics, you shouldn’t invest there. Same is true of India. Now, China and India would argue for example, that the US and Western Europe had a century to pollute the world, and now that China and India have the ability to pollute the world, they shouldn’t be penalized for catching on late and that they should be allowed to do what the US and Europe did for many years and even a century or so.I understand the argument.

Alex Moazed:
I think Mother Nature would disagree.

David M. Rubenstein:
And some people would say, “Look, why should China be able to keep producing and using coal when ultimately that bad air is going to affect the entire atmosphere, not just over China.” It’s just not something that’s going to be resolved very easily. I suspect in China and India, the higher priority is feeding the population, clothing the population, keeping the population reasonably above the poverty level rather than worrying about ESG. Rightly or wrongly, that’s what I suspect is the case there in those countries.

Alex Moazed:
When you look at Sequoia China, for example, has pretty much had a hard split with kind of Sequoia, the mothership from Silicon Valley and all the things around the globalization. You built a global firm in a very different environment than today’s environment. These kind of Western VC funds that have gone into China really just in the past 10, 15 years, and now are having to somewhat just sever ties entirely. You think that’s a trend that’s going to continue or maybe it’s a little bit, it’s peaked and it might come to a lull, or how do you see that playing out?

David M. Rubenstein:
The person who runs Sequoia China used to work for a Carlyle portfolio company. So I’ve known him for a long time and I am a personal investor in that fund or there’s many different funds, but in some of them, so I should disclose that. I would say that Sequoia, like other organizations, recognize that it’s more difficult to keep the Chinese regulators happy if you’re not an American company. So I think Sequoia China and other companies like it are trying to say, “We’re really a Chinese company, we’re not part of an American company, and we really are operating differently.” Because that might give them less regulatory constraints, and same is true in the United States. Many companies in the United States want to say, “We invest in the United States, we’re an American company and we’re not investing in China.” That’s a different organization, and so that’s one of the reasons why they’ve had the separation.
But I think it’s true, it’s true that the United States politically, it’s very difficult to be investing in China right now, and clearly it’s very difficult for the Chinese to want to take companies public or to be able to take companies public in the United States. The US China relationship is as bad as it’s been in several decades, and I don’t think it’s going to get better anytime soon because there’s no political benefit in the United States for Democrats or Republicans to be seen as “soft” on China. And as long as the Taiwan threat is there, and as long as the human rights concerns are arising in Hong Kong and with the Uyghurs, I don’t think you’re going to see better us China relationships anytime soon, unfortunately.

Alex Moazed:
You’re a man of history, as we’ve discussed. This country has been through a lot. What gives me optimism is, when you look through the history of this nation and what we’ve gone through, does that inspire confidence? Does that inspire optimism in you and our ability to rise to the occasion?

David M. Rubenstein:
Well, as Warren Buffett has said, “Nobody’s really made any money betting against the United States.” In the end, the United States has been a dominant economy for a hundred plus years. We became the largest economy in the world in 1870, and we’re still the largest economy in the world, but clearly we’re not as dominant as we once were. After World War II, we were 50% of the world’s GDP, 50%. Today we’re about 18%. So clearly the others have come on board, like China and India made a big impact. I do think that we should recognize the United States is not infallible and no country can stay as the biggest economy in the world forever. We have a lot of strength in this country and a lot of things that should make us be a very strong economy for many, many, many decades in the future. But we will not be as dominant as we once were, that’s clear.

Alex Moazed:
If you look at the people that have worked at Carlyle, you’re mentioning J Powell used to work at Carlyle, the head of Sequoia China was, I think, running one of your portfolios that you were just saying. Is there a mechanism that you’ve put into place? How do you identify or how have you looked at these people that have gone on to have very illustrious careers after Carlyle or within Carlyle? Are those similar things that you look for in identifying the right manager, as you’re saying some of the other interviewees you were attributing attributes to?

David M. Rubenstein:
When I’m hiring people, I’m looking for people that are smart, hardworking, they have good judgment, good people skills. Their IQ is high, but also their EQ is high. I’m also looking for people that want to do something useful with the money they’re going to make, not just buy a whole bunch of big houses and other kinds of accoutrements of wealth. So I’m looking for many things. Glenn Youngkin was here for 25 years. He left, he’s now the Governor of Virginia. We mentioned J. Powell. We’ve had people join who were prominent before they came here. So like Admiral Stavridis was a four star Admiral ahead of the NATO Supreme Allied Commander. We’ve had Arthur Levitt, the former chairman of the F.C.C, Jim Baker, former Secretary of State, Frank Carlucci, former Secretary of Defense, George Herbert Walker Bush was an advisor. So we had many distinguished people who distinguished themselves before they came here and after they came here. And so we continue to look for those kind of highly talented people.

Alex Moazed:
What was one of the worst investments you’ve made? Any complete write offs?

David M. Rubenstein:
How many hours do you have? We have had complete write offs, yes, embarrassing, terrible, but we tried to own up to them. So we had a debt fund that didn’t make it right before the ’07,’08 market crash and great recession. There was a billion dollar fund called Carlyle Capital, which did not survive. We’ve had some buyouts that have gone under, so sure we’ve had some bad investments. We’ve made several thousand investments over the 35 years. So it’s inevitable that some will not work out.

Alex Moazed:
Right. Yes, but certainly when you invest in a portfolio manner, well, even though those were the funds that went under, but yes, the firm has done phenomenally well over many, many years. So nothing to take away from that, absolutely. The venture capital space, you were interviewing Marc Andreessen, and then also in a different vein, you were interviewing Orlando Bravo. I think he was talking about the first investment he made was a software company that basically automated the functions of an HVAC distributor, had no idea that was the first deal that he did, and how that all came about. But you also talk about crypto and the blockchain and any things that you learned or you walked away from these interviews and said, “Wow, I had no idea.”

David M. Rubenstein:
Well, in crypto, I interviewed Mike Novogratz, who was an early and successful investor in Bitcoin. And while that’s gone down, if anybody still owns a lot of Bitcoin, it’s quite valuable, and so I recognized the pluses and minuses of Bitcoin or crypto investments. One of the smartest people I met, and one of the smartest investors in the country is Stan Druckenmiller. Stan Druckenmiller ran the Soro’s Fund that famously broke the pound in 1992, and what he says is, interestingly, he says, “I never give investment advice to people.” Why? Because as he says, “I change my mind all the time, and I want to reserve the right to change my mind, and I can’t be at a cocktail party saying, ‘Do this, do that,’ and then I changed my mind. Two days later, I have to call those people up and say, ‘I changed my mind.'” So he doesn’t give investment advice at cocktail parties and basically just looks at the markets and screens and figures out what makes sense. But again, like many people, he changes his mind based on the facts.
There’s a famous statement by John Maynard Keynes, who was a famous economist, one of the people who really more or less invented modern day economics, and he changed his mind on something and somebody said to him, “Hey, you changed your mind. How could you do that?” And he said, “Well, when the facts change, I change my mind. What do you do?” And the truth is, when the facts change, sometimes you have to change your mind.

Alex Moazed:
I think, that’s the difficult part, is to be able to discern, A, what’s real these days, and then B, to recognize that your original thought might have been wrong.

David M. Rubenstein:
One point I would like to make is that investing is not the only thing one can do who’s very smart and cares about money. There are many different things you can do in the financial service world. You can be an investment banker, you can be a manager, you could be a client person, but investing does have the advantage that you’re more in control of things than if you’re more of a client service person.
You learn a skill about how to allocate capital to good things that make our country better. In other words, venture capitalists, for example, who invested in Moderna, when Moderna was still a very tiny company, and they gave them more and more money over the years, they helped us have a company that created the vaccine that helped all of us get through COVID 19. And so, I think people that invest money well and good investors are really helping their country and helping their society by creating jobs and making certain that we’ll have a good economic base. I don’t think people should look at them as just people that are trying to just make money for the purpose of being greedy and just stockpiling their money. They’re doing a valuable thing, and most of these great investors are gigantic philanthropists. They’re not hoarding their money, they’re giving it away, and I think that’s a good thing too.

Alex Moazed:
Yeah, that’s exactly where I was going to go. I think it might have been in your interview with Sam Zell, where I think you were both just saying you basically work for charity. I think you were one of the original or founding signers of the Giving Pledge. Is that right?

David M. Rubenstein:
That’s correct. There were 40 of us at the beginning. They’re now maybe 220, and Sam Zell was a signer, or I don’t know if he’s original signer, but I think so. So there are about 40 of us at the beginning, and basically we’re committed to giving way at least half of all of our money, our net worth, and I’m doing much more than that. So, I think it’s a good thing for society to let people to be able to do this and hopefully maybe some good will come of it.

Alex Moazed:
Right, and so going back to your original point there a minute ago, was saying, I mean, at this point you’re able to create value in your investments. You’re able to create value for your LPs that are enabling you to make those investments, and then your portion of that profit is now essentially being either all, or certainly the large majority of reallocated to different charities and non-profit endeavors. Anything there you’d like to highlight that you’re really excited about these days?

David M. Rubenstein:
Well, philanthropy generally, sometimes people now criticize it by saying, “Well, why don’t we have these philanthropists pay more taxes? The government will have more money, and let the government allocate money.” As a general rule of thumb, I think most people would agree that letting the government allocate excess wealth to charitable causes may not be as good as letting individuals do it, who also are giving their time and energy and ideas. And so I think that the philanthropists in this country who have made a lot of money are people that we shouldn’t be criticizing. If they’re giving away a large sum of money, they’re probably doing it in a better way than the government could do.

Alex Moazed:
I think. Well, maybe this was you talking about the historical artifacts that you buy and how you make that decision, but maybe it’s similar rubric. You kind of had three or four bullets as you’re kind of gating mechanism, right?

David M. Rubenstein:
Yes. What I’m trying to do is, in my philanthropy is, start something that otherwise wouldn’t get started, finish something that otherwise wouldn’t get finished, have an intellectual interest in it. So I’m willing to give more than this money, but give my time, my ideas, be on a board perhaps, and forsee real progress in my lifetime. So I wish I had enough money to solve climate change. I don’t have enough money and I’m not sure I can see enough progress in my lifetime. So I’ll let others focus on that who have more money than me and probably going to live longer than me. I’m focused more on things where I can really have an impact and see it while I’m alive.

Alex Moazed:
And there’s so many other areas, but even just, you were briefly mentioning the restoration of the Washington Monument. You’ve also helped repair the Lincoln Memorial, Jefferson Memorial, a whole slew of things I have here in my notes. And so just that alone I think is a great example to say, “Well, if the government have allocated it to do these, and as a private individual being able to do that, probably just does it in a better form of allocation.” Going back to the point of capital allocation as a master investor and something that you’ve really helped lead the charge in.

David M. Rubenstein:
Everything that you do in philanthropy doesn’t work. Just like everything you’re do in life doesn’t work, and there’s no doubt that the government can do some things better than humans can do them, or not related to part of the government. But generally, I think humans who’ve made a fair amount of money and are philanthropists, they can, they’re pretty smart and they kind of look at good things to do with their money. I think generally the philanthropy’s been a good thing for our country. We’re the most philanthropic country in the world, but we still only give away about 2.3 or 4% of GDP every year. So it’s not a staggering sum and therefore there’s still a lot more we can do. But I like to remind people that you can be a great philanthropist by giving your time because that’s your most valuable commodity. You can’t get more time.

Alex Moazed:
Very true, and the proceeds from this book are also being donated to charity, right?

David M. Rubenstein:
They’re all going to three children’s hospital, Boston Children’s Hospital, Johns Hopkins Children’s Center and Washington National Children’s Hospital.

Alex Moazed:
Well, it’s a great cause. I think you’ve done a great service. It’s a great book. I learned a lot from this, really enjoyed it. Any parting words of wisdom here, David, for us?

David M. Rubenstein:
No. I would just say that people should think about investing as a positive thing for our country and see that people that do it are doing useful things for our country. I think anybody can learn how to be an investor, maybe not a great investor, but I urge all people who have money to invest. Read something about what you’re doing, do the homework, make sure you’re allocating it so you’re not going to lose your money. The most important principle is basically, don’t lose what you have. And so be careful, diversify, read, make sure the fees, make sure the people you invest with have good track records.

Alex Moazed:
Love that. Very good points. This is David Rubenstein and the book is called How to Invest: Masters on the Craft. Definitely put this one on at the top of the list. David, thank you so much for joining us today.

David M. Rubenstein:
My pleasure. Thanks a lot for having me.

Subscribe to the Applico YouTube Channel

Filed under: Winner Take All | Topics: