The Investment Masterclass with David Rubenstein

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1:49Hello, I'm Anthony Scaramucci, and this is Open Book, where I talk with some of the brightest minds out there about everything surrounding the written word, From authors and historians to figures in entertainment, neuroscientists, political activists, and of course, Wall Street. Sorry, I can't resist. Before we get into today's episode, if you haven't already, please hit follow or subscribe wherever you get your podcasts and leave us a review. We all love a review, even the bad ones. I want to hear the parts you're enjoying or how we can do better. You know I can roll with the punches, so let me know.

2:22Anyways, let's get to it.

2:30So today on An Open Book, we're speaking with David Rubenstein, co-founder and co-chairman of the Carlyle Group. Carlyle was established in 1987. It manages over$325 billion from 26 offices around the world and is one of the largest and most successful private investment firms ever. David's latest book, How to Invest, Masters on the Craft, distills everything he's learned about the art of investing over 35 years from hedge funds and real estate, cryptocurrency investing, ESG, and more.

3:11Welcome, David. It's great to have you here. I want to start immediately with your new book, How to Invest, Masters on the Craft. Your other books, every which one of them that I have read are absolutely fantastic. I know this book is going to go in that same realm. I'd like you to discuss it. Why did you decide now was the time to share this wisdom on investing after writing the book on leadership in America, et cetera? Well, as you know, I've been in the investing world for about 35 years. While I was not the principal investor at Carlyle, other people did it. I was on all the investment committees of relevance.

3:47And so I picked up a fair bit. And then I've been involved in the nonprofit investment world in recent years by being on investment committees. And I've known a lot of the most famous investors in the country from other philanthropic or other investment things. So I just thought it'd be an interesting thing to do to interview a number of them and take their lessons and put them together. The book is designed for people that might want to be investors, people who are doing some investing now but aren't great investors, and people who are really talented investors but want to learn more about the great investors.

4:17Well, you chronicle many investors. Let's go to Warren Buffett. He made his first stock purchase at age 11. Jim Simons was focused on math, not investing. I believe you also had Paula in the book, Paula Volent. Her career was initially in art. So tell me, is investing tied to creativity? Is there a form of artistry to investing? What did you learn in terms of putting the book together? Well, I guess you could say it's a bit of artistry, but basically the common characteristics that I have observed are that the great investors are people that have a facility for numbers, They're probably reasonably good at math.

4:55They try to do some other things early in life. Very few of them, like Warren Buffett, were investing at the age of 11 or so. That's rare. They tend to come from, I would say, middle-class families, not the poorest families and not the wealthiest families. They tend to be willing to make the decisions themselves. They don't like to delegate. They tend to be willing to go against conventional wisdom. That's the most important characteristic, is to go against what the conventional wisdom tells you you should do. And those people that have gone against conventional wisdom have tended to make really good decisions and become famous investors.

5:27Give me one example of going against conventional wisdom where you say, wow, that really worked out for the man or woman. Well, one of the most famous trades made in the last century, in the latter part of the last century, was when George Soros broke the Bank of England, as we say, and he got the pound to be devalued. That was really based on advice that he had from one of his people running his fund, Stan Druckenmiller. And at the time, people didn't think that Bank of England was going to devalue the pound. And therefore, nobody else was really betting that. And as a result, he was able to get a relatively inexpensive bet against the pound.

6:03and it turned out to make a staggering amount of money at the time. A billion dollars is what they made in profit. John Paulson, who you know, John Paulson was a person who bet an enormous amount of money that the subprime credit market would default, essentially. And he made$20 billion profit on that, maybe the most profitable single trade in Wall Street history. But nobody else was really making that bet. Let's go to Stan for a second. You interview Stan for the book. Stan Druckenmiller, someone you and I both know very well. He was worried about that trade, wasn't he, David? Well, on the pound trade?

6:38Yes. Well, it was his idea. And then Soros heard about it. He was kind of running the quantum fund for Soros. And Soros would dabble from time to time. And he would say, well, geez, if it's such a good idea, let's put more and more money into it. Soros' major investment premise over the years was, if you have a really good idea, put everything you have into it. Because you don't have really great ideas that often. And so when Soros heard about the idea, they increased the amount of money they had put into it. That was 30 years ago, if I remember correctly. So we're talking, say it would be several billion dollars of today's dollars.

7:14Does persistence pay off against conventional wisdom? There's also people that have gone against the tide and have gotten hurt, David. Yes. Well, you can always go against conventional wisdom, and sometimes you're going to be wrong. Sometimes the conventional wisdom is right. So you have to know when the conventional wisdom is going to be right and when it's going to be wrong. John Kenneth Galbraith, the famous Harvard economist, once said that the conventional wisdom in Washington is always wrong. It may be right. But the conventional wisdom in the markets is not always wrong, and sometimes the conventional wisdom is right.

7:46And therefore, when you go against the conventional wisdom, you can make a lot of money if you happen to be right. A good example is people that bet on Amazon and Google. One of the guys in the book, Mike Moritz, who was the head of Sequoia, they bet on Google and they bet on Amazon and it turned out to be a pretty good bet. And then, you know, at the time, many people didn't think those companies weren't going to get very far. I'm looking at today's conventional wisdom, which is that the cryptocurrency markets are a bunch of bunk, Bitcoin, other cryptocurrencies. They've had a precipitous fall over the last year.

8:23What are your thoughts there about conventional wisdom and cryptocurrency? Conventional wisdom is often made up of people by people who are older. And so they're not usually the ones that spot the newest trends. Newest trends don't usually come from 70-year-olds. They usually come from people in their 20s. And so it's interesting how many people in their 20s seem to think that crypto has some purpose to it and some value other than just speculation. And I think they're probably right. And this is the reason. Right now, many people fail, the younger people, that the current generation, my generation and your generation have helped to devalue the dollar.

8:59And as a result, it's not worth what it once was. So maybe a currency that isn't so dependent on the follies of government might be better. Crypto also is something you can trade without anybody knowing that you have traded and you can own it without people knowing you own it. And take the Russian oligarchs, for example. Many of them probably wish they owned cryptocurrencies because their assets have been confiscated in many cases by the Western governments. Well, many Chinese people probably say, wait a second, suppose China invades Taiwan. What will be their repercussions against Chinese oligarchs if there are such a group of people?

9:31Well, maybe their assets in the U.S. might be frozen. Well, one of the ways to prevent that is to have assets that nobody knows you have, which would be cryptocurrencies. So I don't think crypto is worthless. I have not bought cryptocurrencies myself. I have invested in companies that service the industry. And for this book, I interviewed Mike Novogratz, who you may know is a big proselytizer for crypto. He's one of the biggest owners, I think, of Bitcoin. It's gone down a bit from where he had it at the peak, but it's way above what he paid for it. Yeah, well, I want to go there because you interviewed Larry Fink, John Paulson, who's a crypto skeptic.

10:09Obviously, Mike is a crypto bull. Larry Fink told me at the Al Arion Hotel in the Four Seasons in Abu Dhabi that he didn't like Bitcoin. But if his clients wanted Bitcoin, he would begin the process of setting up products related to it. What do you think those three brilliant people are? They're all very different people, but they have very different opinions on cryptocurrency. Help us synthesize where you think they are. Larry runs the biggest money management company in the world, and he got that way, in part by listening to what clients want. And so if clients want to trade cryptocurrencies, I think he might do what Jamie Dimon has done, which is to say, I'm not sure this is such a great thing.

10:49In fact, it may be going to zero, but I'm willing to provide an option to our clients. So if they want to trade in it without our telling them they should, that option is available. So I, in John Paulson's case, John is running a family office now, his own money, and he doesn't see any value to crypto and he's very vehement about it. But no, lots of times people who make great decisions, as he did on the credit default swaps and subprime mortgages, sometimes they make mistakes. So I don't know what the right answer is going to be, but I do think it's not going away anytime soon. And, you know, you probably know this better than I, but it seems to me a lot of people who are conservative, libertarian people and younger tend to think this is a good thing.

11:27And it's kind of something they've lobbied Congress to not regulate unduly. And as a result, I think Congress has listened and Congress is not pushing the SEC or the CFTC to do much regulating more than they're already doing. One of the things that you talk about in the book is regrets. I believe that you interviewed Ray Dalio, asked him about his regrets. You talked about Ron Barron and the challenges that he had getting his business started. Tell us about how great investors handle their bad decisions, because none of us are perfect, and especially you think about it from a baseball perspective, you don't have to be perfect to be a great investor.

12:04You know, I talk about in the book some of my regrets, you know, not putting money in Facebook when Mark Zuckerberg was at Harvard and I knew about it or basically selling the shares in Amazon right after it went public because I didn't really think it would get very far. I kind of harbor my regrets for about 20 to 30 years, whereas really great investors, they go into the next thing and they don't even think back on it. I know some investors that have made mistakes and they just get out of it and they go into the next thing and they don't think about it much. I just don't have that ability. You know, Buffett talks about his regrets.

12:35You know, Buffett had the Disney trade on in the 60s, basically said, if I had just held the Disney stack through the ups and downs, you think we make mistakes sometimes? I sold my Microsoft, as an example. I bought it in 1990. And during the bomber years when it was flatlining, I sold my Microsoft. I paid the taxes on my game. It would have been way better for me to have just ridden through that, given how well Microsoft has done in the last 10 years. That's one of my regrets. I'm just wondering, do we hold our investments long enough, David? Well, Warren Buffett has made a large part of his fortune by not selling because he avoids transaction costs and taxes.

13:17And Ron Barron, who is in the book, has the same philosophy. Get good companies, get companies where the CEOs own a fair amount of stock and stay with them through thick and thin, unless you've made a gigantic mistake and you realize that they were not as good as you thought. But generally, stay with companies. Warren Buffett famously says he doesn't sell things. Now, he does sell things from time to time, but generally, he's not a person who likes to sell. So I would say that's a good way to kind of make money, which is to know what you're don't buy it and hold on to it because you avoid all the transaction costs.

13:47And of course, you avoid taxes. Yeah, no, I just want to, I think when I think about my mistakes, sir, I have sold to early many high quality companies and it could have been from boredom or impetuosity, which I regret. I want to ask you about the way you broke up the book. You took it into three different sections. One was mainstream investing. One was alternative investing and then cutting edge investments. Did you notice similarities, similar characteristics and principles across all three? Or how do those three different investment genres differ from each other? Well, traditional is really stocks and bonds and traditional real estate and things like that.

14:27And that's what people have been investing in for hundreds of years. It's fairly well known as the core of a basic investment portfolio. In the 1970s or so, venture capital came along, hedge funds came along, private equity came along, and these categories now called alternative are not really so alternative to mainstream because anybody that's got a portfolio today, of any consequence, will have these so-called alternative assets in that portfolio. And they would also include things like growth capital, opportunistic real estate, and so forth. I had another category which I gave the name to of cutting edge.

15:02These are things which people are doing to get high returns as they are with alternatives, but they're newer. So ESG, for example, or SPACs, which may not be that attractive today, or infrastructure investing, or things like that, which are much newer, haven't yet proven over 20, 30, 40 years to be as valuable and as good an investment as, say, the alternatives are. But no doubt they probably will over a period of time. And crypto is in that category as well. Crypto is something that people either love or hate. Very rarely do people say, yeah, I'm not sure about crypto. Yeah, no, it's interesting.

15:37It's definitely a binary response to cryptocurrency investing. Throughout the whole conversations that you've had, the 35 years of investing, distill it for me. What's the best piece of investment advice you've ever received? And what is the investment advice that you would be giving to your grandchildren? Well, my grandchildren are two and four, so I'm not sure they're going to remember my advice. But look, the most important investment advice that anybody can get, I think, is diversify. Don't put all your eggs in one basket and know what you're investing in. In other words, don't just listen to a stock tip somebody might have given you.

16:16Read something and learn about it. Make sure you know what you're getting into. Many people just don't read enough about it or they'll just rely on some information that's not very reliable. Also, one of the most important mistakes to avoid and one of the most important lessons to learn is that when the markets go up, that's not a great time to get in. And when the markets go down, that's not a great time to get out. People who really make money generally do the opposite. You get into the markets when they're depressed and there's blood in the streets, and you get out of the markets when they're at high valuations, they're not sustainable.

16:46That is the best advice you can give anybody. All right. Well, I want to shift gears for a second because I find your worldview fascinating. And what I did was prior to this interview, I sent out to our fan base, our followers, what questions would they have for you? And what was interesting about it is everybody wants you, David, to predict the future. Everybody sees you as a seer. It's impossible to predict the future, but I'm going to ask you some trying hypotheticals. Okay. When I was at the White House, I got asked three or four hypotheticals in the Brady press room, and I quickly decided not to answer those, but this is fun and games.

17:28And so I'm going to ask you a few, okay? Looking at the US economy, David, should we be worried about low interest rates and the rise of debt we've been incurring over the last three decades? And just let's go back to the George Bush administration. We went from George Washington to George Bush, $7 trillion. And now we've gone from Barack Obama to Joe Biden. And I think we racked up, you tell me,$22 to$23 trillion. Should we be worried about this? I think we should. I think historically, when you have too much debt, it's not good, either your personal investments or government investments. But for recent history, we've kept interest rates so low that the U.S.

18:08government can sustain, really, I think it's about$28 trillion of debt when you count the internal and external debt. And now that interest rates are going up, the government debt is going to be much more expensive. So I think in the end, it's not going to be a happy ending for people. But I've been saying that for a decade or more, and I've been wrong because we've been able to sustain the debt and the markets have not been that upset with the large amount of federal debt. At some point, I think we will pay that price, though. Is your vehicle stopping like it should? Does it squeal or grind when you brake?

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18:50Okay, so I'm worried about it as well. And I also think these interest rate rising, you know, you get 100 basis point interest rate rise on that kind of debt, it starts to absorb a very big part of the tax revenue. So is there a scenario where you could envision where the United States could go into deficit reduction? Or do you think we're caught now in this spiral where we'll always have deficits and therefore levels of devaluation? There's only a couple of ways you can deal with the debt we have, which is staggering when you think about it. And now the level of debt we have is, you know, more than 100 percent of GDP.

19:25There are only a few countries that have debt that's more than 100 percent of GDP. A good example of one is Italy, which is not probably a role model for us. I would say that there are five ways out of this problem. One, you increase taxes. Nobody likes that. Two, you cut spending. Nobody likes that. Three, you default on the debt. Nobody likes that. Four, you inflate your way out of it. which is probably what we're going to be doing at some point, or five, you devalue the currency, basically. And we're in the combination of eventually we're going to devalue the currency, but we're also going to inflate our way out of it.

19:58So not a good solution. The best solution would, of course, be to cut spending in some way and to do that, you've got to cut benefits somehow. As you know, 90 % or so of the federal budget is entitlements, defense spending, and interest. And there's very little left that's discretionary at this point. So it's hard to cut. You know, one of the things that you've done an amazing job, in my opinion, is staying out of the political strife and the political fray, despite living in Washington and despite working for a Democratic president in the early part of your career. Is that something we should be doing, David, as business people?

20:35Should we just stay out of politics and let the politicians handle it? Or do you think that businesses now, because politics is such a big part of our life and we're basically in the high tax states, minority partners in our own lives, that we should be involved in politics? What's your thoughts there? I am different than the others. I'm not against business people or business leaders getting involved in government and politics and lobbying one way or the other. But I just don't feel comfortable giving large sums of money to politicians and so forth. So I don't give money to any politician for anything.

21:05And that takes me out of the game of being influential with some politicians. But I try to take my money and do philanthropic things with it. And maybe it has some impact, maybe not. But I'm not. I just stay out of politics. But I'm not saying that's ideal for everybody. There are some really good public-minded citizens, CEOs, that give money to politicians. And obviously, they want to have politicians listen to them. I don't think that's terrible. But you have to admit that the level of money in politics today is so staggering that if we were a banana or a public, these campaign contributions would be called bribery.

21:38I mean, when you get a million or two million or three million dollars from one individual donor, you know, I won't call it bribery, but I would say it's certainly not the ideal situation. So you've lived in Washington, you've worked in politics, you've worked around political leaders. Do you think that the current tribalism and identity politics that we're struggling with in the society now. Can that fever be broken? Or do you think it gets worse over the as the years progress, David? Or what would have to happen to break that fever? The only way it's going to be broken is if you were to eliminate through some kind of constitutional amendment, which is unlikely, politics being so dependent on money.

22:18Because money is the mother's milk of politics, as it is said. As you probably know from your experience in Washington dealing with politicians, they raise money incessantly. Members of Congress on the House side saying, well, they spend 40 % of their time calling people for money. Why do they need so much money? Well, one, if you have more money, you tend to win. Two, if you have more money, you have money to give away to other politicians who maybe curry favor and for seniority kind of positions or committee chairmanships. Three, you also tend to scare people away from running with you. If you have a big bank account, people may not run against you.