8

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Inspiring
Comprehensive

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How to Invest
Masters on the Craft
David Rubenstein • From HOW TO INVEST: Masters on the Craft
by David M. Rubenstein. Copyright © 2022 by David Rubenstein.
Reprinted by permission of Simon & Schuster, Inc. • 448 pages

Economics / Financial Markets

Take-Aways
• When he founded BlackRock in 1988, Larry Fink didn’t think he’d become rich.
• Jon Gray of Blackstone says that, even after the pandemic-era runup in real estate values, a crash seems
unlikely.
• The leverage used in real estate investing makes the sector a tried-and-true wealth generator, according
to Sam Zell.
• Paula Volent turned a little-known college into an investing powerhouse.
• Jim Simons used algorithmic investing to generate eye-popping returns.
• By shorting mortgage bonds before they crashed, John Paulson made perhaps the most profitable bet
ever.
• Enterprise software companies have been a fruitful area for Orlando Bravo’s firm.
• For venture capitalists, the numbers have grown more favorable, according to Marc Andreessen.
• Mike Novogratz believes bitcoin owes much of its appeal to generational pushback by Millennials.

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 Recommendation
Despite its title, this book isn’t a guide for everyday investors wondering how to plan for their retirement.
Rather, it’s an intriguing look into the careers of upper-echelon financiers of exceptional ability. In this
collection of interviews with more than 20 Wall Street superstars, David M. Rubenstein – a prominent
investor himself – delves into the backstories of such luminaries as BlackRock founder Larry Fink, real
estate titan Sam Zell and hedge fund operator John Paulson. Rubenstein puts his subjects at ease, leading to
some valuable insights into how the wealthiest investors view their craft.

Summary

When he founded BlackRock in 1988, Larry Fink didn’t think he’d become rich.

Fink’s firm now controls $9.6 trillion in assets, and he’s so revered for his financial acumen that many think
he should become US Treasury Secretary or Federal Reserve chairman. But Fink insists that his ambitions
were modest when he launched a bond fund; he wanted simply to build a viable firm. Fink started BlackRock
after becoming disillusioned at his first job as a trader at First Boston. After years of profitable returns, Fink
became a pariah at the company because his trading group hit a rough patch and lost $100 million. Fink was
disappointed that the bank scapegoated him, and he decided to go out on his own.

“Wealth is an outcome of success, but there was not one person among us who was
motivated principally by material possessions and achieving great wealth.” (Larry Fink)

BlackRock’s rise has come in large part because of the growth of its iShares exchange-traded funds. In 2009,
Fink negotiated to buy Barclays Global Investors and its iShares ETF unit. At the time, iShares held client
assets totaling $340 billion; by 2022, that figure was $3 trillion. Despite BlackRock’s size, Fink sees room to
grow – the company holds less than 2% of all assets globally. Fink contrasts that with banks, which might
hold 10% to 12% of all deposits in a given state.

Jon Gray of Blackstone says that, even after the pandemic-era runup in real estate
values, a crash seems unlikely.

Jon Gray is the president and chief operating officer of Blackstone, a real estate operator with $290 billion
in assets under management. Gray was the architect of several major wins, including the 2007 acquisition of
the Equity Office Properties portfolio for $39 billion. While that deal came at the peak of the market, Gray
protected Blackstone from downside risk by immediately flipping many of the less promising office buildings
in Blackstone’s portfolio. The company held on to office properties in California, New York and Boston, but
it unloaded assets in Connecticut and suburban Chicago. Gray also scored a big profit in the purchase of
Hilton Hotels. The timing proved prescient – Blackstone bought when hotel values had been beaten down by
the Great Recession, and the firm later reaped a $14 billion profit.

“One positive thing about real estate is that inflation drives up the replacement cost of
buildings.” (Jon Gray)

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 While the 2022 real estate market looks frothy, Gray doesn’t see a repeat of the Great Recession. Crashes
usually arise from a combination of loose lending and overbuilding. However, the post-COVID real estate
economy involves neither. Leverage remains at moderate levels, and the supply of properties is still
tight. Values have been contained in part because the pandemic made investors concerned about the wisdom
of investing in gathering places. And the rise of remote work has dampened the demand for office space.
What’s more, inflationary pressures create a tailwind for real estate investors.

The leverage used in real estate investing makes the sector a tried-and-true wealth
generator, according to Sam Zell.

Sam Zell has become a legendary real estate investor, one who sold his collection of Class A office buildings
at the peak of the commercial real estate market in 2007. The portfolio sold for $39 billion, but Zell started
out small. After attending the University of Michigan Law School, he began dabbling in real estate. He
bought his first property for $19,500. Zell sensed that he could make money as a property baron, because it
was a field that allows the use of leverage in the form of mortgages. Compellingly for investors, real estate
loans come without personal recourse. Even if a deal goes bad, the investor stands to lose no more than the
value of the underlying collateral.

“What I want to do is be right 60% or 70% of the time, but wrong in a controlled
fashion.” (Sam Zell)

In 1981, Zell had seen success as a real estate investor, and he decided he wanted to diversify half of his
portfolio into other asset classes. Zell invested in logistics, health care, manufacturing and agriculture,
among other sectors. In the 1990s, Zell focused on turning around troubled companies, a strategy that
won him the nickname “Grave Dancer.” But Zell is quick to point out that he often makes mistakes. An
obvious flop was his purchase of the newspaper company that included the Chicago Tribune. Zell expected
newspaper revenues to shrink by 6% per year; instead, they collapsed by 30%, undermining his assumptions
about the investment. But Zell is undeterred by failures. He expects to be wrong about one-third of the time.

Paula Volent turned a little-known college into an investing powerhouse.

When Volent left Yale to take over Bowdoin College’s endowment in 2000, its portfolio was $465 million.
By the time she stepped down in 2021, Volent had grown the endowment to $2.7 billion. She outperformed
other university endowments in part by underweighting fixed-income investments and cash. Volent also
added venture capital to the college’s portfolio. The endowment had no private equity exposure when she
took over, and the college’s profile was so low that she had to badger venture capitalists to take her money.
Finally, after years of pestering Sequoia, the fund allowed Volent to take a $500,000 position in a China-
focused fund.

“Some of the most successful investments I’ve made have been when managers have
had their worst performance period, and I’ve added capital because I understand the
portfolio and have a good line of communication with them.” (Paula Volent)

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 Volent paid special attention to asset allocation. She was skeptical of fixed income, but she embraced
equities. Volent also focused on choosing the right outside managers, which is crucial in illiquid sectors
such as venture capital and private real estate. Volent also built what she called a “farm team” of promising
managers, who show glimmers of talent but have yet to build a track record. And she was patient with
managers who went through rough patches – sometimes sticking with them proved profitable.

Jim Simons used algorithmic investing to generate eye-popping returns.

Jim Simons is the founder of Renaissance Technologies, whose Medallion Fund is said to have generated
average returns in excess of 40% for more than three decades. Simons earned a doctorate in mathematics
just six years after finishing high school, and for a time he headed the math department at the State
University of New York at Stony Brook. He decided to apply his numerical skills to investing, pushing the
concept that computers could make investment decisions more quickly and more effectively than humans
could.

“The way I’ve really succeeded is by surrounding myself with great people.” (Jim Simons)

When Simons started Renaissance Technologies, he hired mathematicians and scientists, including
physicists and astronomers, to make trades. Medallion did so well that Simons began to fear it had
grown too large to stay nimble. So he closed the fund to everyone but employees of Renaissance
Technologies. Simons invested by looking for market anomalies – opportunities that had been overlooked by
the market. His math acumen helped him spot these trades and then capitalize on them.

By shorting mortgage bonds before they crashed, John Paulson made perhaps the
most profitable bet ever.

John Paulson’s hedge fund, Paulson & Co., had about $6 billion under management by the
mid-2000s. During the 1980s, Paulson had succeeded by shorting bonds issued by financial
companies. Years later, as the 2005 housing bubble inflated, Paulson thought homes were overvalued, and
he looked for a way to bet against the housing market. His firm began shorting mortgage-backed securities,
focusing their efforts on the BBB-rated tranches of securities backed by subprime mortgages.

“A lot of people disagree with this, but I think you shouldn’t invest in
cryptocurrencies.” (John Paulson)

In 2006, Paulson discovered that he could use credit default swaps to act as short sales of mortgage-backed
securities. Paulson’s pitch to investors: “For 2% of cost per year, we could short bonds with a notional value
of 200% of our assets under management.” When the housing bubble burst, Paulson and his investors
profited handsomely, to the tune of some $20 billion, and Paulson himself reportedly wrote a $1 billion
check to the US Internal Revenue Service to cover his income taxes for the year. These days, Paulson is a
proponent of gold and homeownership, and he actively advises against speculating in cryptocurrencies.

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 Enterprise software companies have been a fruitful area for Orlando Bravo’s firm.

Orlando Bravo founded and runs a buyout firm, Thoma Bravo, that has developed a “secret sauce”: He
looks for software companies that could benefit from more professional management and more disciplined
decision making, but he seeks to keep the existing management team in place. Bravo adds to the bottom line
by focusing on improving business processes.

“At the end of the day, the combination of a deep analytical approach to business
problems with a deep understanding of people and how to inspire them is our secret
sauce.” (Orlando Bravo)

The approach is working well. In 2020 and 2021, Bravo raised more than $22 billion in three new funds. His
firm’s specialization in enterprise software appeals to investors. He routinely resells software companies
for three to four times his investment. In one big score, Bravo resold a portfolio company for 17 times his
purchase price.

For venture capitalists, the numbers have grown more favorable, according to Marc
Andreessen.

Marc Andreessen, co-founder and general partner of venture capital firm Andreessen Horowitz, first made
his mark in the 1990s with the launch of the Internet browser Netscape. Andreessen Horowitz has produced
hit after hit, investing in Lyft, Airbnb, Stripe, Groupon and Zynga. During the COVID-era internet boom,
venture capitalists saw the numbers shift in their favor. In the old days, venture capitalists could expect 10%
of companies in their portfolios to succeed and the other 90% to fail. Today, the ratio of winners to losers is
close to 50-50, Andreessen reports. What’s more, venture capitalists no longer expect mere tenfold returns.
Big hits such as Coinbase can generate hundredfold returns. With billions of people across the planet using
smartphones, the potential for any given tech firm is much larger.

“We’re at the beginning of a grand experiment, seeing how far we can push this whole
idea of remote work.” (Marc Andreessen)

The pandemic changed the dynamics of the tech economy in some potentially significant ways. Silicon Valley
was long the unquestioned hub of the tech world, a place that attracted the most educated, talented and
ambitious workers, though New York, Austin and Boston drew some start-ups as well. But the pandemic
proved to the world that distributed workforces could function effectively. So it’s possible that emerging
tech hubs such as Miami will gain momentum. It’s also conceivable that Silicon Valley will move into the
computing cloud that it invented. Andreessen Horowitz has also invested in cryptocurrency companies and
blockchain start-ups. Andreessen says cryptocurrency is “a fundamental technological breakthrough.” His
fund also is focusing on biotech, an area that is pushing the marriage of biology and computer science.

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 Mike Novogratz believes bitcoin owes much of its appeal to generational pushback
by Millennials.

Mike Novogratz has become a prominent proponent of bitcoin and other cryptocurrencies. The founder
and chief executive officer of Galaxy Digital, Novogratz came up through the mainstream financial services
industry. He attended Princeton and then became a partner at Goldman Sachs and president of Fortress
Investment Group. He bought bitcoins on a whim in 2013 and became intrigued by the power of a currency
controlled through a peer-to-peer system rather than issued by a central bank or treasury. Bitcoin’s
popularity comes in part because young people are disillusioned with the way the Baby Boomers have
managed an economy in which wealth inequality has intensified. While mainstream financial leaders such as
Jamie Dimon dismiss digital currencies, younger investors see the concept as a referendum on old ways of
running economies and financial markets.

“The energy of crypto comes from the youth.” (Mike Novogratz)

The popularity of digital assets means that their ownership has spread widely. Some 60 million Americans
own some amount of cryptocurrency, creating a powerful voting bloc and preventing federal authorities
from engaging in onerous regulation. Meanwhile, cryptocurrencies continue to appeal to investors looking
for protection against the devaluation of fiat money. The plunge of the Turkish lira is a case in point: That
currency lost 80% of its value in three years because of foolish monetary and fiscal policies. Meanwhile,
bitcoin mining has gotten an undeservedly tarnished reputation for hogging electricity. In truth, Novogratz
asserts, Christmas lights and YouTube videos suck up more electricity than bitcoin mining does.

About the Author

David M. Rubenstein is the bestselling author of How to Lead, The American Experiment and The
American Story. He is co-founder and co-chairman of the Carlyle Group, a global private equity investment
firm.

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