#69 Stephen Schwarzman: What It Takes

Episode Summary

Executive Summary: Steven Schwartzman traces his path from a competitive youth shaped by demanding coaches and unsentimental parents to building Blackstone through repeated lessons in risk control, judgment, and culture. He emphasizes avoiding losses, valuing rigorous group decision-making, hiring only top talent, and using cyclical awareness to invest conservatively when others are euphoric.

Main Topics: Early formation: parents and coach Jack Armstrong (Priority: 5/5): Schwartzman credits his parents for teaching persistence and internal validation, and his high school track coach for instilling endurance, discipline, and the idea of making deposits in training before expecting results. Career launch and learning by failure (Priority: 5/5): He describes landing his first banking job by chance, arriving with almost no knowledge, and learning finance through embarrassment, hard work, and close observation at DLJ and later Lehman. Harvard, maturity, and staying the course (Priority: 4/5): He found Harvard Business School repetitive and almost dropped out, but a letter from Dick Jenrette persuaded him to finish, reinforcing the value of persistence over impulse. Founding Blackstone and the struggle to build credibility (Priority: 5/5): Blackstone began with little capital and few clients; Schwartzman explains that leaving a prestigious firm meant clients trusted the institution more than the individuals, forcing him to build a new brand from scratch. Risk management and decision-making process (Priority: 5/5): After early mistakes, Blackstone adopted a rigorous committee-based process focused on identifying downside risk first, protecting capital, and using written pre-mortems and partner debate to avoid self-deception. Talent, culture, and executive development (Priority: 4/5): He outlines Blackstone’s view that executives are made through coaching, that the firm uses 360-degree anonymous reviews, and that hiring only top-tier people is essential in a high-performance environment. Crisis, cycles, and contrarian investing (Priority: 5/5): He explains how Blackstone recognized overheating before the 2008 crisis, profited from deals like Hilton and EOP, and views real estate and other assets through supply-demand and cycle timing rather than short-term price signals.

Key Arguments: The most important decision is not to lose money; upside matters only after downside is controlled. Great judgment comes from group deliberation, written risk analysis, and challenging assumptions before investing. Success at scale requires a big idea; small ideas attract fewer people and create less room for exceptional returns. Most executives are trained, not born, and judgment improves with experience and coaching. Hiring should be uncompromising: average talent and weak onboarding create avoidable organizational problems. Worry can be useful because anticipating what can go wrong leads to better pricing, positioning, and discipline. Cyclical awareness matters more than linear optimism; in overheated markets, conservatism and capital preservation win. Real estate is slower-moving than most assets because supply is visible and takes years to develop, making it easier to assess risk than in fast-moving industries.

Data Points: High school track record under Jack Armstrong: 186 dual meets won, 4 lost - Used to illustrate the coach’s exceptional effectiveness and influence on athlete performance. Blackstone initial capital: $400,000 - Schwartzman and Pete Peterson each contributed $200,000 to start the firm. First Blackstone client assignment: $50,000 - Early work from Squibb was tiny compared with the firm’s capital needs and underscored startup pressure. First fund raise: $850 million + $100 million - Blackstone raised $850 million initially and later another $100 million, reaching $950 million in commitments. Fund-raising rejection rate: 17 rejections per yes - He describes a grueling fundraising process with repeated live investor pitches. Black Monday timing: One day before the 1987 crash - Final legal papers for the first fund were completed just before the market collapse. Lehman corporate finance team size: 30 partners and 30 associates - He cites the small, apprenticeship-style structure of the firm when he worked there. Hilton operational savings: $500 million savings + $500 million profit - Blackstone identified immediate value through consolidation and expansion opportunities. Hilton deal profit: $12 billion - He says Hilton became the biggest profit in private equity history. EOP transaction volume: $70 billion of properties in one month - Blackstone bought and sold massive real estate holdings during the crisis period. EOP return: 3.2x profit on $10 billion - He describes strong returns from the property portfolio sale. Blackstone stock decline in crisis: Down 90% to $3.55 - The firm’s public stock fell sharply during the financial crisis before recovering. Market decline cited: Average financial company down 85% - He compares Blackstone’s crisis decline with the broader financial sector. Growth after crisis: 6x growth in 11 years - He says Blackstone expanded dramatically while much of finance shrank.

Pivotal Quotes: "I believe the most important decision is to not lose money." — Steven Schwarzman: He frames Blackstone’s investment philosophy around downside protection before upside. "You have to make deposits in training so that you can make withdrawals for game day." — Jack Armstrong (quoted by Schwartzman): Used to explain the coach’s approach to discipline, preparation, and endurance. "The objective isn't to blame anybody, it's to develop new rules so you don't visit the same mistake twice." — Steven Schwarzman: He explains Blackstone’s post-mistake learning culture and process improvement mindset.

Implications: For investors and leaders, the episode argues for rigorous downside control, patient cycle-aware investing, and talent systems that prize judgment over ego. It suggests durable firms are built through process, coaching, and honesty about mistakes.