David Rubenstein (03:42):

I say “briefly”, it was all four years of his term. When he lost the election in 1980, I went back and practiced law. I wasn’t really that good a lawyer in my view, so I decided to start an investment firm in Washington called the Carlyle Group. I started it with $5 million that I raised from four investors, and today, as you mentioned, we now manage $376 billion, and it’s become one of the largest private-equity firms in the world.

Rebecca Hotsko (04:05):

You mentioned you started Carlyle in Washington. Can you talk a bit about why you chose there? What kind of opportunity did you see there?

David Rubenstein (04:14):

Well, as a general rule of thumb, most entrepreneurs start companies where they happen to live. Now, obviously, Jeff Bezos famously drove across the country to start Amazon in Seattle where he hadn’t lived. But generally, people tend to start companies where they live. I lived in Washington after I left the White House. I practiced law there.

David Rubenstein (04:30):

I also thought that in Washington we would be a little unique, because most of the private-equity firms in the United States were then in New York, or Chicago, or Los Angeles. By being based in Washington, I think I could correctly say we understand companies heavily affected by the federal government better than the people, let’s say, in Los Angeles. Now, maybe that was true, maybe not, but I thought it was probably true.

David Rubenstein (04:49):

We brought into the firm many people who had served in the federal government at senior positions, to give us more credibility in that area. So, Secretary of State Jim Baker, George Herbert Walker Bush, after he finished as president, Frank Carlucci as Secretary of Defense, those kind of people. That gave us credibility in this space of trying to say, “We understand the federal government better than people in New York or Los Angeles.”

Rebecca Hotsko (05:09):

What was interesting to me about your firm is, it’s one of the largest private-equity firms that invests in emerging markets and China. But I also recently saw an article that said private-equity interest in China has declined. So, I’m just wondering if you can talk a bit about this. Has your conviction behind emerging markets, and particularly China, changed?

David Rubenstein (05:31):

Well, remember, most of the people in the world live in the emerging markets. So, after Carlyle began to become a well-known investor in the developed markets… that would be United States, Canada, Australia, Japan, and Western Europe… we began to look in the “emerging markets”, as they were called. Of course, in the emerging markets, you’re including countries like China and India, Brazil, countries with large populations and great potential.

David Rubenstein (05:56):

The bloom is probably off the rose on emerging markets, just because the economy and the world is challenged because of what’s going on in Russia, Ukraine, and other supply-chain issues. There’s no doubt that it’s not as easy to make big profits in emerging markets as it might have been a few years ago. Nonetheless, the emerging markets have the biggest populations in the world, and populations represent consumers. Therefore I think, in time, being in emerging markets will prove to be very profitable for people that stick with it.

David Rubenstein (06:25):

We are still a large investor in the emerging markets, though we have not renewed our fund in Africa. We had a fund in Africa, we had one in the Middle East, we had one in Latin America. We are investing in those areas through other funds now, without dedicated funds just to Africa, let’s say. But on the other hand, we do have a large dedicated fund to Asia, which includes China, India, Southeast Asia, and that’s still a very important market for us.

Rebecca Hotsko (06:51):

I am interested to know which markets you are most excited about right now, and maybe which sectors you see the greatest opportunities in.

David Rubenstein (07:00):

Well, let’s talk about geographies. The United States, in my view, is still the most attractive place in the world to invest, because [inaudible 00:07:07] a very stable and strong currency, you have a large population, you’ve got financial markets are quite robust and sophisticated, a large executive base, and you have an entrepreneurial spirit, and I think a government regulatory apparatus that is not discouraging of entrepreneurial activities. So, I think that’s the number-one place.

David Rubenstein (07:26):

The question is, what about Europe? Europe is maybe not quite as attractive as the United States. It’s probably going into somewhat of a recession. It’s had some challenges recently because of what’s going on in Ukraine. In terms of China and India, we are still a large investor in those areas, but India has turned out to be more attractive in recent year or two than maybe China.

David Rubenstein (07:46):

As we all know, China has had a bit of a regulatory crackdown on some technology companies, so it’s harder to either get an investment in China, or to exit those deals on favorable terms. One of the problems in China in recent two years or so has been that Western investors have not been able to really physically go to China, because of Covid constraints and so forth.

David Rubenstein (08:09):

So, it’s been hard to make meaningful investments in China when you can’t go there. Now, we do have people who live in China, but a lot of our people that are investment professionals live in Hong Kong, and they still find it sometimes difficult to go to China. So on the whole, I would say we are more attracted to India at the moment than we might have been a few years ago. India is still a pretty strong economy. It’s got a very good, educated population.

David Rubenstein (08:32):

China will always be probably the most attractive emerging market over a longer period of time, just because it has a large population base, and it has a somewhat capitalist-oriented, in some respects, economic system. Not as capitalist-oriented of course, as we would prefer, or as it is in the United States.

David Rubenstein (08:49):

So, we are attracted to China, we’re attracted to India, still very attracted to Japan, and of course Europe as well. In terms of sectors, we very much believe that healthcare is a very growing area. When I worked in the White House in the late 1970s, the United States, the percentage of GDP devoted to healthcare was roughly 7% or 8%. Now, it’s about 21% or 22%.

David Rubenstein (09:09):

That’s because the population is aging, but you have more sophisticated medical technologies. People have greater ambitions of what they can do with their healthcare treatments, and so therefore that’s been a big sector for us. Also has financial tech or FinTech, has been a big growth area for us and for others. So, that’s an area that we are investing in heavily as well.

Rebecca Hotsko (09:29):

I want to touch on a couple of things there. You mentioned that you think the US is still one of the best markets to invest in, but I’ve also heard some people are just more skeptical of the US market going forward, partly given the large amount of debt that the US has. So, I’m wondering what your thoughts are on that, and how that might impact the markets.

David Rubenstein (09:51):

The United States has a staggering amount of debt. I would say, the beginning of this century, the amount of debt that the United States had was probably maybe five or six trillion dollars. Now, it’s roughly $30 trillion. All of the presidents in the 21st century have had enormous amount of debt. We’re able to service it because interest rates are relatively low, they’re obviously going up. And two, we have the only reserve currency, and therefore people are willing to buy our dollars.

David Rubenstein (10:16):

So, if there were five reserve currencies, I don’t think we would be able to find as many buyers as interested in our dollars as the case. But as long as people are willing to buy dollars because they realize the dollars will be repurchased, in effect, or we [inaudible 00:10:30] at some point, and the interest is being paid, people are still, I think, going to buy dollars for a long time, and our treasury bills are things we can market.

David Rubenstein (10:36):

I do think that the debt level is too high in the United States, and at some point, if interest rates keep going higher, it’ll be harder and harder to sustain that debt. The only way out of it is inflating your way out of it, or cutting spending, which is hard, or increasing taxes, which is hard. There’s no easy way out of it. What you usually find in these kind of situations is that governments tend to, knowingly or not, inflate their way out of the debt problem.

Rebecca Hotsko (11:01):

You mentioned that you’ve cut back on some investments in China recently. I’m just wondering, was that more due to more risks associated with those investments, or just because you found better opportunities elsewhere in emerging markets?

David Rubenstein (11:15):

Well, China is a great place to invest. It’s been a little challenging lately for regulatory and other reasons, and obviously, the US-China relationship is not all that would be desired. Hopefully, when President Biden meets with Xi Jinping, which will probably occur at the G20 Summit in Asia, I hope that maybe there can be a reduced level of tension. But right now, it’s obviously a bit challenging and that’s unfortunate, but hopefully it’ll get better.

Rebecca Hotsko (11:45):

I’ve read some recent numbers that the private-equity sector as a whole has grown substantially over recent years. Do you have any comments on why that is?

David Rubenstein (11:56):

Well, of course, I like to think it’s because of the good looks of the founders of these firms, but nobody else thinks that. So, I think it’s because over the last five years, ten years, fifteen years, twenty years, twenty-five years, and thirty years, private-equity firms’ returns have exceeded the returns of public market indexes or returns by a fair amount.

David Rubenstein (12:15):

So, as people observe the situation, they see that private-equity firms on average will outperform public markets on average, and if you’re fortunate enough to be in a top-quartile private-equity firm, you can dramatically outperform public-market averages. So, I think people consistently think that when you have people incented as well as people in private equity are, by getting a piece of the profits, and they’re investing a lot of their own money alongside their investors, that’s a pretty good bet.

David Rubenstein (12:38):

So, I think that that’s why the growth is so great. It’s also great because there’s a lot more people coming into the markets who want to get these returns. So, you now have not only public pension funds in the US, which were a big source of capital, but sovereign wealth funds, family offices, and now retail investors are coming into private equity as well.

Rebecca Hotsko (12:57):

For our listeners that are interested in participating in the returns of private-equity funds, I’m wondering if you think there’s anything different they should look at in terms of analyzing if a private-equity firm is a good investment compared to public companies?

David Rubenstein (13:15):

Well, public companies have a lot of information that’s readily available, but I’d say when you’re looking at a fund, a private-equity fund, look at the track record, make certain the people that produce the track record are still there. Make certain that the firm has a reputation for integrity. Make certain it doesn’t get sued for fraudulent activities, or things like, that all the time. Make certain that the investors in the firm or the professionals in the firm are investing a large part of their own money alongside the investors.

David Rubenstein (13:40):

Make certain you understand the fee structure. Make certain you can get information on an updated basis of how your funds are performing. Make certain that people who are investing there are people you know, or know of, because smart people will know who are the good funds are, and where the best funds are. If you don’t know who any of the investors are, and you’ve never heard of any of the investors, that’s probably not a good sign. Those are the things people should look at, investing in private-equity funds.

Rebecca Hotsko (14:05):

I want to switch gears a little bit now, because you have a new book coming out next month called How to Invest: Masters on the Craft, where you interviewed many of the world’s top investors like Larry Fink, Ray Dalio, Stanley Druckenmiller, to just name a few. I just want to know, after you spent all that time interviewing these other superinvestors, what were some of the common traits you identified among them all that you think was key in driving their success?

David Rubenstein (14:34):

Well, all of these individuals have certain traits in common. I think it’s probably true of any industry. If you pick the leaders, you’ll probably see they have certain things in common. But the things that these industry leaders have are these. Number one, they come from middle-class families, by and large. Maybe in some cases, blue-collar families. They generally don’t come from the wealthiest families in the world.

David Rubenstein (14:54):

Secondly, they tended to do very well academically, many have advanced degrees. They tend not to be people who are uneducated. Third, they tend to be very intellectually curious. They’re always asking questions, they’re always reading as much as they can. They tend to be people who are able to make a mistake and get over it relatively quickly. They don’t labor over their mistakes, and try to convince people they’re right when in fact they were wrong.

David Rubenstein (15:20):

They are people that, most important, are willing to defy conventional wisdom, which is to say they’re willing to take risks that other people say is not a good thing to do. So, if you look at the most famous investors, the ones I interviewed, almost all of them have picked an area to invest in at one point or another where everybody has said that’s a bad thing to do, but they’re willing to be strong enough to overcome that conventional wisdom. That’s another important opportunity or another important trait that they have.

David Rubenstein (15:45):

I think they also have the trait of being willing to share the credit, but also they like to make the final decision. They generally don’t like to delegate investment decisions to their teams. They want to pull the final trigger. Finally, I’d say they’re all philanthropic. Generally, when you’re an investor, you tend to make a fair amount of money. When you do, you have more money to do with than you might need for your daily living. So, they tend to become fairly philanthropic, and very significant philanthropic leaders.

Rebecca Hotsko (16:11):

That was one big thing that stuck out to me, was they all seemed to make those big, contrarian bets. I’m wondering if you could just walk us through an example of maybe an investor in the book that made a big contrarian or against-the-grain bet, and what all led and factored into the success of that particular investment.

David Rubenstein (16:31):

Perhaps the most famous trade in recent decades has been the famous trade made by John Paulson, a hedge-fund manager in New York, who shorted, in effect, the market for subprime mortgage loans in the ’06, ’07, ’08 period. Now, obviously, many people thought subprime mortgages were great because they tended to pay investors higher interest rates, and the prospect of their defaulting was not commonly thought to be a real risk.

David Rubenstein (16:57):

John Paulson thought differently. He did a lot of work on it, and he concluded that he could have a pretty attractive trade if these mortgages defaulted, as we know they did. So, he made roughly, for himself and his investors, roughly $20 billion on one investment concept.

David Rubenstein (17:13):

At the time, while we now know that the mortgage market was probably ripe for these kind of defaults, many people thought he was making a big mistake. They thought it wasn’t possible to short this big of a market. They also thought he was risking his own firm by putting so much of the firm’s capital at risk. So, it was a contrarian bet, but it turned out to be very good.

Rebecca Hotsko (17:32):

I’m also wondering how that same wisdom applies today. So, what do you think, what kind of investments would be ones that go against the grain in today’s environment?

David Rubenstein (17:43):

Well, today, it’s generally thought that technology companies have had the air taken out of their valuations, and that investing in technology companies today is a bit risky. So, a lot of people who are interested in good returns are looking elsewhere, and not looking at technology companies, because it’s thought that the valuations were too high, they’ve come down a bit, and probably there’s not so much upside in the future because valuations won’t go back to where they were.

David Rubenstein (18:10):

But in truth, I think the valuations probably will come back. I think we’re in a slow economy right now in the United States. I think a contrarian bet today would be to invest in some technology-related companies. Another contrarian bet today would be to invest in cryptocurrencies. The conventional wisdom amongst people, my generation or so, is that crypto is not really something that has real substance to it.

David Rubenstein (18:32):

But in your generation, and the younger investors, they have a very, very strong interest in investing in crypto or crypto-related companies, particularly those that use blockchain technologies. So, for older people, I would say investing in crypto is a bit of a contrarian bet, because it’s thought to be not all that safe and secure. So, that’s another example.

Rebecca Hotsko (18:52):

I am curious to get your thoughts on crypto. I know that you’ve interviewed some people in the space on your show, and so I’m just wondering how you think crypto can play a role in a long-term investor’s portfolio.

David Rubenstein (19:04):

As a general role of thumb, investment trends tend to be ones that are generated initially by younger people. Usually, the new trends don’t come from people in their 70s or 80s. They come from people in their 20s or 30s. So, just as people in their 20s or 30s were excited about personal computers years ago, or smartphones, or buying things over the internet, people in my generation missed all that.

David Rubenstein (19:29):

So, when Jeff Bezos was starting his company, many people like me told him it wasn’t going to work. We didn’t realize how much the world would depend on buying things over the internet. We didn’t really understand the internet. So today, I would say many people in my generation are skeptical that crypto can really produce long, sustained returns.

David Rubenstein (19:48):

On the other hand, younger people seem to think that while it has its risk, it’s not going away. I do think the US government is not going to overly regulate crypto. I also think that in my own case, what I’ve done is, through my family office, invested in companies that service the industry of crypto. That makes it possible for me to invest in the industry without having to pick one currency versus another currency.

Rebecca Hotsko (20:10):

So I’m wondering, going back to that contrarian way of thinking, is that a strategy that you also use, and do you have any examples of a contrarian bet that worked out well for you?

David Rubenstein (20:21):

I guess Carlyle was the best contrarian bet that I made, because people didn’t think that was going to work. But I’d say Carlyle over the years, and my family office over the years, have invested in areas that people thought not to be that attractive. For example, Carlyle became a large investor in China when that wasn’t considered to be that easy to do.

David Rubenstein (20:41):

We also became a large investor in Japan when that was not considered to be a great private-equity market. We’ve invested in many different types of sectors that people didn’t think initially would be that attractive, like aerospace defense, for example. But there’s a number of contrarian bets we’ve made, and we’ve made some that didn’t work out, but on the whole, I think the firm has done quite well.

Rebecca Hotsko (21:04):

I think the hardest thing about being a contrarian investor is maybe realizing when you’re wrong, because there are going to be times when your bet isn’t right. I’m just wondering, how do you navigate those situations? When to realize, to cut your losses, versus stick to your conviction.

David Rubenstein (21:22):

That’s a very complicated problem for people like me, because I tend to hold onto my mistakes longer than I probably should, and don’t cut my losses quickly enough. Great investors are people that see they made a mistake, and then they go onto the next thing, and they don’t think about it again.

David Rubenstein (21:36):

I still talk about the fact that I could have invested in Facebook 30 years ago when Mark Zuckerberg was in college, or 20 years ago, and I didn’t. I could have bought Amazon relatively cheaply, and didn’t do that. I think I probably don’t cut my losses probably as much as I should, but that’s one of my faults, many faults.

Rebecca Hotsko (21:55):

I’ve heard you talk about those two deals before, and I’m wondering if you can share anything you learned from those experiences with our listeners.

David Rubenstein (22:04):

When it’s something new, ask younger people what they think. Very often, you’ll see on investment committees of organizations, people who are 50 years old, 60 years old, 70 years old. These, I’m talking about, let’s say, non-profit organizations have investment committees, or even other organizations. Probably listening to younger people about what they think is good, is not a bad idea.

David Rubenstein (22:24):

For example, when Marc Andreessen came to my office when he was starting a company that later became known as Netscape, he told us that he had invented, helped to develop, something called Mosaic which helped navigate the internet. We said to him, “What is the internet and why would you want to navigate it?”

David Rubenstein (22:41):

So, we didn’t know much about what he was talking about, and obviously that was a mistake. So I think you can’t read too much, I’ve said before, but also keep in touch with younger people, because they’re going to spot trends much more than the older people are going to spot trends.

Rebecca Hotsko (22:54):

Circling back to your book, what was also interesting to me about all these investors that you talk about is that they all have very different investing strategies, very different paths that led to their success. But I’m wondering if there’s anything common among them all in their strategy, that you would like to point out, that you think is just important, or was it just more so that they became a master at their own craft?

David Rubenstein (23:18):

Well, they tended to specialize in things. There are very few people that are so good that they can do every different type of investment. So, I divided the book into different categories. There’re venture investors, your distress-debt investors, ESG investors. I think it’s important to recognize your areas of strength and weakness, and I think each of these investors tended to focus on one area and made it their own. I think that’s an important thing to do.

David Rubenstein (23:40):

No investor can know everything about everything. So, try to find an area that is your own, and make it your own, and study as much as you can about it, and read as much as you can. I tried to… the book is written not just about the insights of these famous investors and their backgrounds, but it’s designed for three different types of people. People who are students, or young people that are thinking about a career in investing, and kind of tells them what things they should do, and how they might prepare.

David Rubenstein (24:06):

Secondly, for average people who are not professional investors, but who want to learn how to be, or do some investing on their own, but do it directly. Like they might buy real estate themselves, or they might buy a company, or something like that. Then, there’re the third category of people, more typical, which is people that invest in funds, they could be private equity funds or mutual funds. What they should be looking for when they do that.

David Rubenstein (24:28):

I try to remind people that by reading this book, you’re not going to become Warren Buffet. Just like when I read a book on Tiger Woods, I didn’t become a great golfer. You can’t read a book and all of a sudden become great at something. But over a period of time, you can get to be better than you were before, if you do research, you work at it, and you try to put real time into something.

Rebecca Hotsko (24:47):

After you’ve studied all these superinvestors and their strategies, as well as just from your own experience, I’m wondering, where do you think the greatest wealth-building opportunities come from? Is it these times of uncertainty, or is it more so that good investors can make money in any market?

David Rubenstein (25:07):

Well, the really great investors tend to do well in good and bad times, but the most common mistake that investors make is they get out of the markets when the market is down, and they get in the markets when the markets are going up. Rarely are people able to time the markets well enough to really figure out when to get in and when to get out.

David Rubenstein (25:24):

The best thing to do, in my view, is when the markets are going down, that’s when you invest, and when markets are going up, that’s when you have to be much more cautious. Now, people might say, “Well, the markets are going down, I want to wait till it hits the bottom.” Trying to figure out when it’s going to hit the bottom is almost impossible, just like it’s almost impossible to figure out when the market’s going to hit a top.

David Rubenstein (25:41):

You don’t have to wait for the top or the bottom, but if you think that prices are attractive, like when markets are down as they are now, now is a much better time to invest than when the markets are very high. I would also add that many of the great fortunes in the world have been made by investors who bought things when markets were depressed, and not when they were very highly priced. This is often called value investing.

David Rubenstein (26:03):

Value investing is what Warren Buffet is basically about. It’s in fact what he would say is, buying something that’s worth a dollar for 50 cents, or what he used to call “cigar butts”. Things that people throw away and then aren’t really thought to be worth much, and you can buy them at a discount. Seth Klarman, who I wrote about in the book as well, is also a great value investor. I think right now is a good time to be a value investor, because prices are down.

Rebecca Hotsko (26:28):

I am glad you mentioned that. A lot of our listeners might follow that Warren-Buffet-style value-investing approach. I’m just wondering, you mentioned Seth Klarman that you wrote about in the book, he was able to consistently deliver net returns of nearly 20%. Can you talk a bit about his strategy? What made his value investing strategy different than maybe Warren Buffet’s perhaps?

David Rubenstein (26:52):

Well, of course, Warren’s been doing it for longer than anybody. Warren has averaged 20% a year for 60 years, six-zero years, 20% a year, pretty good. Seth Klarman’s younger, but he is still somebody that is considered one of the best value investors out there. What he’s done is, from a perch called Baupost, B-A-U-P-O-S-T, in Boston, his hedge fund has consistently done very, very well, as you point out. But he’s had incredible discipline in recent years to avoid investing when markets were very ebullient.

David Rubenstein (27:21):

Many people would say to him, “You’re sitting on a lot of cash. 30% or so of your entire hedge fund is in cash that’s not earning a lot.” But he resisted the temptation to go buy things because they were very popular or they seemed to be going up even more. He’s stuck to his discipline of buying things that are worth a lot less than they’re trading for, I should say. That’s what he tended to do, and he’s done quite well. I think, recently, as prices have come down, his value investing style has done quite well.

Rebecca Hotsko (27:48):

I think we’re often told as investors that sitting on cash is a bad thing, but what are your views on that, holding on to maybe more cash at some points to wait for a good opportunity? Do you think that is a better approach, perhaps?

David Rubenstein (28:04):

Well, some investors say that. Ray Dalio for a while was saying, I’m not sure if he still says it now, “Cash is trash.” Which is to mean, don’t hold on to cash, because it’s going to yield 1% or less. So, you put your money at work where it’s going to earn more than the cash return that you might get in a bank.

David Rubenstein (28:21):

I think it’s always good to have some cash, because when you have cash, you have liquidity, which is to say you have money to do what you need to do on various opportunities that might arise. So, my own self, I try to keep a reasonable amount of money in cash, but I recognize that there are some investors who think that holding cash is a waste of an asset.

Rebecca Hotsko (28:43):

Another value investor that you include in your book is John Rogers who started a firm called Ariel Investments, and he was able to turn $10,000 into more than a billion dollars in 20 years. I think that we often think that you need a massive win or an extremely risky bet to make that kind of money, but his firm’s motto is “Slow and steady wins the race”, which is really interesting to me. Can you talk a bit about his strategy? What led to his success?

David Rubenstein (29:13):

For those who don’t know, John Rogers is an African American man, grew up in Chicago. His parents were both graduates of the University of Chicago Law School. He was an only child. He played basketball at Princeton, and in fact was the captain of the team. Then after he graduated from Princeton, he went to work in an investment banking firm in Chicago. But after just two years, at the age of 24, he started his own investment firm, Ariel Capital.

David Rubenstein (29:39):

It is now the largest African-American-owned investment company in the United States, and that’s done quite well for many, many decades. Mellody Hobson is the Co-CEO with him. She’s a very talented African American woman who is best known to some people as the wife of George Lucas, but she’s better known to other people as a really, really talented person who’s now the chairman of the board of Starbucks, among other corporate things that she does.

David Rubenstein (30:04):

That firm has consistently had a value-investing approach, which is to say, buy things at a lot less than they’re really trading for. John Rogers did that through very difficult times in recent years, because prices were so high, he couldn’t get comfortable with them. So, he didn’t deploy as much money as some people wanted him to deploy. But now, he’s able to find things at very good discounts, and I think the firm is doing quite well.

Rebecca Hotsko (30:27):

I’m wondering, while we often try to learn from these superinvestors, and to try and inform our own investing strategy, are there any things that we should do differently as retail investors compared to someone who manages a really large account?

David Rubenstein (30:43):

Well, retail investors should recognize that they’re not principally investors, and therefore they should rely on people that are doing this full-time to get good insights and opportunities. Don’t put all your money in one basket, for example, diversify. Don’t put in risky assets more than you can afford to lose. Looking for good managers who’ve been around for a while. Those are the kind of things I think people should do.

David Rubenstein (31:07):

If you’re a retail investor, presumably you have other occupations that are more important to you, and you’re doing other things. So, if you’re a doctor or a dentist, you don’t want to spend all your time looking at screens about stock prices, versus the working on your patients. You have a different job to do. But if you’re an investor, to be a full-time investor, professional investor, it’s a full-time occupation.

David Rubenstein (31:29):

You should recognize, if you’re a retail investor, you have other opportunities to pursue in life, and you shouldn’t think you’re a full-time investor and put too much of your time into trying to replicate what Warren Buffet has done. Remember, investing is a full-time occupation. If you’re going to be a professional investor, be a great investor, it takes a lot of time.

David Rubenstein (31:47):

Just because you might be a great dentist or a doctor doesn’t mean you’re going to be a great investor. It’s a very big mistake to think that because you’re a genius in inventing a company that has a great product, you’re also going to a genius in investing. They’re different skill sets.

Rebecca Hotsko (32:00):

What do you think it takes to become a great investor? For our listeners who want to take a more active approach and do better than the market, Wondering what your thoughts are on that.

David Rubenstein (32:12):

It takes a lot of hard work, dedication, focus, willingness to work with other people, sharing the credit. Also, just reading, reading, reading. Just learning as much as you can, and being willing to make mistakes and admit your mistakes, I think is a very important part as well. Also, focus and dedication. Also, you shouldn’t expect you’re going to be a great investor in one year, or two years, or five years. It takes a long time.

David Rubenstein (32:34):

The people that I have cataloged in the book and profiled have been doing each of their areas for at least a dozen years, if not 20 years or 30 years, in some cases 40 years. So, it takes a while to get to the top of the profession, as it does in any profession, but it’s focus, hard work, reading, getting along with people, sharing the credit, keeping your ego in check. Those are important things.

Rebecca Hotsko (32:55):

Then, you also mentioned the piece about diversification is key for retail investors, but I’m just wondering, because concentration, even in Warren Buffet’s value-investing approach, concentration is what led him to gain significant wealth over time. Do you think there’s a certain amount of money where a concentrated bet makes sense? Does it not make sense for retail investors, if they can only invest a smaller amount?

David Rubenstein (33:22):

I think concentrated investing is a very complicated thing for people that are retail investors, that are not focused on a particular area, have real expertise. In the book I describe how Stan Druckenmiller had an idea. That idea was, in 1992, to short the British pound because he thought it was overvalued, and would probably be devalued and decoupled from other European currencies.

David Rubenstein (33:45):

He talked to his then boss, George Soros, who said, “You know, that’s a good idea, but you made one mistake, you didn’t put enough money into the idea.” George Soros, his investment strategy historically has been, if you have a good idea, and really good ideas come along infrequently, pursue it to the nth degree. Which is to say, put a lot of money in, not just a little money. That’s not something I would recommend for most retail investors.

David Rubenstein (34:07):

Most retail investors are not full-time investors. They can’t take that risk, and they shouldn’t put more money at a risk than they can afford to lose. So, I think with retail investors, the key thing is to diversify your risk and to be realistic in what your expectations of returns are. If you expect to get 25% annualized rates of return as a retail investor, I think you’re in for a big disappointment.

David Rubenstein (34:29):

I think for the average retail investor, if he or she can get net internal rates of returns, after all fees and everything, in the mid to high single digits, which is to say 6%, 7%, 8% a year consistently through thick and through thin, that’s pretty good. Trying to get, consistently, 25% returns or 15% returns as a retail investor is going to be difficult.

Rebecca Hotsko (34:51):

You touched on this before, but I’m wondering if you have any other advice. What do you think investors do wrong or where they make the biggest mistakes when trying to emulate these great investors? Is it just trying to copy their strategy or picks exactly?

David Rubenstein (35:07):

Well, everybody holds out the hope that they’re going to find one great opportunity, and that’s going to make them rich, or richer. I think it’s a fool’s errant to some extent. You can make a lot of money just by not making a lot of mistakes. So, going for reasonable rates of return, not taking undue risks, making certain you don’t put things in risky assets you can’t afford to lose the amount of money in those assets, is very important.

David Rubenstein (35:30):

But also, if you’re a dentist, or you’re a doctor, or you’re a car salesman, if a great investor came in and said, “Geez, I’d like to learn how to be a doctor, I’d like to learn how to be a dentist, I’d like to learn how to sell cars,” you’d probably roll your eyes and say, “Well, it’s not that easy. You can’t just get here and do it because you’re a good investor.”

David Rubenstein (35:48):

Every profession, every vocation, takes a fair amount of time to prepare. So, don’t try to be something you’re not. If you’re 50 years old and you are, let’s say, a very accomplished heart surgeon, you’re not really going to be, most likely, a great investor, because you’ve passed that bridge already.

David Rubenstein (36:06):

Now, obviously, there are some doctors I know who do become good investors, and I’ve met a number of them over the years, but generally, if you bet the odds, the odds are that you’re probably not going to, at the age of 50, learn a new profession. That it’s going to be called “investing” and you’re going to become a superstar investor. So, be realistic with your expectations. That’s one of the most important things I can advise people to do.

Rebecca Hotsko (36:26):

What do you think are the biggest challenges that investors face today, then?

David Rubenstein (36:32):

The biggest challenges investors, retail investors, face today are, there’s an enormous number of opportunities. People are always advertising to invest in this or that. There’s an enormous number of people who like to tell you how smart they are, and they might be your friends in some cases, and they’ll give you ideas, stock tips, and so forth. I think that’s difficult to avoid, feeling you’re missing opportunities.

David Rubenstein (36:54):

Remember, the smartest man in the world, in many cases, at one point was thought to be Sir Isaac Newton. Brilliant man. Sir Isaac Newton invested in a company called South Sea Corporation, which the stock went up a lot. This is in the 1700s, and stock went up a lot, and then he sold it, made a big profit, and then the stock kept going up. He said, “Oh, I’m not as smart as I thought, I got out too soon.”

David Rubenstein (37:15):

He went back in and put all of his money back into this company, and went bankrupt. So even the smartest man in the world, Sir Isaac Newton at the time, makes mistakes. So, even being smart is not going to make you a great investor, it takes experience, and time, and you should be realistic about what you can achieve.

David Rubenstein (37:31):

Now, if you’re a student, and you’re listening to me, or you’re reading this book, you have the potential to be a great investor in the future. There’s going to be great investors in the future, we don’t know who they’re going to be yet, but there’s no doubt it’s possible. But I think it’s better to start in your 20s and 30s, building a great reputation as an investor, and skill set, than trying to start in your 50s, or 60s, or 70s.

Rebecca Hotsko (37:50):

For our listeners who are listening to this, and they want to take their success in investing to the next level, do you think it’s possible to achieve that substantial wealth through investing in just public equity markets? Or do you recommend branching out to maybe private funds or other alternative investments as well?

David Rubenstein (38:12):

Over the last century, the public market averages in the United States for stocks, publicly traded stocks, has been about 6% a year. In other words, stocks go up on average maybe 4% to 6% a year, 6%. Some people would say it depends on how you measure, 4%, 5%. So, what you have to say is, if you’re going to be a public-market investor, you’re going to outperform the averages year in, year out.

David Rubenstein (38:33):

That’s very difficult to do. That’s why index funds have become so popular, because most people have recognized that trying to pick stocks yourself is a very difficult thing to do. Even trying to pick managers who pick stocks is hard to do, though obviously there’re very good people at doing that.

David Rubenstein (38:47):

I would say, on the whole, if you’re a retail investor, probably if you’re interested in public stocks, probably better in an index fund that tracks the market. Therefore, you should probably be expecting rates of return, minus fees, of 4% to 5%, 6% a year. I’m not counting inflation and other things. I think trying to think you’re going to become a multi-billionaire investing in publicly traded stocks is a big mistake.

Rebecca Hotsko (39:10):

If you could leave our listeners with one piece of advice today, what would that be?

David Rubenstein (39:15):

It would be to read as much as you can about where you put your money, keep up with what’s going on, and don’t expect to get out-sized returns by being an average retail investor. But you can get reasonable returns, and not worry about losing your money overnight when you sleep, by backing people or investing with people that have solid track records, that know what they’re doing, and that will inform you on a readily available basis of how you’re performing.

David Rubenstein (39:43):

But remember, whatever you’re doing, I mean your career, presumably you enjoy it, and if you enjoy it, don’t try to become a great investor overnight by moonlighting as an investor when you have another profession. If you’re a full-time investor and that’s all you want to do, you have a chance to be a great investor.

David Rubenstein (39:58):

But it takes many, many years to learn the skill set. So, on the whole, one word of advice is, don’t have undue expectations of rates of return, and don’t follow the market trends all the time, when people tell you, “Now’s the time, good time to invest. Now’s is a good time to get out.” You just have to be more cautious, and not try to trade all the time.

Rebecca Hotsko (40:18):

Thank you so much for that advice, and taking the time to speak with us today. That was an excellent conversation, and I’m really excited to read your book and learn more about all the investors as well, and their strategies. I want to thank you again for coming on, David.

David Rubenstein (40:36):

Thank you very much. My pleasure. Thank you for having me.

Rebecca Hotsko (40:39):

All right. I hope you enjoyed today’s episode. Make sure to subscribe to the show on your favorite podcast app, so that you never miss a new episode. If you’ve been enjoying the podcast, I’d really appreciate it if you left us a rating or review. This really helps support us, and is the best way to help new people discover the show.

Rebecca Hotsko (40:59):

If you haven’t already, be sure to check out our website, theinvestorspodcast.com. There’s a ton of useful educational resources on there, as well as Our TIP Finance tool, which is a great tool to help you manage your own stock portfolio. With that, I will see you again next time.

Outro (41:17):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.