‘I tend to think that you make your own luck’: Billionaire David Rubenstein on what makes a great investor

Welcome to?Human Capital, an open exploration of the ideas and people moving financial services forward. In each edition, we feature a leader or rising star who’s changing the game in his or her own way. “Finance is an apprentice business,” one often hears in this sector. Here are some of the teachers. Click Subscribe above to be notified of future editions.

David Rubenstein — the billionaire co-founder of 凯雷投资集团 , host of two television shows, New York Times bestselling author, chairman of the Council on Foreign Relations and more — won’t admit that he is talented at much.

He’s not a good manager, he tells me. Or a great communicator, which surprises me and our live audience during a recent event. Or even a great investor.

Of course, these things aren’t really true. What’s true is that Rubenstein, 73, has exceptionally high standards. That applies to Carlyle, his numerous roles as chairman of boards, his family-office investing, his multiple bestselling books, his philanthropy — and himself.

Which is why we largely turned to the talents and success of others during our recent conversation. Rubenstein’s latest book is a distillation of the traits that have made certain investors the masters of their craft, from Larry Fink to Mary Callahan Erdoes to Ray Dalio and Orlando Bravo . For an hour with the membership of CFA Society San Francisco , Rubenstein and I discussed the attributes that great investors share, how to acquire them, the economic environment today and his outlook, and more.

Below are excerpts from the conversation. And for more with David Rubenstein, who’s now a repeat guest of this series, you can read our earlier (2020) interview here.

What are some of the common qualities or characteristics that you found the best investors share?

One, they tended to come from blue-collar or middle-class families, not from very wealthy families. They tended to be pretty good students, not high-school-dropout types who just all of a sudden got successful in life. They tended to be very good at math. They also tended to like to make decisions, especially to make the final decision; they don’t like to delegate much.

They also tended to be people who are incredibly interested in everything and anything, and therefore they read insatiably — not just about what they’re investing in, but anything, on the theory that something might be interesting to them and a help to them later on.

They also tended to defy conventional wisdom. Conventional wisdom would say do A, B, and C, and they tended to go do X, Y, and Z. And that’s generally the thing that made them so successful: They would depart from others in their thinking.

They also tended to, I would say, share the credit pretty well and take the blame.

They also have a great quality that I wish I had, which is that when they make a mistake, they get over it quickly. They go on to the next thing and they don’t linger on and think about it for the next year or two or, like me, 20 or 30 years. So, they tend to recognize that if you’re in the investment world, you’re going to make some mistakes.

And since they all make mistakes, they tend to have a reasonable amount of humility. Obviously, there’s some arrogance sometimes in some great investors, but generally the people I interviewed were pretty humble.

Are these qualities innate — i.e., you’re born with them or you’re not — or can they be learned?

As a general rule of thumb, you can learn these skills. You can’t learn intellectual curiosity — you kind of have it or you don’t — but you can certainly get better in intellectual curiosity. You can’t change the nature of your birth, of course — you’re born into a certain family. But generally, I think you can work to acquire all these skills. If you look at what these great investors did and how they became that way, I don’t think it’s outside the reach of people.

The role of luck is often debated when looking at investors’ trades or track records. What’s your take on luck in investing?

It’s not unlike luck in life. People will say somebody’s lucky, he or she wasn’t that qualified and look what they achieved. And there’s no doubt that if you take a look at some of the most famous people in the investment world or the business world, you can say, well, if this hadn’t happened or if that hadn’t happened, they wouldn’t have gotten to where they are. Sometimes that’s jealousy, but you could also say these people had luck.

I tend to think that you make your own luck.

You make your own luck by connecting with other people — reaching out, trying to learn as much as you can, bringing something to the table.

When I started Carlyle, the people that I brought into the firm I met through luck — I didn’t really know them before. Had I not met somebody who introduced me to these people, they wouldn’t have helped build Carlyle.

By reaching out, by trying to make as many connections as you reasonably can, by making those connections meaningful, and by being open to new ideas, you can make your own luck. There’s no doubt about it.

Who’s an example of somebody who, because of these traits we’re talking about, built a long-term track record of investment success?

One of the most long-term ones is Ray Dalio . He built Bridgewater Associates into a firm that is now 50 years old. Fifty years old! And over those 50 years, it has produced more quantitative dollar profits for its investors than any other hedge fund.

Ray basically had a series of principles that he followed religiously — he’s written a book about them — and he is a person who’s stuck to his principles and basically ingrained them in the employees he had. Those employees who were willing to accept the principles stayed and did quite well.

Note: Join Dalio in conversation with Daniel Roth this Thursday here.

Let’s look at the flip side of the coin — what are some red flags when you’re sitting across from an investor?

When I’m interviewing people I often will say, do you have any questions? And I’ve been amazed at how many times people say they have no questions. I mean, think of a question! Even if you’re not curious. It doesn’t sound very good to somebody who’s looking for intellectual curiosity that you have no questions. That’s a red flag to me.

Also, if anybody ever asks right off the bat what the compensation is, that could be a red flag that they’re not focused on the right things. Same with people who start by asking what the work hours are.

I tend to look for people who have a track record of success. I also look for people who are self-starters, people who want to be in the investment business not because they want to get rich, but because they think that doing this work is useful and intellectually interesting.

I'm looking for people who have ambition in life, but not people whose egos are so large that you can’t really manage them.

The best investors attract capital and talent around them, and then suddenly they’re people managers. I would venture to say that not all great investors are great managers. Would you agree?

In general, investors who are great are so tunnel-visioned on making investments, they tend not to pay that much attention to the management side, and they get somebody else to do it.

But take Ray Dalio, who I mentioned earlier. He’s a really, really brilliant investor with a great track record, and he built a very large organization. So, he was able to do both.

Mostly, great investors have smaller organizations because they’re just not really good at building organizations or managing them. It’s a different skill set.

Personally I loved reading your conversations with some of the women in the book. Who’s one who inspired you?

Paula Volent is a great example. A graduate of University of New Hampshire, she ultimately was interested in art and built an art conservation business. As the business was taking off, somebody said, you really ought to make sure you know what you’re doing in the business world. So, she decided to go to Yale School of Management.

While there, she kind of walked her way into David Swensen’s office and asked if she could volunteer. He said, you have no investment background. Eventually, she convinced him to let her work with him, and she helped with his famous book on portfolio management.

Later, she went on to run the Bowdoin endowment and increased it dramatically. In the last 10 years that she ran the Bowdoin endowment, its rate of return exceeded that of every single Ivy League endowment — including Yale’s.

She did an incredible job. She’s now the chief investment officer for Rockefeller University.

Many of the qualities we’ve discussed are fundamental — their role in success may not change over time. What are some skills that are emerging or on the rise now?

It’s very important for people to understand how to thoroughly navigate the internet and social media in ways that they didn’t, or that didn’t exist, 20 or 30 years ago. It’s a skill that obviously you can delegate, but being able to get information quickly that might be helpful to you is important.

The skill of reading and doing so thoroughly is really important. I recommend that people read books because I think it focuses the mind. These days everything is in emails or short formats, like tweets. We are getting out of the habit of reading books, and people are missing out on the lessons and benefits.

I also think that investment professionals should spend more time learning how to talk better, as many are not so wonderful at communicating their thoughts. You don’t have to be a great communicator, and I wouldn’t say I’m a great one, but I’ve tried to work on that skill. It can be very helpful in attracting investors, attracting talent, and getting people to share information with you.

I’ve noticed you’re always talking about books. Have you always been a voracious reader?

I came from a modest family in terms of its income, and they didn’t have the money to buy a lot of books. I would go to the library, which let me borrow 12 books a week, and finish them in the first couple of days and then have to wait until the next week to get another 12. That was frustrating. I like to absorb as much information as I can.

Let’s turn to the economic environment. What are you watching? What do you expect?

Right now, we basically are looking at a recession some time in the reasonable future.

Because interest rates are being jacked up so much, the inevitable result is to slow GDP growth, and also to increase unemployment. I suspect the Fed is determined to not make another mistake on inflation. I think the Fed generally would say that they misread how much inflation was going to be caused by the $5 trillion injected into the economy by Congress to deal with COVID, and also the quantitative easing impact as well. It was transitory, they said, but it turns out it wasn’t.

Paul Volcker used to say that once inflation gets in the system, it’s very, very difficult to get it out — it takes much longer than you think. The Fed now recognizes that it’s got its work cut out. So, I don’t think they’re going to ease up on increasing interest rates any time soon.

The Fed cannot say publicly what I can say, and what others have said, which is that until we get unemployment to about 6%, we’re not likely to get inflation down appreciably.

With rates on the rise, do the levels of corporate or government debt concern you?

It’s a big concern to me. I don’t seem to be in a majority, though.

To put it in context, the United States government owes roughly $31 trillion of debt. $31 trillion! When I was in the government, we had a lot of economic problems — obviously, in the Carter administration, high inflation and so forth — but when President Carter left office, I think the total indebtedness of the federal government was under $1 trillion.

We’ve been able to manage this in recent years because interest rates have been essentially zero. It was costing us 4-5% of the federal budget to pay interest on the debt. As interest rates go up, we’re going to be paying as much as maybe 10-12% of our federal budget in interest payments. At some point you just can’t tolerate it.

What other market risks do you see on the horizon?

There’s always the risk of hubris: When you make money in something, you think you’re a genius, and you put more and more money into it. There could be hubris in some areas where people get overconfident.

I’d say generally, technology has seen incredible valuations in recent years — staggering valuations. I think some of the tech companies that have changed our lives for the better are very good, and maybe their valuations will come down a bit. But I think a lot of the valuations for newer tech companies that don’t have revenues, let alone earnings, probably are going to come down more than a fair bit. That’s a cautionary note.

Is the era of globalization over?

There’s no doubt that globalization was a major component of the investment phenomenon — and society — over the last half-century or so.

Why? Well, because it was more efficient to produce something at a low cost in China, ship it here, and buy it here than it was to manufacture here. But now, because we’re concerned for security and other reasons about being dependent on supplies from China or specific parts of the world, we’re going to probably bring more things back in the United States and re-manufacture things here. It will probably have an inflationary impact.

Globalization won’t go away completely — we clearly are going to remain somewhat dependent on products and services produced elsewhere. But I think the pleasure people have had in saying how great globalization was is probably gone.

Coming back to the qualities of great investors, what’s something that somebody watching this or reading this can do immediately to begin on that journey?

I would try to find an area that you truly enjoy working in. Suppose you enjoy sports and you’d like to be an investor in the sporting world. It’s then something that you would regard as interesting, and also something that you can master.

What you really need in life to be successful is to have a passion for what you’re doing.

The people who win Nobel prizes have a passion for the area they’re working in. They don’t win it by luck, or by hating the area they work in. And the best investors really do have a passion for something, but also the best professionals in any area have a passion for something.

I try to tell young professionals all the time, as well as my own children, who are all in the investing world: Have a passion for certain things, and follow that passion. If you have a passion and you follow it, ultimately I think you will be successful.

Join the conversation with your own take on these topics in the comments below.