What It Takes: Lessons in the Pursuit of Excellence

by Stephen A. Schwarzman

Eights just do the stuff you tell them. Nines are great at executing and developing good strategies. You can build a winning firm with 9s. But people who are 10s sense problems, design solutions, and take the business in new directions without being told to do so. Tens always make it rain.

“When I started my business I couldn’t think of a name. In the end, we just invented one: ‘Sesame Street.’ What a stupid name that is. Now it’s in 180 countries all over the world. If your business fails, nobody will remember your name. If your business succeeds, everyone will know it. So just pick something, get on with it, and hope you succeed enough to be known.”

One of my first acts was to design our logo and our business cards. I hired a design firm, had them come up with alternatives, and spent an enormous amount of time going over them. The design we chose is the one we still have: simple, black and white, clean, and respectable. I thought the time and money we spent when both were scarce were essential to getting this right. When you’re presenting yourself, the whole picture has to make sense, the entire, integrated approach that gives other people cues and clues as to who you are. The wrong aesthetics can set everything off kilter. Our business cards were an early step in establishing who we wanted to be.

As a salesman, I’d learned you can’t just pitch once and be done. Just because you believe in something doesn’t guarantee anyone else will. You’ve got to sell your vision over and over again. Most people don’t like change, and you have to overwhelm them with your argument, and some charm. If you believe in what you’re selling and they say no, you have to presume that they don’t fully understand, so you give them another opportunity.

But it had been a year since we had sent out our initial placement memoranda, a year that had felt like The Perils of Pauline, one heart-stopping event after another. We had persevered through rejection, disappointment, and despair.

We carved the transportation division out of USX and called it Transtar. Blackstone put in $13.4 million in equity; USX put up $125 million in vendor financing, lending us money to take the division off their hands; and Chemical raised the rest.

when we sold our final stake in the business, we had made a total return of twenty-six times our investment, or 130 percent a year.

The erstwhile Comical went on to swallow Manufacturers Hanover, Bank One, Chase Manhattan, and eventually JPMorgan itself, whose name they adopted.

Market tops are relatively easy to recognize. Buyers generally become overconfident and almost always believe “this time is different.” It’s usually not.

Timing the bottom of a cycle isn’t easy, and it’s often a bad idea to try in any case.

The way to avoid this type of situation is to invest only when values have recovered at least 10 percent from their lows. Asset values tend to increase as economies gain momentum. It’s better to give up the first 10 to 15 percent of a market recovery to ensure that you are buying at the right time.

And right on cue, a few months after we closed, steel prices began to nosedive. Edgcomb’s inventory was now worth less than they had paid for it and dropping in value every day. The profits we anticipated, which were to pay our borrowing costs, never materialized. We couldn’t make our debt payments. Edgcomb was imploding, just as David Stockman predicted it would.

said I understood, and we would do better in the future. As I found my way to the parking lot, I vowed to myself, This is never, ever going to happen to me again.

Failures are often the best teachers in any organization. You must not bury your failures but talk about them openly and analyze what went wrong so you can learn new rules for decision making. Failures can be enormous gifts, catalysts that change the course of any organization and make it successful in the future. Edgcomb’s failure showed that the change had to start with me and my approach to investing and evaluating potential investments.

Everyone contributes to the discussion. Risk is systematically broken down and understood. Debate is full and robust. The same small groups of people, who know each other well, go over each investment applying the same rigorous standards.

If I had to apply for a job at my own firm today, I seriously doubt I’d be hired.

finance is an industry that encourages self-delusion.

invested in a thorough training program to make sure our recruits knew what to do before we put them to work.

The cost of an efficient, effective training program was minimal compared to the benefits of having our newest people, our greatest resource, feeling informed, confident, valued, and ready to work.

as the Federal Reserve began raising short-term interest rates more than expected, long-term rates also moved up sharply and many bond investors were caught off-guard. Bond prices crashed in what subsequently became known as the “great bond massacre,”

I believed that once you signed something, you stuck to it, but in retrospect, I should have put the contract aside and accommodated Larry’s request.

Selling that business was a heroic mistake, and I own it.

Blackstone and BlackRock have become. Two firms, hailing distance from each other in midtown Manhattan, starting with a few people in the same office.

I should have recognized that when a situation changes and a business is doing extremely well, sometimes you have to make accommodations.

In any conversation with someone you don’t know, you should always be patient and keep asking questions until you find a place of common ground.

And then we decided that our edge was being unabashedly American, unabashedly Blackstone. We would offer the connection to American money and American business know-how, no cultural baggage attached. Just straightforward Americans, there to do business.

And the best way to get what you want is to figure out what’s on the mind of the person who can give it to you.

I wanted the same for everyone at Blackstone: warmth, elegance, simplicity, balance, and natural light pouring in from huge windows.

We had just avoided the excesses of the dot-com bubble. Despite our younger partners urging me to invest more aggressively in technology firms, I had resisted. Investors seemed to have abandoned all logic in valuing tech firms. Our investment discipline kept us from joining the herd.

Every Monday morning, for example, all of our investment teams gathered to talk about their deals and their context, starting at 8:30 a.m. and running until early afternoon. We discussed the global economy, politics, conversations with our investors, media, any issues that might affect the business. Then we went through a list of live deals, sharing our insights and ideas from our different activities around the world. Everyone could attend. Those who had something relevant to say were encouraged to say it, whatever their age or rank within the firm. All that mattered was the quality of their thinking. To this day, Monday mornings remain the clearest demonstration of our commitment to transparency, equality, and intellectual integrity.

Why, she asked, aren’t all companies run like private equity–owned companies?

Some, I said, need access to bigger pools of capital, which exist only in public markets. A mining company, for example, has to invest huge amounts in exploration and extraction before it can earn any cash flow. As for the rest, maybe they should.

We step into markets when we see a dislocation. A great company hits a rough patch and needs financing and operating intervention to help it through. An infrastructure project needs capital. A corporation wants to sell a division and invest its capital elsewhere. A terrific entrepreneur wants to expand or acquire rivals, but banks won’t lend to him or her. We enter these situations with financing, a strategy to transform the business, and expert operating professionals, and we invest the time needed to turn them around.

My experience of entrepreneurship was anything but a smooth, upward curve. It was so grueling that I have never understood the idea of people wanting to be “serial entrepreneurs.” Doing it once is hard enough.

You have two options: either run a middling company going nowhere or clear out the mediocrity you created so you can grow. If you are ambitious, you have to fill your company with 9s and 10s, and give them the difficult tasks to do.

Finally, to succeed as an entrepreneur, you have to be paranoid. You always have to believe your company, regardless of size, is a little company.

The turbulence of starting a firm must at some point permit systems to be implemented that allow other people to help drive the organization forward.

“We’re seeing the same thing in India. Raw land here is up ten times in eighteen months.”

Changing your behavior in the face of changing information is always hard. But when people are doing well, they don’t want to change. They choose to ignore the discordant notes and the tunes you are hearing. They feel threatened by bad news and dread the uncertainty of change and the hard work it demands. This tendency makes them passive and rigid at the very moment they should be most active and flexible.

I have always regarded worry as an active, liberating kind of activity. Worrying allows you to articulate the downside in any situation and leads to action to avoid it. We had set up Blackstone to give us reasons to worry, to absorb reams of raw data, so we could develop our intelligence by looking for anomalies and patterns. At its best, worrying is playful, engaging work that requires that you never switch off.

In two months, we had bought $40 billion and sold almost $30 billion, a total of $70 billion in real estate transactions in eight weeks. By the time we were done, we had managed to sell about 65 million square feet at a price of $461 per square foot. By contrast, the final cost to us of the 35 million square feet we kept was just $273 per square foot. We had acted at a scale and speed no one else in global real estate had ever done. We had reduced every bit of risk we could to protect and deliver for our investors.

But the week Lehman went down, I called down all of our bank credit lines. Before I hunkered down for what was bound to be a nuclear winter, I wanted all the cash we could lay our hands on. There would be a lot of people in trouble and trying to sell. I was determined that we would be ready to buy.

In both the housing boom that preceded the crisis and the bust that followed, the government’s policies exacerbated the situation. When the market was going too fast, they slammed on the gas. When it was grinding to a halt, they hit the brakes. The poor American consumer suffered whiplash in the passenger seat.

Historically, mom-and-pop operations dominated the business of buying, fixing, and renting out houses in America. Of the 13 million rental homes, most belonged to individuals or small real estate businesses. Many landlords were absentee and didn’t maintain their properties to the standard of a professionally run apartment complex. Our real estate team saw an opportunity to consolidate and professionalize the sector.

We applied our usual three tests for a new line of business. It must have the potential to be hugely rewarding for investors. It must add to Blackstone’s intellectual capital. And it must have a 10 in charge of it.

I had learned not only to manage through crises, but also to create them for ourselves and our clients in order to provoke a change in the status quo that creates opportunity.

But corporate executives are the opposite. They are conditioned to expect and maintain order. They get uncomfortable easily, particularly when there is negative publicity or pressure from customers. They hated being in the middle of very public dramas, especially one as inflamed as this.

I advised that the United States should begin closing some deals, starting with NAFTA, the biggest deal of all, right on our borders.

Prime Minister Trudeau thought a meeting with US CEOs might foster a better understanding of US business priorities and provide him with new ideas on how to progress negotiations. We held the meeting in my conference room at Blackstone.

It took another forty-eight hours of waiting and pleading from all sides before finally, at 10:00 a.m. on Friday, the Americans received the Canadians’ written offer. Over the weekend, the details were worked out between the two countries, and on Monday, October 1, 2018, the president announced a revised NAFTA, the United States–Mexico–Canada Agreement, or USMCA.