David Rubenstein, Billionaire Investor Who Hired Jay Powell, On What Makes A Great Investor
What this covers
Today Jack speaks to a true titan in the investment business. David Rubenstein is the co-founder and co-chairman of The Carlyle Group, a global investment firm with over $360 Billion in assets under management, and he joins Forward Guidance to share lessons from his latest book, “How To Invest: Masters On The Craft,” in which he spoke to legendary investors such as Stan Druckenmiller and Jim Simons about the keys to their success. Filmed on December 6, 2022.
Link to David Rubenstein’s book: https://www.amazon.com/How-Invest-David-M-Rubenstein/dp/1982190302
Link to David Rubenstein’s interview with Fed Chair Jay Powell in 2021: https://www.youtube.com/watch?v=5Nwf_VySYFU&t=601s
Link to David Rubenstein’s interview with Fed Chair Jay Powell in 2019: https://www.youtube.com/watch?v=SLE3eRMFUJo&t=17s -- Follow David Rubenstein on Twitter https://twitter.com/DM_Rubenstein Follow Jack Farley on Twitter https://rb.gy/uesguv Follow Forward Guidance on Twitter https://rb.gy/cy0dki Follow Blockworks on Twitter https://rb.gy/igyzsj
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Market commentary, charts, degen trade ideas, governance updates, token performance, can’t-miss-tweets and more. Subscribe to the Blockworks Research “Daily Debrief” Newsletter: https://rb.gy/feusos -- Timestamps: 00:00 Introduction 01:25 What Makes A Great Investor? 04:16 David Rubenstein's Journey Into Private Equity 09:06 Importance Of Getting Involved In On The Ground Floor 11:42 Fundraising 19:22 Inflation 21:05 The Business Cycle 24:22 Venture Capital and Technology Valuations 27:36 Economic Outlook 29:22 How High Will The Federal Reserve Hike Interest Rates? -- Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.
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Rubinstein argues that great investors share common characteristics—humble origins, voracious reading, contrarian thinking, and humility from failures—and that success requires finding a specialization, understanding macroeconomic cycles, and maintaining discipline rather than chasing bubbles or optimizing purely for monetary returns.
- Great investors consistently come from modest backgrounds, read widely across domains, and aren't afraid to admit and exit mistakes quickly
- Different investment specializations (macro, stock picking, private equity, venture) require different skill sets, but all successful investors go against conventional wisdom and enjoy the work intrinsically
- Timing market bubbles is impossible until they burst; the best investments occur when prices are low and sentiment is fearful, not when valuations are sky-high
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Great investors, when very successful, tend to become extremely philanthropic, suggesting a relationship between investment success and charitable giving.
“when they're very successful they tend to be extremely philanthropic”
Great investors have an insatiable appetite for reading and learning across all domains, not just their area of expertise, which distinguishes them from average professionals in finance.
“they have an insatiable appetite for knowledge and reading they just don't want to read just what might be their area of expertise”
Great investors quickly recognize their mistakes, admit them, and exit positions promptly rather than lingering while trying to prove they were right, demonstrating humility and adaptability.
“they know they made a mistake and they get out of it relatively quickly and don't linger around it trying to prove that they were really right when they were not”
The 1970s inflation environment was different from contemporary inflation because unionization was 25% of the US workforce in the 1970s but is now approximately 10%, and China's rise as a producer has lowered global production costs and inflation.
“the 1970s was a different world uh 25 of our Workforce the United States was unionized now it's maybe 10 and most the products and that we and con Services we consume were producing the United States today because of the fall of of uh communism more or less or the end of the Cold War I should say and the rise of China as a producer of so many products we have more or less lowered the cost of production therefore lowering inflation”
Identifying when a bubble is finished bursting in real-time is difficult; bubbles can only be reliably identified in retrospect after valuations have collapsed.
“nobody really is great at predicting bubbles except when they finish um they burst so you know whenever markets are going up people think well maybe there's got some more value there and maybe that's a fair price only when the bubble bursts do people say it's obvious that that was a bubble”
When founding Carlyle Group in 1987, the term 'private equity' had not yet been invented; the industry was called 'leverage buyout firms' or similar names, indicating rapid domain evolution and rebranding.
“the phrase private Equity really hadn't even been invented at that time we were called Leverage buyout firms and things like that”
Jay Powell was initially a lawyer in investment banking at Dylan Reed who moved to work in the George Herbert Walker Bush Administration and later joined Carlyle Group, where he worked for seven to eight years before becoming Federal Reserve chairman.
“Jay Powell was uh a person had been in an investment banking world at Dylan Reed he came down to work in the George Herbert Walker Bush Administration and Anthony enough that he didn't want to move back to New York and we were in Washington and somebody put us together and I interviewed him he came in it was in our firm for seven or eight years and did a very good job he's now obviously the chairman of the Federal Reserve”
Private equity firms now have their own debt capital operations and many other money management firms provide debt capital, so banks are no longer the only source of debt for buyouts.
“remember the banks are not the only people that provide that anymore uh private Equity firms have their own debt Capital operations and many other money management firms do as well”
When prices are sky-high and investors want to get ahead of everybody else by paying sky-high prices, that generally doesn't have a good outcome; when prices are low and people are afraid, that's when investors should really invest.
“if the prices are Sky High and you want to get ahead of everybody else and go in and pay sky high prices generally that doesn't have a good outcome when prices are low and people are afraid of the market that's generally when you really should invest”
Carlyle's early novelty was deciding to have multiple funds (buyout, real estate, growth capital, etc.) rather than just one fund type, and to globalize operations with dedicated American, European, Asian, and Japanese teams, whereas historically investors tended to invest only in their own country.
“when we started the firm private Equity firms were basically firms that did this they tended to be in one city they tended to invest in their country and they tended to focus just on buyouts our novelty was if anything uh can be considered novel was that I decided what we should do is have multiple funds not just a buyout fund but have a real estate fund a growth Capital fund and many different funds take advantage of our brand name and also build up uh the ability to have bigger infrastructure and so forth and then secondly to globalize it historically Americans invested in America Europeans and Europe Asians and Asia and I decided we'd have an American firm with a dedicated European team a dedicated Asian team a dedicated Japanese team and so forth and we did that and that was novel at the time of quite contrarian people made fun of it”
Different investment specializations (trading, macro investing, stock picking, private equity) require meaningfully different skill sets and operational approaches, with different time horizons and decision-making paces.
“some are ones where you got to be very quick to be Trader a very good Trader private Equity you don't have to have their trading skills the quick ability to read a screen or something like that you have much longer elongated times to analyze a deal”
Paula Boland, who ran the Bowdoin College Endowment, outperformed her mentor David Swenson (Yale endowment chief) over the last decade of her tenure at Bowdoin, demonstrating exceptional endowment management capability.
“Paula Boland who runs the Rockefeller Foundation Rockefeller university endowment she had run the Bowdoin Endowment for a number of years and actually beat her Mentor the last 10 years her Mentor was the legendary David Swenson the Yale endowment Chief and she actually outperformed him the last 10 years of her time at Bowdoin”
Federal Reserve quantitative easing kept interest rates at zero, which further facilitated inflation by making borrowing cheap and encouraging asset purchases and consumption.
“secondly the FED basically took interest rates and and kept it at zero and that quantitative easing which facilitated even more inflationary kinds of things”
The war in Ukraine caused inflation by spiking energy prices and food prices, disrupting supply chains for commodities and affecting global cost structures.
“so has the war in Ukraine because Energy prices spiked up food prices spiked up as those Supply chains were interrupted”
Human nature inherently tends toward getting caught up in bubbles and feeding frenzies where valuations become divorced from reality, and this has been true throughout investment history.
“people get carried away this is the the true of human nature forever and so people get caught up in these so-called Bubbles and we've seen some bubbles in the technology space and and in the Venture space”
Modern private equity increasingly generates returns through EBITDA growth (operational improvements) and adding value from operating executives, CFOs, and technology experts rather than purely through financial engineering and multiple expansion.
“now there's a lot of added value that comes in from the people that have uh experience who work in firms like ours where they're operating Executives or CFOs they're technology people and they go in and help the company so it's more of a what we call ebitdog growth than just um Financial engineering or multiple growth which means you're buying it at 10 times EBA dot but you hope to sell it at 12 times ebitda we don't try to do that anymore”
Carlyle Group has generated a gross internal rate of return of approximately 26 percent since its founding and has generated slightly over a quarter of a trillion dollars in returns.
“the Carla group has an extraordinary track record uh right in the book The Gross internal rate of return since the founding has been roughly 26 percent uh generated slightly over a quarter of a trillion dollars uh in Returns”
In the early days of private equity (1970s-1980s), deals were typically financed with 95% debt and 5% equity, and sometimes that equity was taken out as management fees, leaving firms with no actual equity at risk.
“in the early days in the 70s and 80s to have one to five percent equity and some of that Equity would come out as a fee so some places people would put one percent equity and they'd take it out as a one percent fee they have no equity in”
Inflation was partly caused by approximately 5 trillion dollars in additional fiscal spending by the Trump and Biden administrations without corresponding tax revenue offsets, which injected excess demand into the economy.
“inflation rate is probably going to be coming down in part because the FED is done but also because uh we're not faced with the crises that we had at least not now that produce higher inflation higher inflation was caused by five trillion dollars of additional spending by the uh Trump Administration in Congress and the body Administration in Congress that was put into the economy with no tax revenues offsetting it”
The Fed should accept 3% inflation rather than target 2% inflation because achieving exactly 2% would require rate increases with undesirable side effects on the broader economy.
“I do think the FED will at some point say we don't need to have the inflation rate go to two percent I think three percent would be probably tolerable by the markets and so I think that would require the FED to not increase quite as much because the increase to get the two percent inflation is going to be very very difficult to do and have uh side effects in the economy I think are not desirable I think the the business where all the economy can live with three percent inflation”
Great investors tend to come from blue collar or lower middle class families rather than very wealthy families, and this background pattern holds across the universe of legendary investors Rubinstein interviewed.
“the common characteristics I would say are these one they tend to come from blue collar or lower middle class families not from very wealthy families”
Stan Druckenmiller is exceptionally rare in that he successfully operates as both a macro investor and a stock picker, which most investors specialize in one or the other.
“Stan druckenmiller's case he tends to be a both a macro investor but also a stock picker that's very rare usually your stock Pickers or your macro he tends to do both”
Being paralyzed by world problems and refusing to invest is harmful; investors must recognize that challenges and unforeseen events are always present and invest despite uncertainty.
“if you are paralyzed by the fact that the world always has problems you won't invest then that's not a good thing you have to recognize that you're always going to have challenges things that are unforeseen and so forth”
Good investors understand macroeconomic factors, business cycles, energy dynamics, and other macro variables and attempt to incorporate this into their analysis when predicting future returns.
“good investors do look at macro factors and try to put them into context and as I say at the beginning of the book all of investing is really about predicting the future who's really good at predicting the future well nobody's perfect at it but essentially you're trying to predict what's going to happen macroeconomic wise energy wise and a whole variety of other factors next six months next year next five years”
Companies purchased at reasonable multiples of 5-7x EBITDA in buyouts or low double-digit multiples in venture/growth capital are more likely to generate strong returns than companies purchased at 20-30x+ multiples during feeding frenzies.
“people who are buying things at five six seven times ebitda nine times ebitda uh in the buyout world or even low double digits in the technology or Venture world or growth Capital we're probably going to do much better but people get carried away this is the the true of human nature forever”
Valuing companies at 30x, 40x, or 50x earnings implies assuming the company will earn its current level of earnings for 30-50 years with no growth, which is unrealistic and typically leads to price corrections when hype subsides.
“or remember if somebody's buying something or investing in something at 30 times earnings or 50 times earnings what that means is that if the company is going to earn what it's earning now for each of the next 50 years you would get your money back well companies really don't you know go a flat line for 50 years and kind of pay those kind of multiples back so generally when people get into Feeding Frenzy and they pay 30 times 40 times 50 times earnings and sometimes people are paying 10 and 20 and 30 times revenues for some technology companies in the end that always leads to something coming down”
Classic buyouts will probably still get done, but really big buyouts probably won't get done because the debt market may not be there for the biggest buyouts, though there's still a fair amount of debt available for modest-size buyouts.
“I do think that uh you'll probably see some uh continued investment in the kind of things that we've been seeing in the last couple of years uh classic buyouts will probably still get done very big buyouts probably won't get done so really because the debt Market may not be there for the biggest of buyouts but I think there'll be there's a fair amount of debt available for modest size buyouts”
The Federal Reserve, by its own admission, made a mistake by initially characterizing inflation as transitory when it turned out to be more persistent, driven by factors like COVID and supply chain interruptions that lasted longer than expected.
“the Federal Reserve uh by its own admission uh made a mistake they thought that the inflation rate when it was high was transitory maybe because of covet or supply chain interruptions it turned out not to be quite as transitory as they thought and they admitted that”
Michael Moritz, a founding partner of Sequoia Capital, built the venture firm from a journalist and immigrant background (from Wales), making Sequoia one of the most successful venture firms in history.
“Michael Morris is an incredibly and gifted investor he more or less built Sequoia into the most successful Venture firm in the history of the world and uh done it from a background of being an immigrant from Wales and and with a journalist background”
Private equity was historically seen as an unusual, exotic, non-mainstream investment vehicle unsuitable for institutional capital; today it is accepted as a standard, important part of institutional investment portfolios.
“people accept this as an important part of the investment world in the early days private equity and buyouts were seen as in a kind of an unusual thing very very exotic and not something you could really put uh institutional money in now almost every institution that reinvests across the board will have some private Equity kind of uh uh elements in their portfolio”
Today, more professionals actively want to pursue fundraising because they recognize that successful capital raising with competent investors leads to large fund sizes and strong returns, reversing the historical low-status perception.
“now and people more and more want to do it because they recognize that if you can raise money and do it successfully you're likely to get a big fund and if you have good people to invest it you should do pretty well”
Glenn Youngkin was a talented young professional Rubinstein hired at Carlyle approximately 25 years ago; he later left to run for governor of Virginia and is now considered a potential U.S. presidential candidate.
“I interviewed a person about 25 years ago who was a very talented young man I thought he had a good career ahead of him but he ultimately left to run for governor Virginia his name is Glenn Younkin and now people think he's running for president of the United States”
Successful private equity firms maintain consistent returns by avoiding being carried away by short-term trends, focusing relentlessly on debt paydown rather than chasing hot opportunities, and cultivating firm culture that incentivizes hard work, learning, and collaboration.
“you need to have a uh I think a level head not get carried away with the latest trends uh don't get caught up in things that might seem hot for an hour or two but in the end they're not going to be sustainable focus on in the buyout we're paying down the debt and not on other things that may not be as important as paying down the debt in a timely way also making sure that you have a culture in The Firm which incends people to want to work hard to learn to get along with other people”
Rubinstein does not view recession as 100% certain because the Fed is likely to moderate rate increases and because unemployment is difficult to push higher given workforce constraints, reducing the traditional transmission mechanism for recession.
“I believe that the recession is not 100 certain to happen because the FED is probably going to modulate their rate increases and secondly the unemployment rate usually goes up when you have a recession we have a hard time getting the unemployment to go higher now in part because there aren't that many people in the workforce”
Modern private equity deals feature substantially higher equity components, now approximately 50% equity and 50% debt, reflecting a fundamental shift in capital structure and risk allocation.
“today the equity component may be 50 and something like that”
In January 2019, at the height of the 'Powell pivot' when the Fed stopped hiking rates and later began cutting them, Rubinstein anticipated the Fed would pause and lower rates in response to economic deterioration related to COVID and other factors.
“at that particular time he had been criticized by President Trump who appointed him to be the chairman for raising interest rates eventually he lowered them in part because uh of the economic situation and deterioration relating to covet among other things”
The Federal Reserve's terminal rate (the peak at which rate hikes will stop) is predicted to be slightly above 5 percent, with Rubinstein doubting rates will go above 5.5 percent.
“I would suspect a little bit over five percent is probably where the FED will probably take it at the peak but it depends on the number of factors that we don't know now I doubt the FED will take it above five and a half percent”
Stan Druckenmiller uses a defensive strategy to avoid being asked for investment advice: he tells people that he changes his mind every day, so any recommendation would be unreliable, allowing him to maintain privacy while admitting his decision-making adaptability.
“he has a very clever way of avoiding people asking him for investment advice because he says look I changed my mind every day so I can't tell you something because I might change my mind tomorrow so he and he does change his mind a lot”
Great investors derive more pleasure and intrinsic reward from the work of investing itself than from external material gains, treating it as an end rather than merely a means to money.
“they tend to enjoy what they're doing more than pleasure uh in other words to them this is pleasure and it's not work”
Rubinstein's primary skill set at Carlyle Group was not investment analysis but capital raising, fund development strategy, firm building, recruiting, and serving as the public face of the firm.
“my skill set was raising the money or or coming up with the way to develop new um uh Bill uh new funds for Carlisle thinking strategies that would help us grow The Firm recruiting people and being the public face of the firm but in many ways that my partners were the real investors who really did the day-to-day work of analyzing the deals”
Fundraising is rarely taught in business school curricula despite being a critical skill that most professionals in finance must master, creating a knowledge and skill gap in the professional market.
“if you go to Harvard Business School or Stanford Business School or any good business school or any bad business school I doubt that you'll find a course anywhere in any of the curricula which says here's how to fundraise but the truth is most people in the professional world are asking other people for something usually money”
Finance and investing are good professions because they are highly analytical (using your brain), and because skilled investors allocate capital in ways that benefit society.
“I think the reason I think finance and investing is a good profession is one it's very analytical you get to use your brain too I think as I say in the book if you're a good investor you'll actually allocate capital a way that's helpful to society and you can say you're helping Society”
Being on the ground floor of emerging investment fields that subsequently prove mainstream (like private equity once did) is generally beneficial, though early-stage success depends on whether the field proves durable.
“today if you're on the ground floor of anything that makes some sense it probably will be good for you”
You should only pursue finance and investing if you genuinely enjoy it; pursuing it solely for money relative to other professions is likely to lead to underperformance and dissatisfaction.
“you're going to be good in finance if you enjoy it don't do it because you just want to make more money if you think uh the only purpose of being in finance or investing is making money more than you might make in some other profession and you don't really don't enjoy it then it probably won't be for you”
Recession predictions are among the most frequently made forecasts, with many people predicting recession for extended periods before it actually occurs; when recession finally arrives, many who predicted it take credit.
“this is probably the most predicted recession I've ever seen people have been predicting for a year eventually it'll show up probably and people say see I told you so”
Private markets have done reasonably well compared to public markets in recent times, with marks (valuations) being relatively okay, although growth capital and venture capital tech valuations have come down considerably.
“private markets uh have done reasonably well compared to public markets in recent times the marks have been relatively okay obviously growth capital and venture capital and tech stocks and valuations in the private sector have come down a fair bit”
If young investors/analysts write 100-page memos about the economy, some of them conclude that inverted yield curve means economic contraction is coming, which is one of the most predicted recessions ever.
“I think it was in the interview you did with Sam Zell you said how young people on your team or Sam Dell's team often write these 100 page memos and a lot of them are about the economy and some of them might say oh the yield curve is inverted so uh economic contraction is coming uh how do you you know so number one what do you a lot of people expect a recession to come I actually think as a month or two ago Bloomberg uh session indicator was at 100 and you know this is this is bloomwork we're talking about um so do you would you agree with that uh analysis and uh you know if so how do you um sort of invest uh during during a recession well first um this is probably the most predicted recession I've ever seen people have been predicting for a year eventually it'll show up probably”
Currently (as of the interview date), inflation and costs in key products like gasoline are coming down, suggesting the Fed's rate increases are working to moderate inflation.
“at the moment we see inflation and many costs and key products like gasoline coming down”
Historically in private equity, fundraising occupied the lowest status in the organizational hierarchy, with most professionals preferring to be CEO or lead deal person; Rubinstein differentiated himself by specializing in the undervalued function.
“historically fundraising was at the lowest part of the totem pole in private Equity you know people want to be the CEO they want to be the top deal person um so forth nobody wanted to do fundraising and so I did it”
Rubinstein's primary contribution to Carlyle's success was being willing to go on the road and raise money for approximately 30 years, developing relationships around the world, some of which led to deals.
“what I probably did the most to help Carl I was being willing to go on the road and raise money and I did it you know roughly you know for for 30 some years basically be the person who would raise the money and develop their relationships around the world some of them led to deals but generally my partners would analyze the deals”
Rubinstein does not identify current bubbles in the market but suspects that many previous bubbles (technology, real estate) have already burst or are bursting, creating opportunities.
“I can't say that I know where there are bubbles right now I suspect that a lot of the bubbles have burst in technology for example or in real estate some bubbles are burst”
Stan Druckenmiller rarely grants interviews, making his participation in Rubinstein's book and project unusual and valuable from an information perspective.
“Stan druckenmiller was quite interesting because he rarely gives interviews and he talked about his philosophy a bit”
Rubinstein's interviews with Jeff Bezos and Oprah Winfrey in front of live audiences were particularly compelling because live audiences enable the interviewer to 'play to the audience' and create more excitement than studio recording.
“one of the most favorite one of my most favorite ones was with Jeff Bezos because I did it in front of a live audience when you have a live audience you can play to the audience more and the and and there's a lot more excitement in the in the room”
The 2020-2021 fiscal and monetary stimulus led to very low credit spreads, high equity valuations, and frothy speculative assets (meme stocks, crypto like Dogecoin), indicating overheated asset prices during the stimulus period.
“you could see very low credit spreads very high Equity valuations meme stocks crypto Dogecoin is I guess an extreme example of that”
Great investors generally possess good mathematical skills, though they are not necessarily mathematicians, indicating that strong quantitative ability is important but not the only factor.
“they all tend to be pretty good in math generally they're not mathematicians necessarily but they have pretty good skills in math”