As we steam into September, historically one of the worst months of the year for the stock market, the capital markets are under pressure. U.S. equity markets are coming off three straight weeks of declines as we begin the holiday-shortened trading week, and we have been witnessing a breakdown across nearly all sectors. It took about two months for the S&P 500 to rally 20% off its June lows, but only three weeks to give up 60% of those gains. Easy come, easy go, but it’s been mostly “go” all year for the major indexes. The S&P 500 is down 17% in the first 167 trading days of 2022. That, my friends, is the fifth-worst start to a trading year in history, according to Compound Advisors.
Why does it matter, beyond the obvious reasons for those of us who are invested in the U.S. equity market? Because this recent bout of selling has pushed the S&P 500 well below its 200-day moving average (MA), and it’s coming close to passing through its 50-day moving average. Those are key indicators of support—if the index falls through that 50-day moving average, a lot of chart watchers say it could retest the June lows. It doesn’t mean it will, but trends in motion tend to stay in motion.
Which brings us to number two: the bond market is in a bear market and that is a big deal. The Bloomberg Global Aggregate Total Return Index of government and investment-grade bonds, which is the most widely-followed proxy for the global fixed-income market, has fallen more than 20% from its 2021 peak. That’s the biggest drawdown since the index was created back in 1990. From 1990 to its peak in January of 2021, that Bloomberg Global Index delivered an aggregate total return of 470%–that’s a raging bull market. And it kind-of coincided with the broad lowering of interest rates in major capital markets, especially the United States.
We talk a lot about stocks in the stock market and financial media because they’re more fun. But as we keep saying, the bond market runs things around here. The global fixed income market totals about $130 trillion in outstanding debt. By comparison, global equity markets total about $42 trillion. So when the bond market sneezes, everyone catches a cold. And the global bond market has a bad case of late summer allergies. As central banks around the world, except for China, raise interest rates to battle inflation, investors fearing an economic slowdown have been selling short-term bonds, which is driving up yields. Yields move inversely to prices, but a recession could drive them back into bonds and other safe-haven assets, which puts pressure on yields, especially if inflation remains high. The Fed’s been pretty clear: it will continue to raise rates until inflation, particularly the Personal Consumption Expenditures (PCE) price index, gets back to its target of around 2%. As a reminder, we’re at 8.5% today.
The silver lining, if there is one, is that bond yields are at their highest level since the 2008-09 Global Financial Crisis. That’s great if you own a lot of bonds and you are feasting off the yields. The problem, and why this matters, is that most individual investors–especially those in or nearing retirement–have taken the 60-40 approach to their portfolios: 60% equities and 40% bonds. As they get older, they weight their bond portfolios more heavily because bonds are generally more stable, and their yields deliver that fixed income. Bond prices are pretty stable and have been grinding higher, more or less, for the past 40 years–until this year. 2022 has turned the 60-40 portfolio theory on its head, as both stocks and bonds have been under pressure all year, which is very rare. Typically, when stocks fall, money flows into bonds, which cushion the blow. Not this year–not at all. The classic 60-40 portfolio is down 15% this year, on track for its worst annual performance since 2008.
Meet David Rubenstein
Prior to co-founding Carlyle in 1987, Mr. Rubenstein practiced law in Washington, D.C. From 1977 to 1981, Mr. Rubenstein was Deputy Assistant to the President for Domestic Policy under the Carter Administration. From 1975 to 1976, he served as Chief Counsel to the U.S. Senate Judiciary Committee’s Subcommittee on Constitutional Amendments.
Mr. Rubenstein is heavily engaged in philanthropy. He is Chairman of the Boards of the John F. Kennedy Center for the Performing Arts, the Council on Foreign Relations, the National Gallery of Art, the Economic Club of Washington, and the University of Chicago. Mr. Rubenstein also serves on the Boards of Memorial Sloan-Kettering Cancer Center, Johns Hopkins Medicine, the Institute for Advanced Study, the National Constitution Center, the Brookings Institution, the Lincoln Center for the Performing Arts, the American Academy of Arts and Sciences, and the World Economic Forum. He is also a member of the American Philosophical Society, Business Council, and the Board of Dean’s Advisors at Harvard Business School.
What’s In This Episode?
What is it about the world’s greatest investors that make them great? Is there a common DNA that runs through them that allows them to see around corners? Is there a certain character trait that allows them to make the bets that others are not willing to make at a time that nobody is willing to make them? How much does luck play a part in any of it? David Rubenstein has interviewed hundreds of the greatest investors in the world across asset classes, and he has identified a few of the core traits that they all share. He’s also run one of the world’s most successful private equity firms in the world, so he knows his way around corners as well. He’s out with a new book this fall How to Invest: Masters of the Craft, which will surely be another New York Times bestseller. He is our special guest this week on The Investopedia Express. Welcome, David.
David: “My pleasure. Thank you for having me.”
Caleb: “I am such a big fan of your work. I’m such a big fan of your books, and of the program you host on Bloomberg. I learned so much watching how you interview people. But through this book, your latest, you’ve identified 13 traits and skills that some of the most successful investors have. I’m going to list them, but I want to dig into just a couple of them and we’ll take them one by one here. The background is important, early jobs, failure. intelligence, ultimate responsibility, focus, reading, battle of wits, conventional wisdom, attention to detail, recognition of a mistake, hard work and philanthropy–that’s something you’re passionate about, and we’re going to get back to that in a second. But let’s go to early jobs, David, because I think that’s so important in terms of the character forming of a lot of the people you profile in this book, and a lot of successful people in general. What did you find through your research and by speaking to these folks?”
David: “Well, most of the great investors were not investors at very young ages. There are some exceptions, obviously, Warren Buffett was investing when he was 12 or 13, but generally they were pursuing other avenues and they were not interested in making money or investing. And then eventually they wound up in that area.”
Caleb: “Yeah, well, that’s so important because you’re also a lawyer. You didn’t train to be an investor, yet you ended up co-founding and running one of the most successful private equity firms in history. But it was your other training and other skill sets that helped you get good at what you got good at, and I think you’ve noticed this across investors, across asset classes, right?”
David: “That’s true. I mean, I had some skills that I developed more when I started Carlyle, but, you know, I didn’t realize that I would ever be in the investment business. I expected to be a government official or a lawyer most of my career, but it just evolved that way and that’s happened with some of the great investors. Jim Simons, as an example, was a great mathematician, and then he more-or-less helped invent quantitative investing, and he used his math skills, but he never expected to be an investor.”
Caleb: “Yeah, he’s just one example of several like that in your book, and he is a math genius and there are some great books about him and the work that he’s done. Let’s talk about ultimate responsibility, David. I’m a goalkeeper. I was a goalkeeper, chose to be a goalkeeper because I felt like I wanted the responsibility. But what is it about investors, the great investors that bear that responsibility? What does that trait mean when you say that?”
David: “The great investors tend to want to have the ultimate final decision. They don’t say to their subordinates, “go ahead and work it out, or do the best you can or use your judgment.” They want to say, “I’m making the final decision. This is my judgment. I’ll take the responsibility, right or wrong.” And so they tend to be control-oriented, I would say.”
Caleb: “Right. And then you talk about reading, and I’ve been to Keywood Plaza–to Warren Buffett’s office–I’m sure you have as well. The one thing about Mr. Buffett is there are stacks of books, annual reports, research reports, scientific journals–the man reads probably about 14 hours a day, but he’s just one example. What is it about the reading aspect that’s so important beyond the obvious?”
David: “Well, obviously reading gives you more information, it also sharpens your brain. But most importantly, investors, great investors think that you never know when some piece of information that you picked up somewhere that you didn’t expect would be related to investments, will come up and be relevant for an investment. So most investors who are really good really like to read a lot, and they don’t necessarily read just about things relating to investments. They read all kinds of things, so they can have their brain know something about almost everything.”
Caleb: “Yeah, that’s a great point. Being able to triangulate, being able to bring different ideas from different aspects, disciplines, even the storytelling aspect of investing is so important for those that are on the buy side or even the sell side, so that reading really plays into that conventional wisdom. By reading your book, I know you mean people who aren’t afraid to buck it–to zig when others are zagging or vice versa. How important is that for the folks who want to be super successful and the folks you profiled in this book?”
David: “The path of least resistance in life is always to go along with conventional wisdom: do what your parents tell you to do and your teachers tell you to do, your friends tell you to do. If you do that, you might have a nice life, but you won’t be a great investor or a great scientist or great anything because you have to break the mold, go against conventional wisdom. Conventional wisdom would say you can’t build a company like Amazon, or Apple, or Microsoft. And then people went against that grain of thinking. And the same is true of investors. People would tell John Paulson, “your great short on the mortgage market, it’s not going to work.” Or they would tell Jim Simons “you can’t really do a mathematical quantitative investing process that’s going to be better than humans.” People just don’t think that you can go against the conventional wisdom, traditionally. And when you do go against it, if you’re smart, you probably can make a lot of money as an investor.”
Caleb: “Yeah, you have countless examples of folks like that in your book, and John Paulson was the one and I wanted to bring up, because he famously bet against the housing market pre-2007, going into 2008 before the Great Financial Crisis. He smelled and he saw what was going on and made that huge bet, which is probably the trade of a lifetime, trade of the century. What is it about Paulson that allowed him just to have those steely wits to go through with that, when everybody thought the housing market was fine and the economy was in decent shape?”
David: “He just saw it as an asymmetric kind of investment where the downside was relatively modest, but the upside was spectacular, and you didn’t see many of those kinds of deals. He basically went to his investors and said, “I want to do this, and it could cost us some some returns in our hedge fund.” But they went along with it. And they ultimately wound up getting returns that were spectacular by any stretch of the imagination. He made $20 billion on an investment. So maybe, I don’t know, maybe $2 billion total.”
Caleb: ”Yeah, you have a great chapter on him in your book, and folks will remember him if they’ve read The Big Short or seen the movie. Lots of interesting work around that. But that again, being able to take that bet, take that leap when everybody’s looking one way–what is it that people are missing–and I think that’s something Paulson and a lot of the great investors you profile have in common here. You also talked about the recognition of a mistake. Now, I’ve interviewed a lot of great investors as well, I’ve had the privilege, maybe not as many as you. But one thing you find about most of them is this ability to be humble, the ability to eat their mistakes and learn from it. How important is that? And who who really exemplifies that in your book?”
David: “Well, if you’re an investor, you’re going to make mistakes, or you’re not really doing many different things. So Warren Buffett, as you know, when talking to him, is actually a pretty humble guy, given what he’s built and is maybe the greatest investor of them all. Most of the people I interviewed have very good degrees of humility. Some cases maybe, it’s feigned a little bit, but generally they’re pretty humble. They don’t like to brag about what they’ve done. If you meet an investor who likes to brag about what he or she has done, probably that person’s not going to be a great investor.”
Caleb: “Yeah, that’s a great point. And Buffett and Munger–they’re first to admit their mistakes, especially in their annual meeting. But you can probably see that with a lot of the great investors. If you read the annual reports, the great investors, the great CEOs, the great leaders are not afraid to say “we were wrong, we learned, we got to move on now; we’ve moved on because we’ve learned from our mistakes.” So it’s such a key part. I want to talk about philanthropy. I know you’re passionate about it from everything from your historical pursuits, restoring monuments to panda rescue, but I think that speaks to a lot of great investors and great executives as well. Money is not the end, so to speak, for them. What it is, is a means to do the things that they care about. And why do you see that common denominator in all the great investors that you profiled here, that willingness to give back and the passion for giving?”
David: “If you’re a great investor, you’re probably going to make a lot of money. Obviously, some great investors work in endowments, which are not designed to make a lot of money. But in the private sector, if you’re an investor, you’re going to make a lot of money. At some point, you’ve made more money than you really need to live on. So what are you going to do with it? Well, you’re going to give it away, and hopefully intelligently. And I think most of the investors I interviewed have enormous philanthropic interest. And what they’re doing now is really working for their philanthropies, because they’ve already given their kids what they’re going to give their kids, and they generally have taken care of their own personal lifestyle. They’re really working for philanthropy, and they regard it as pleasure. And so almost all of the people I interviewed have really large philanthropic footprints.”
Caleb: “And most of them don’t call what they do work. This is their calling. And the work has produced the results that allow them to do the thing that is their calling, which is, in your case, whether it be pandas or the restoring of historical monuments. I know you’re the Chair at Duke University. You put in a lot of time on your side as well. Which one of those really calls to you as an individual that makes you want to give back?”
David: “Well, obviously, I came from a lot of circumstances in this country that enabled me to rise up. So I try to give back to the things that I call patriotic philanthropy, fixing monuments or preserving historic documents and giving them to the country–things that remind people of our history and heritage. What I try to be involved with the universities that were helpful to me when I needed scholarships and so forth, and the other people that I had written about in the book are the same way. They feel that they owe the society something and they want to give back. Anybody who’s ever won a Nobel Prize doesn’t regard what they did to win it as work. It’s pleasure, and you really have to find in life something you really enjoy, so that when you do it every day, it’s pleasurable and not work. You know what you’re doing today, I assume you enjoy, or in your career you enjoy it, and if not, you would do something else. If you’re fortunate enough to be able to find a something in your career that makes you enjoy what you’re doing and going to work every day–that’s what makes it likely you’re going to be very successful.”
Caleb: “Yeah, so true. And it doesn’t happen right away necessarily, so you just have to keep going at it. I love the title of the book, How to Invest: Masters of the Craft, and why I love that is because I also think of investing as a craft. You really can study a lot of things to become a great investor, but there’s no “investing degree.” You don’t get a degree in that. You can get a degree in corporate finance, you can get a degree in economics, you can get a degree in quantitative mathematics if you want. But I think of it as a craft as well, much like a chef, right? You become very good by working around other really good chefs, by putting in the hours, by experimenting and continuing to develop your skills, and that’s why it’s a craft. And I love that you put it that way. What is it about the craftiness and the art of investing that makes it so different and special from so many other trades?”
David: “Well, it’s highly specialized. It takes a lot of work to be ready to be a great investor. And one of the points I like to make about investing is it’s not about greed. Sometimes people see people who make a lot of money on Wall Street and they say, well, they’re very greedy. I actually think it’s a unique profession, in that your main purpose is to make money. You know, if you’re a doctor, your purpose is to save people, a lawyer to represent people. But your purpose as an investor is to make money. But why is that not a bad thing? Well, because by making money, you’re giving money to companies that need it and can create jobs or save jobs. For example, the venture capitalists who gave money to Moderna–look what they did. They helped to create a company that produced a vaccine that saved a lot of lives. And so I think that investing well enables a country to have capital allocated in sensible ways that can grow an economy. Our economy has been really successful over the last 200 years, in large part because we had some good investors who allocated money in the right ways, and we grew industries that became the envy of the world.”
Caleb: “You also break up the book into three parts, which really are the three main asset classes. And you have interviews across these types of investments–the mainstream investments–the stocks and bonds and real estate, the alternatives, which include hedge funds and private equity and distressed debt–your world. And then the cutting-edge investments which include crypto, SPACs and ESG investments. I want to tackle ESG because it’s kind-of in the crosshairs right now as an investing theme because of concerns about greenwashing or misrepresentation of funds or the marketing of ESG funds. This is a relatively new category of investing, though it’s been around for a couple of decades, but new to the mass investor base. When you’re looking at great investors in that area, how do you identify them? What makes them great in a theme that is still sort-of getting its personality?”
David: “The theory behind investing is you’re going to get a certain rate of return and you can do whatever you want with the opportunities in front of you. ESG investing is saying that you should look at the ESG, the environmental, social, and governance performance of the companies. The theory has always been that if you focus on ESG, you’ll get a lower rate of return because, by definition, you’re not going to do some things that might otherwise be available to you. A firm that I profiled, David Blood’s firm called Generation Investment Management–they have a higher rate of return than the traditional market indexes suggest they should get. And they have about a 500 basis points (bps) increase over the market averages for publicly traded stocks. And they’ve done that by focusing only on companies that are really good in ESG. So he’s trying to prove that an ESG focus does not mean lower rates of return, and it can mean higher rates of return. What you were alluding to earlier was that many people are now saying that ESG has been overblown and it’s actually hurting the United States and hurting other countries by having too much of a focus on environmental and other constraints. For example, by worrying about renewable energy, some people would say we’re energy short in Europe, or energy-short in the United States. And that’s been a pushback that we’re now seeing.”
Caleb: “Yeah, great point. And we profile that and talk about that on The Green Investor, our other podcast. You have these three big themes, but you rarely find an investor who’s good at all three of these things. So that, with the focus that you’re talking about in your characteristics, is also about focusing on the thing that you’re really good at and not chasing the hottest thing. You don’t see Buffett and Munger chasing SPACs or crypto–hardly, or John Paulson necessarily. They stick to what they’re good at and they don’t necessarily style drift. How key is that?”
David: “Well, it’s very important because once you know what you’re good at, and you stay with it, you’re probably going to be successful. If you say, well, “the latest fad is this and I’m going to chase that,” more likely than not, you’re not going to succeed at that.”
Caleb: “Yeah, great point. You helped build and run the Carlyle Group for over three decades. You’ve turned it into one of the most successful PE firms in history. But you again, you trained as a lawyer and in politics for many years. But still, I want to put your CEO hat on, just for the moment here. If you were looking at the economy and the markets right now, sort-of in this recovery theme and the future is a little bit uncertain, how would you be allocating capital today?”
David: “The most important thing that people said when I interviewed them–and I think it’s true–is that the biggest mistake investors make is that when the market gets go down, they get out and the markets go up, they get in. You should actually do the opposite. Right now, the markets are down–they’re choppy. It’s not a time to go home and wait for the market to go get stronger. Now is actually a good time to invest. You may not hit the absolute bottom of the market, but nobody can time exquisitely well the bottom of the market or the top of the market. Right now, prices are lower than they’ve been because the tech bubble burst, because interest rates are high, the war in Ukraine. But it’s actually probably a pretty good time to get in and make some bets now at reasonably good prices, because the markets are going to come back like they always do.”
Caleb: “Yeah. To your point, that’s that bucking against conventional wisdom, having the courage to zig when others are zagging. In such a key time, especially if you’re a young investor, you hope for moments like this, you hope for periods like this, because this is where you can get in cheap and take advantage of that compounding. Well, I want to talk to you about your greatest influences. You’ve written a terrific book here again, How to Invest: Masters on the Craft, David Rubinstein’s latest book. You’ve interviewed dozens of investors here and hundreds over your career, but who’s been your greatest influence, as an investor or just as a professional?”
David: “I associated with a lot of people who I think were really talented. As a young man, I worked for a lawyer named Ted Sorensen, who worked in the White House for President Kennedy. And I really idolized what he had done as President Kennedy’s chief speechwriter. I worked in the White House for a man named Stuart Eizenstat who was Carter’s domestic advisor, and he had a big influence on me as well. And then my two founding partners at Carlyle, Dan D’Aniello, who came from Marriott, and Bill Conway, who came from MCI, have really taught me a lot about investing. And I dedicate the book to Warren Buffett and to them, for all their help and for helping me to learn about the investment business, and I admire, obviously, Warren Buffett for what he’s done, to kind-of show that investing is a real skill and that if you really know what you’re doing, you can be very successful at that. But you got to take a lot of time and work at it. It’s not easy. It takes hard work. It’s not a matter of just going to parties or things like that. There are a lot of people that have influenced me.”
Caleb: “And it’s so important to to cultivate those people who will influence you in your life, throughout your career. It looks like you’ve done that even when you thought you were going to be in politics or maybe pursue the law. You’ve cultivated mentors along the way, and I’m happy to have been able to do the same. David, you know, we’re a site built on our investing terms and our online dictionary–a lot of folks come to us to learn those. I’m wondering, for you, what is your favorite investing term or definition? What’s one that just speaks to your heart the most?”
David: “I like it when people tell me that they have an opportunity to invest in a company where the person who is building that company is putting a lot of their own personal wealth in it. And they’re really not just trying to get somebody else to put money in–they’re putting a lot of their own wealth in it and they’re putting their time into it, and those are really good things for me to watch.”
Caleb: “Yeah, we call that home cooking at Investopedia. So if you’re willing to eat your own cooking and put in the work and put in your own capital, then other people will be convinced as well. Well, this is a terrific book, and I’m delighted to have you on the Investopedia Express. How to Invest: Masters on the Craft, by David Rubenstein, the co-founder of the Carlyle Group, a New York Times best selling author. You’ve got your own show on Bloomberg. I’m such a big fan of what you do, and I really appreciate you joining the show.”
David: “Thank you very much. I appreciate it. Good to be with you.”
Term of the Week: Delisting
It’s terminology time. Time for us to get smart with the investing term we need to know this week, and this week’s term comes to us from Austin. Austin wrote in to us that he learned recently that Walmart was trying to acquire Massmart with plans to delist it if it does. So he suggests delisting as this week’s term, and he wants us to explain what it means and why it matters to investors. Of course we will, Austin First of all, Austin is correct. Walmart has agreed to begin buying the 47% stake in South African retailer Massmart that it does not already own. And it’s offered 6.4 billion rand, which is $373 million, to purchase the remaining shares and then delist the company from the Johannesburg Stock Exchange. The offer represents a premium of 53% to the closing share price and a 62% premium to the 90-day volume-weighted average price (VWAP) calculated at the close of the market on August 26, 2022, according to the press release.
Well, according to Investopedia, delisting is the removal of a listed security from a stock exchange. Just like it sounds, the delisting of a security can be voluntary or involuntary, and usually results when a company ceases operation, declares bankruptcy, merges–like in this case, or does not meet listing requirements, or, if it seeks to become private. In this case, Walmart is acquiring Massmart completely, and in doing so, delisting it from the Johannesburg Exchange. As for Massmart investors, they can cash out of their positions, which they may want to do, given the premium Wal-Mart is paying for the company based on its recent share price, or they may have the opportunity to convert their Massmart shares to shares of Walmart–we don’t know that yet. But in basic terms, this delisting, due to an acquisition, is the end of Massmart as a public company and maybe the end of its brand as well. We’ll see. Good suggestion, Austin. Some of Investopedia’s finest socks are coming your way. And if you are in South Africa, we’d like to see you sporting those on the streets of Joburg.