Beautiful minds of the investment world

David M Rubenstein's compilation of interviews with star money managers is a joy to read

How to invest: Masters on the craft

Author: David M Rubenstein
Publisher: Simon & Schuster
Pages: 416
Price: Rs 486
 

Early in his career, Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates (it has assets under management of more than $150 billion), made a painful mistake. In 1980, Fed chairman Paul Volcker began raising interest rates to tame high inflation. Mr Dalio bet that a number of countries that had borrowed heavily from American banks would default on their debts. His thesis proved correct initially and many countries did default. But then the Fed did a U-turn and began loosening its monetary policy. Instead of tanking, the stock market and other assets rose. The loss from this bet left Mr Dalio so broke he had to borrow $4,000 from his father to pay his family bills.

Mistakes like these helped Mr Dalio arrive at his life’s paramount principle: “Pain plus reflection equals progress.” He also realised the importance of hiring smart people who had the intellectual strength to disagree with him, and against whom he could stress-test his thinking.

Mr Dalio came to regard painful mistakes as puzzles. If he could solve them, he would be rewarded with gems. The gems were the principles he arrived at, which he could use in the future to solve similar problems. Mr Dalio also used these principles to have decision-making algorithms built. If they proved their worth in back-testing, he used them to manage money.

It is stories like these that make How to Invest a joy to read. The book is a compilation of interviews by David M Rubenstein. The reader should pick up this book for two reasons: The preeminence of the author and the cast of star money managers he has assembled, many of whom are very reclusive and would only agree to speak to someone of Mr Rubenstein’s stature.

A lawyer by training, the author worked in Jimmy Carter’s administration. When Mr Carter lost his reelection bid to Ronald Reagan, the author found himself out of a job. He started practising law, realised he wasn’t cut out for it, and decided to set up a private-equity firm. He co-founded the Carlyle Group in Washington in 1987. It has since spread its wings globally, has assets under management worth $375 billion (June 1, 2022 figure), and has generated a gross internal rate of return of 26 per cent over more than 30 years.

Though the author wasn’t a money manager himself, he learnt a lot about investing from attending several thousand investment committee meetings. Mr Rubenstein views life as a series of endeavours to predict the future. When at a crossroad, we pick a course that we believe will yield the highest reward. Some of our calls work out well, others don’t. In investing, unlike in life, it is possible to measure accurately the payoff from a decision. These interviews are the author’s attempt to understand how great investors prepare themselves to become proficient at predicting

the future.

Another illustrious money manager one encounters is Seth Klarman of Boston-based hedge fund, Baupost. Over four decades he has earned a compounded annual return of around 15 per cent with only four years of negative returns. Mr Klarman attributes his success to applying the principles of value investing not just to stocks but also to other areas of the market, such as private investments, real estate, and structured products.

A valuable insight one gleans from the Klarman interview is that a value investor doesn’t require the entire market to be cheap to practise his style of investing. Finding just a handful of bargain securities is sufficient to build a portfolio. These, says Mr Klarman, can be found in all market conditions.

Incidentally, Mr Klarman wrote a book in 1991 called Margin of Safety, which is almost as highly acclaimed as Benjamin Graham’s The Intelligent Investor. 

Mr Klarman has never revised it. He reveals to the author that he hopes to do so one day as he would like to incorporate into the new edition his learnings from the past three decades.  

Another enjoyable read is the interview with math wizard Jim Simons of Renaissance Technologies, whose Medallion Fund has garnered over 40 per cent annual return for more than 30 years using computer-based quant investing techniques.

In the interview with Jon Gray of Blackstone, the reader learns the essence of the techniques that have made Mr Gray such a legend at structuring high-value real estate deals. 

One downside to a book such as this is that after devouring the hors d’oeuvre, the reader is left hankering for more. In the case of Ray Dalio, the reader can satiate his appetite by reading Mr Dalio’s own books such as  Principles and The Changing World Order. In Jim Simons’ case, there is Gregory Zuckerman’s The Man Who Solved the Markets. But learning more about some of the other greats who deliberately shun the limelight may require some digging around.