Book Excerpt: ‘How to Invest: Masters on the Craft’

I figured my Little League All-Star skills at shortstop were unlikely to translate into a major league career, so I decided to focus my efforts on improving my academic ability rather than my athletic prowess. Good prediction.

I figured there was no way the Colts in my hometown of Baltimore could lose to Joe Namath and the up-and-coming New York Jets in Super Bowl III in 1969, so I placed a very large bet (for me) on the Colts. Bad prediction (and my very last sports bet).

I thought that the private equity world would become more attractive and that it would be possible – with the help of talented investment professionals that I could recruit – to build a global private equity firm out of Washington. Good prediction (maybe my best ever).

I figured that Mark Zuckerberg’s company, which he started while he was a student, wouldn’t grow beyond its college campus roots and therefore wouldn’t be an attractive investment for me. Bad prognosis.

I thought Jeff Bezos’ book start-up on the Internet couldn’t possibly beat Barnes & Noble, and I told him so when we first met in his cluttered first office in Seattle, and later decided to buy our Amazon stock as soon as possible for sale . Bad prognosis.

Whether someone has predicted life events well or badly can be judged differently by different people. In truth, there is no single, universally accepted standard for measuring how successful someone has been at predicting and responding to the future.

In this respect at least, the investment world is very different. The ability to predict the future and take preparatory action is quite measurable. In the investment world, making a profit—more or less depending on the type of investment—is the essence of investing.

In seeking profit, an investor is actually making a prediction about the future – the desirability of owning a particular asset (stock, bond, house, currency, etc.) in the future based on the likely future performance of the asset. Will the company acquire new customers or invent a desired product? When the investment is made, will the economy be strong or weak? Will interest rates be higher? Will climate change affect asset values? Will the competition be less than expected?

In other words, are there possible risks that could prevent the investor from making an investment work and thus achieve the desired result? And how big are these risks?

In life there are always risks to be assessed, but the consequences cannot always be accurately assessed. When it comes to investing, the consequences can be measured fairly accurately.

While investing today is a much more sophisticated process of predicting the future than in the past, the process of investing is centuries old, although back then it wasn’t as sophisticated by today’s standards. For as long as there has been money, or something equivalent, individuals have sought to take steps that will give them back more than what they have invested. In the United States, the land was basically started as an investment. Settlers in Jamestown, Virginia arrived in 1607 because their financiers in England expected the settlement would eventually return many times the sums invested in bringing the settlers there. That didn’t turn out to be a huge investment for the original backers.

For the past half century, Warren Buffett has been the gold standard as an investor and therefore as a predictor for the future. He initially bought shares of Berkshire Hathaway for $7.50 per share, and over the past sixty years, the stock price has appreciated at an annualized rate of 20%. Others have made more money outside of the investing world. Others have achieved better returns on investments over shorter periods of time. And still others have achieved more visible and spectacular investment returns on specific investments. But no other investor has achieved more over a longer period of time. Berkshire Hathaway now has a market value of $761 billion as of April 2022. With that, one could say that Warren Buffett is the best long-term predictor of the future. Because that’s basically what he’s been doing all these years.

I have interviewed Warren many times, as have others, and have always learned something new from him by interviewing him or reading other people’s interviews. These interviews got me thinking about the views of other big investors – how could they predict the future in their own investing space and how did they execute on those predictions well or not so well?

That prompted me to attempt to interview some of America’s top investors to assess how they are preparing to predict the future and act accordingly in their own specialty. The result is this book, which is a summary of those interviews, with some of my own thoughts on each of the investors and their investment types, as well as some of my perspectives on investing. As with my previous books, the interviews have been edited with the interviewee’s permission for length and clarity.

Great investors share a number of skills and attributes, as I will discuss. However, they also have skills and attributes that are unique to their particular investment space. A great venture investor may not have everything it takes to be a great distressed debt investor, or a great real estate investor, or a great cryptocurrency investor.

So I thought it would be helpful to have leaders in many of the different fundamental investment areas to give a reader a meaningful sense of the different skills and attributes required for different types of investment areas. I’ve interviewed people like Jon Gray, who built the world’s largest real estate investment firm in Blackstone; Seth Klarman, who has long been one of the most respected value investors in the country in his leadership at Baupost; Michael Moritz, who helped make Sequoia perhaps the most successful of the big venture funds over the past five decades; Mary Erdoes, who has led JP Morgan’s wealth management business to a global leadership position; John Paulson, whose bet against subprime mortgages between 2007 and 2009 became known as “the biggest trade” in Wall Street history; John Rogers Jr., whose dedication to thorough stock research led him to build one of the largest African American-owned investment firms; and Jim Simons, whose mathematical genius enabled him to pioneer the use of “quantitative” investing strategies.

All of these people, along with the other great investors interviewed for this book, also have interesting life stories and investment approaches that I have tried to highlight in the interviews. I have also tried to show through a series of interviews that the investment industry – long the domain of white males – is changing and various investment leaders are now taking their rightful place in the investment world.

But as with my previous books, the interviews are really appetizers, which in this case are meant to pique a reader’s interest in learning more about that particular investor and also about that type of investing.

Out of How to Invest: Master Craftsman by David M Rubenstein. Copyright © 2022 by David M Rubenstein. Reprinted with permission from Simon & Schuster, Inc.