How losing $330 million taught Blackstone Group CEO Stephen Schwarzman a valuable lesson

Growing up in Philadelphia, Stephen Schwarzman pressed his father to expand the family’s curtains and linens business. He saw potential in opening more locations.

His father declined, but the younger Schwarzman continued to embrace bold thinking. Audaciousness became his guide star. It’s as easy to do something big as it is to do something small, he likes to say.

Schwarzman went really big. After graduating from Yale and getting an MBA at Harvard, he got a job on Wall Street, eventually landing at Lehman Brothers, where he became a managing director in his early 30s. In 1985, he and a partner started the Blackstone Group, an investment firm that is worth about $63 billion.

Schwarzman, now 72, ranked 61st on last year’s Bloomberg billionaires index. He’s also a trusted adviser on trade for President Donald Trump, despite refusing to endorse him during the election. In fact, he called Trump the P.T. Barnum of America.

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Last year alone, Schwarzman made eight trips to China on the Trump administration’s behalf. He remains one of the few free-trade advocates with a direct line to the president.

Schwarzman delves into his life story and his dealings with China in his new memoir, What it Takes: Lessons in the Pursuit of Excellence.

The book, which vaulted up Amazon’s bestseller list after coming out Tuesday, is a quick and engaging read for anyone interested in how the rich got that way. Like many business memoirs, it glosses over controversies — Schwarzman once apologized after equating President Barack Obama’s plan to raise a tax that affects private equity fund managers to Adolf Hitler’s invasion of Poland — and doesn’t spend much time on some of the headier issues of the day like income inequality.

But Schwarzman lays out some of his early shortcomings, including how he didn’t get the best training in his first job on Wall Street. He emphasizes that he has never stopped learning. In an interview with the Tampa Bay Times, he said he’s a better investor and leader now than he was in his 30s because he’s always trying to learn something new.

“It’s easy to think you know everything when you’re young,” he said.

He also shows the readers how some of his mistakes helped him turn Blackstone into a better investment firm, including a $330 million blunder early in Blackstone’s history.

In 1989, Schwarzman was trying to decide whether to take over Edgcomb Corp., a maker of steel parts for planes and cars. A young banker who had recently joined Blackstone championed the deal.

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A partner with the firm told Schwarzman that the deal was a dog. The company’s profits were propped up by an increase in steel prices, he argued.

“It’s a disaster in the making,” the partner said.

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But Schwarzman thought the young banker made the better argument and went ahead.

Months later, the price of steel dropped. Blackstone lost millions. Schwarzman was summoned to the office of the chief investment officer of Presidential Life, an investor in Blackstone’s fund. The executive screamed at Schwarzman asking if he was stupid or incompetent.

Schwarzman felt like crying. Instead, he resolved never to let it happen again.

He and his partners instituted a comprehensive and transparent way of assessing deals. Less emotional and more “scrupulous with the facts,” he calls it. Everyone involved has a voice including the junior analyst crunching a spreadsheet, and they are expected to speak up about any risks.

He equated the new approach to a basketball team that hangs onto the ball until there’s a wide-open, close-range shot.

“We would obsess about the downside of every potential deal until we were certain we could not miss,” he wrote in the book.

It’s no wonder that his 25 rules of success include:

“No one person, however smart, can solve every problem. But an army of smart people talking openly with one another will.”

As for China, Schwarzman isn’t optimistic that the two sides will ink a comprehensive deal anytime soon. They remain at odds over their visions for a fair playing field for emerging technologies like artificial intelligence and biotechnology.

That said, he thinks tensions could ease. China knows it has had many advantages when it comes to trade over the past 40 years. The country benefited from tariffs, central planning and strict requirements that forced foreign companies to share intellectual property if they wanted access to the massive Chinese market. The setup has allowed China’s economy to grow astonishingly fast, but it has come at the expense of Western economies, including the United States, he said.

“That leads the developed world to say, ‘It’s working for you, but not for us,' ” he said. “Approached that way, they understand that they need to change. There needs to be a rebalancing.”

A few more of Schwarzman’s insights from the interview:

On failure — “Most people pretend those dropped balls didn’t happen. That’s the exact opposite of how to deal with it,” he said. “Look failure in the face without getting emotional about it. That’s how you learn from it.”

On writing another book — It doesn’t sound likely. He said he enjoys public speaking and finds it easy to talk without using notes, but he described writing as “difficult and time-consuming.”

On what he would tell his 23-year-old self — “I might ought to be a little easier on the people who couldn’t keep up,” he said. “Be a bit more patient. More inclusive.”

On his future with Blackstone — He’s 72 but he feels 38, he said. He plans to keep working and points out that his grandfather worked at the family shop until he was 89.

“Work gets easier as the firm gets better,” he said. “And I don’t golf.”

Bio box:

Stephen Schwarzman, 72

Job: Chairman, CEO and co-founder of the Blackstone Group, a private equity investment firm.

Net worth: Almost $18 billion.

Born: Philadelphia.

Family: Two children from his first marriage. He lives with his second wife in New York City.

Education: Bachelor’s degree from Yale; MBA from Harvard Business School.

Early career: Worked for Wall Street firms Donaldson, Lufkin & Jenrette and Lehman Brothers.