Just two years into starting the Blackstone Group (BX), Stephen A. Schwarzman made a colossal misjudgment that could have ended his investing career.
After emerging from it, he developed an investment process that is still used today, the mogul told Yahoo Finance.
In 1987, Schwarzman approved a $330 million takeover of steel distribution company Edgcomb. Yet as if on cue, steel prices tanked soon after the deal closed, causing massive losses.
The deal soured so badly that one angry investor summoned Schwarzman to Nyack, New York, just to berate him. In an interview, Schwarzman called the situation one of "the defining moments" of the firm and his career.
"We basically bought a company where two partners disagreed," he said. "One thought it was going to be a big winner. The other one thought it was going to go bankrupt," the billionaire investor told Yahoo Finance.
"I picked the first partner. We didn't have any processes. We were just sitting in front of my desk. I thought I was King Solomon at the age of 38. Guess what? I wasn't," he added.
Fast-forward to the present day, and Blackstone has grown into the world's largest private equity firm, with more than $545 billion in assets under management.
But that near-catastrophic failure turned into a teachable moment for Schwarzman, which prompted him to create a new investment process that involves workers at all levels.
Ideas are submitted in a written memorandum that's delivered two days before a meeting, so people "don't' get hoodwinked by somebody flipping through charts," Schwarzman said.
When the group convenes to go over the investment, everyone at the table must participate by pointing out risks, the probability of those risks, and how bad they might be.
The process helps the presenters “realize that they are basically going to be intellectually filleted every time they come in the room, then it's never personal because it happens every time,” he explained.
“And it makes the team be much better prepared. And it makes everyone who is at the table much better prepared,” the billionaire added.
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.
