Letter #159: Richard Rainwater (1997)
Founder of Rainwater Inc. | Wall Street Week
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Today’s letter is the transcript of Richard Rainwater’s appearance on Wall Street Week with Louis Rukeyser. In one of his only public television appearances, Richard joins host Louis Rukeyser to discuss concentration vs diversification, market valuations, searching for value, looking for systemic changes to create disruption, oil & gas and real estate and their relation to inflation, and his predictions for O&G and RE over the next 10-15 years. He then answers questions from Louis’ panel of guests from that week: Jim Grant (Founder of Grant’s Interest Rate Observer), Brian Rogers (Chairman and CIO of T. Rowe Price), and Elizabeth Dater (Managing Director of Warburg Pincus Asset Management). Richard tells Jim about how he can take a decade long view of a highly volatile asset, Brian about the characteristics he looks for in companies after identifying a systemic change, and Elizabeth about what kinds of businesses he is attracted to because of demand factors. He then wraps up the interview by telling Louis what the most important thing the average investor can learn from him is.
Richard Rainwater was the Founder of Rainwater Inc. Richard started his career at Goldman Sachs in 1968, where he spent just two years before his former classmate Sid Bass invited him manage the Bass family investments. He was just 26 years old.
As Chief Investment Advisor to the Bass family, he was given $5mn to invest during his first year, but lost it all. Rather than cut him loose, the Bass family gave him more money. Determined to not make the same mistakes, he sought out and studied great investors such as Ben Graham and Warren Buffett, to develop a new philosophy. Then, he was off to the races, notably investing ~$500mn into the Walt Disney Company and hiring Michael Eisner to turn around the struggling company, revitalizing it. All told, over his 16 year run as chief advisor, the Bass family fortune grew from $50mn to $5bn—and Richard himself amassed a fortune of $100mn.
In 1986, Richard started Rainwater Inc., and began investing his own capital. He completed a series of notable deals, including helping George W. Bush purchase the Texas Rangers, creating HCA Healthcare with Rick Scott, and ousting feared corporate raider T. Boone Pickens from Mesa Petroleum. He also founded ENSCO International, an oil field service and offshore drilling company, Crescent Real Estate Equities. He semi-retired in the mid-90s, and handed over the reins of Rainwater Inc. to his wife, Darla Moore.
Throughout his life, Richard sought to work with talented people, and work with talented people he did. Notably, he was a part of two talent clusters—one of which he was a part of and one of which he played a key role in creating—1) The Greatest Class Ever and 2) The Bass Family Office.
The Greatest Class Ever refers to Stanford’s 1968 MBA class, whose graduates include legendary investors and operators such as Reece Duca (IGSB), John Scully (SPO), Lorenzo Zambrano (CEMEX), Jim Crownover (McKinsey), Patrick Gross (AMS), Jon Dawson (Dawson Capital), Garen Staglin (Staglin Family), and others. They kept in contact throughout the decades and throughout all their successes, sometimes working together, and showing up for each other at tributes and awards events. And for the class’s 40th reunion in 2008, they raised a record ~$50mn from 82% of the class—after having previously set records for their 25th, 30th, and 35th anniversaries. And Richard played a big role in that fundraising effort—in the Fall of 2007, he issued a challenge to Stanford’s Graduate Business School to raise $50mn, committing $50mn of his own money to match it if reached. In all, the class has raised >$100mn for the school.
The Bass Family Office, of which Richard was the first employee, Chief Investment Advisor, and architect, was a breeding ground for investment talent—thanks in large part to Richard. Over his time at Bass Brothers and Rainwater Inc., he hired or mentored a number of future financial heavyweights, including David Bonderman (TPG), Barry Sternlicht (Starwood), Eddie Lampert (ESL), Barry Volpert (Crestview), Gerald Haddock (Crescent), John Phelan (MSD), John Goff (Crescent), Ken Hersh (NGP), Roger Staubach (Staubach) Al Checchi (Northwest Airlines), Bill Oberndorf (SPO), Randy Chappel (HFI), Dan Stern (Resevoir), and more. Others who cut their teeth with the Bass family included Jim Coulter (TPG), Nicolas Berggruen (Berggruen Holdings), David Offsend (Evercore), Daniel Doctoroff (Oak Hill), Tom Barrack (Colony), Marc Lasry (Avenue), and John Grayken (Lone Star).
Richard was truly a remarkable man—for those interested in learning more about his legendary life and career, I highly recommend this two-part podcast from Rame Adi.
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Transcript
Louis Rukeyser: Now, before we meet tonight's special guest, let's see how he has conquered empires ranging from oil rigs to real estate investment trusts to hospitals to health spas, as he built The Reign of Rainwater. It all began with two friends at Stanford Business School in the late 60s. Richard Rainwater, who had grown up in Fort Worth's small but tight knit Lebanese community, though his last name reflects another part of his ancestry, Cherokee Indian, and Sid Bass, one of the heirs to a Fort Worth family oil fortune that then totaled about $50 million. With Rainwater as an investment adviser, the family's wealth reportedly increased by an amazing 80x before Rainwater went out on his own, just over a decade ago. He amassed profitable investments in such firms as ENSCO International, the world's largest offshore oil drilling company, Crescent Real Estate, a real estate investment trust whose holdings ranged from office buildings to the plush Canyon Ranch Resorts, and Columbia HCA Healthcare. As his personal fortune soared toward a billion dollars, Rainwater was back in the headlines last year, ousting T. Boone Pickens from the helm of his natural gas firm Mesa Incorporated, thereby turning the tables on a man whose own reputation in the 80s was as a corporate raider and advocate of shareholders' rights. What's next for this famously quick deciding tycoon? And can a little of his success spill over into our accounts? For some thoughts on that, let's go over now and meet tonight's special guest: Richard E. Rainwater. Richard, hello. Great that you're here. Thank you.
Richard Rainwater: Thanks. Nice to be here.
Louis Rukeyser: Richard Rainwater is quick to acknowledge that he hasn't always hit homeruns. He admits that after the first few years of investing a $20mn stake for the Bass brothers, it actually lost three of the 20 millions. But he sought advice from some of the great investors of the day and developed his winning philosophy, an effort to capitalize on what he calls major one time transformations in an industry or company. It seems to be working. Over the past 10 years, this super investor says, his personal assets have been compounding at an annual rate of 26%. Richard, in final Texas style, when you bet, you bet big. 85% of your assets are invested in just six companies. Whatever happened to the textbook advice to diversify?
Richard Rainwater: Well, I think that textbook advice is good if you want to stay rich. But if you ever want to get rich, you have to be very concentrated. It's one of the things that I realized when I began investing. Most of the great fortunes were made by people who were invested, generally, in only one thing. And in the case of who is the richest man in the world today, or the richest man in America, he clearly has only one stock...
Louis Rukeyser: Bill Gates.
Richard Rainwater: Bill Gates.
Louis Rukeyser: Of Microsoft.
Richard Rainwater: Right.
Louis Rukeyser: You think that diversification would have been bad advice for Bill?
Richard Rainwater: Well, it wouldn't have been bad advice for Bill, in the sense that Bill probably is smart enough to have figured out if he had done 10 things they would have all worked out. But when I started out investing, I needed to basically do something other than just maintain a family fortune. Because they really wanted to grow it, and they wanted to grow it nicely. And I was given that responsibility. And after those first few years of making mistakes, I focused on things that really worked. And a concentrated effort to look for these systemic changes turned out to really work.
Louis Rukeyser: You're a demonstrably brilliant judge of value. Is this overall stock market overvalued?
Richard Rainwater: I don't think it's overvalued from a capitalist point of view. From an investor's point of view that has to invest money on a quarter to quarter basis, you may be able to statistically say that it's overvalued at any one quarter. But from a capitalist point of view, we've turned loose an extra 2-3bn people to play unfettered capitalism. And that world is producing unbelievable opportunities for American companies. We clearly are at the zenith of that opportunity with American corporations. And they're taking advantage of it.
Louis Rukeyser: Are you still able to find values in your own search?
Richard Rainwater: Well, I really don't look for values as much as I look for systemic changes--big major changes that are occurring in an industry.
Louis Rukeyser: Give us one example of how you've done this.
Richard Rainwater: Well, let me just run through a couple. The advent of the VCR and cable put tremendous demands on software in the entertainment business. The advent of cellular telephone created a brand new major industry. Hurricane Andrew wiped out the catastrophic reinsurance business. DRGs changed the way healthcare and the hospital costs would be done. The upheaval in the real estate business created great opportunities to create for the first time an industry out of real estate versus more like a cottage business that it had been up until that time. There are these changes, and right now what I think is the biggest change that's going on, a major systemic change, is something which is kind of unseen. But the world is slowly growing into its resource base that it had overprovided for during the 80s. And I believe all the people that are now playing unfettered capitalism are going to ultimately have dramatic impacts upon the entire world's resource base.
Louis Rukeyser: Two of your big areas of investment, oil and real estate, have been traditionally tied to inflation. Is an inflation forecast part of your investment there?
Richard Rainwater: Uh, not really. I would do--make those investments without an inflation forecast. If inflation happens to come along, I would also make those investments. So as far as I'm concerned, it's a win win. You have, in both of those cases, commodities. Oil and gas is a commodity. Real estate's really a commodity. And you have them both on what I consider to be a major change--unexperienced in my entire business lifetime, what's gone on in those two industries. And what is going on and what will be going on in those two industries over the next 10-15 years.
Louis Rukeyser: Seems to be very positive at this point.
Richard Rainwater: Very positive. I have half of my net worth, basically, in those two industries. And that was a shift that I made out of a whole group of industries, which included technology companies and a lot of other things. And I feel very comfortable that I'm kind of set for the next, hopefully, 10 years.
Louis Rukeyser: Let's turn to our panel, starting with our undiversified, don't be so sure: Jim Grant.
Jim Grant: Richard, people have looked at the price of oil go from $26 a barrel to $19 a barrel, and wondering whether it's gonna go to $14 a barrel. Is this a new age for oil in that it's no longer going to be so cyclical? Or why can you be so bullish for 10 years if something has had such volatility?
Richard Rainwater: Well, I hope it goes to 14 or even lower, because that'll give us more opportunities, hopefully, to continue to expand our businesses at low prices. But let me just give you, real quick, 30 second look at the world. We've gone through a world that had 30% of the world production shut-in in 1988 to a world that at the end of 1997, should have 5-6% of the production shut-in. By 1999, it's my belief that ultimately all of the shut-in production will be on-stream, and the countries that have control of the market then will change dramatically from what they've been in the past. The past has always been Saudi Arabia, Kuwait--friends of the US, friends of the West. I believe we're getting ready to have an environment where friends, as well as enemies, of the West will have as much power in pricing that commodity. Now, in the meantime, while you get there, you'll still have prices go up and down. And the price did get down to $9, $8 or $9, I guess, in the summer of '86--it's been sawtoothing its way up ever since then. And I believe a world that--once again, all these econometric models need to have available hydrocarbons for all of these worlds to play this game--and I believe we're right at the verge of finding out that we will have some limits to growth. And those limits will be very real, and I have a feeling that hydrocarbons are going to be one of them.
Brian Rogers: Richard, once you identify a sector, an industry, or a field going through major change, are there one or two characteristics you look for to to help you identify how to play one of those trends?
Richard Rainwater: I wouldn't say they're one or two characters, Brian, because different businesses and different systemic changes make for a different kind of equation each time. When Hurricane Andrew came and wiped out the catastrophic reinsurance business, that's certainly something that's different than when you have something along the lines of a healthcare industry that has the government starting to try to reduce costs and the implications of that. And so you have to take--and what I do is, I take a tremendous amount of time and effort to study each individual industry separately. Now, the common characteristic of it all is, I try to build, in the midst of that change, the biggest and the best company of its time. And I've done it--I've been very fortunate. I mean, I think a person is very fortunate to experience it once in their life. I've been able to do it now, 7, 8, 9 times. And it doesn't come with any set formula.
Elizabeth Dater: Richard, in terms of your thesis about natural resources, I'm really intrigued with this. What are some of the areas that a builder or rebuilder of businesses such as yourself might be attracted to because of its demand factors?
Richard Rainwater: Well, I want to have domestic resources. I actually believe that we're going into a world where the countries that have most of the natural resources will start to husband those resources, and even maybe hold those resources off the market. I also believe we're going to go into a world where US-based, or foreign countries operating in some of these other places, may in fact find themselves in the same situation that they found themselves before, where the country simply take the resources away--give them a check, tell them that's what is. So, I want domestic resources. I want long life resources that are domestic resources. And I want them in the hands of aggressive, entrepreneurial-oriented managers that want to take advantage of what Jim pointed out--these swings. And as these swings come along, the opportunities to buy other companies and buy their assets at attractive prices are there. And I want the kind of management that, once again, thrives and thirsts for the opportunity to take advantage of those things. And fortunately, in Pioneer, which is a combination of Mesa and Parker Parsley, we have that type of management.
Louis Rukeyser: Richard, we have time, really, for only one more question. You're not an investment advisor, you're not a money manager--you invest for your own account. What's the most important thing that the average investor could learn from your success?
Richard Rainwater: Well, probably the most important thing is that capitalism is the only game. It's the best game. We pioneered it in this country. There's more information about capitalism in this country than the rest of the world put together. The great asset allocators that run mutual funds are available to you. It's a very easy and simple thing to basically play that game, and you ought to be doing it.
Louis Rukeyser: Thanks very much, Richard Rainwater. Thanks for our panel… this has been Wall Street Week. I'm Louis Rukeyser. Goodnight.
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