Source: "Hard Lessons" Podcast
Compiled by: Felix, PANews
Rick Rieder, BlackRock's Global Chief Investment Officer of Fixed Income, recently appeared on Morgan Stanley's "Hard Lessons" podcast, sharing his insights on investment, liquidity, and discipline. At BlackRock, Rick Rieder helps manage up to $2.7 trillion in assets across global bond and multi-asset markets and serves as the chairman of BlackRock's Wide Investment Council.
In the conversation, Rick Rieder explained the drivers of long-term returns and why it is crucial to seek perspectives that differ from market consensus. PANews has compiled the highlights of the dialogue.
Host: You've been at BlackRock for 17 years, which is a long time. How has this journey at BlackRock felt?
Rieder: I remember back in 2009, when I was still running a hedge fund, all my partners were discussing whether we should join BlackRock. I remember saying that this place could become the center of finance, but I had no idea the company would grow to the size it is today. We happened to join just before the acquisition of BGI and iShares, which somewhat reshaped the ETF industry. Think about it, managing over $14 trillion in assets now, whereas when I first joined, we were only a small part of that. It has become an incredible place, so the experience has been very interesting.
Host: You just mentioned the word "center," which I think is very apt. When you were managing only billions of dollars, did you ever imagine that one day you would be talking about managing trillions of dollars?
Rieder: I serve as the chairman of the board of a charter school in Newark, New Jersey, and once gave a speech about the scale of assets we manage. I asked the audience, "Does anyone know how many zeros are in a trillion?" Someone answered, but I actually didn't know myself at the time. I had to stop and mentally count the zeros. It was quite funny, but when you think about such a massive scale, it's truly incredible. Of course, in the portfolios I manage, we have an almost obsessive focus on precision in every detail. So, managing at this scale doesn't feel out of control; it feels very manageable.
Host: Do you think pure scale is one of the secrets to your success? What exactly is the secret to success?
Rieder: Scale does bring some benefits, such as the ability to see massive capital flows across different asset classes and observe thousands of various scenarios. Statistically speaking, being able to see so many different things naturally increases the odds of success. By the way, it's not that all my decisions are right, or even many of them; the key is having the ability to observe and judge, saying, "Okay, this makes sense," and to identify relative value in places you might not even expect. It's like being able to piece all the fragments together. It gives you the ability to truly try and effectively complete the puzzle.
Host: I'd like to shift the topic a bit and try to glean some wisdom from you, delving a little into the process you've gone through when reflecting on your career. There have been times when your views contradicted the consensus, but you turned out to be right.
Rieder: Maybe I should first clarify what you mean by "wisdom." I really don't think I should be described as having wisdom because I feel everything depends on doing a lot of work. At least for me, there's no innate unique skill. I just try to piece all the fragments together and then maintain a firm belief in it. Some people, if others don't believe them, are very confident in doubling down, but I'm not very good at that. However, I think what I do well is observing things like technology. I'm a super geek when it comes to technology. Whenever new technology is released, I have to be first in line. My wife always laughs at me; I have to run to the store, stand in line, be with the crowd, and I have to understand what it is. I just love technology. I'll never forget when electric cars first came out. Many people said, "This won't work; the batteries are too expensive, they can't compete, there are so many entrenched giants in the traditional car industry, this absolutely won't work." I remember doing all the research and realizing it wasn't really a car business at all but an energy business. You have to consider whether it's efficient? Can you create real economies of scale around it? I remember sitting alone in a conference room, feeling like the only fool. By the way, I often don't mind expressing my firm beliefs, but I tell you, getting in early on these things is very important. I remember the first test drive; my feeling was, "Wow, it's fast, clean, quiet—it's a better product." I had that feeling with many new things, like when the first Mac computer and AirPods were released; I thought, "This works well; it's very different." But for me, the next step is to understand: What is the total addressable market (TAM) for this? How big is the market size? How do you reduce costs over time? What will the backend cash flow look like?
Host: You just described a very disciplined and humble process. But sometimes going it alone is also a lonely process. When everyone else says you might be crazy, what do you do in those moments?
Rieder: I'd say 99% of the time, it's thanks to teamwork because everyone tends to follow the consensus, myself included. When there are people who share non-consensus views and are different, you often check with them repeatedly, asking yourself, "What did we miss? Where did we go wrong?" Then I like to read a lot of analysis from people with different views to see why they think it makes no sense. So I tend to communicate with those who agree with me, but for those who don't, I try to study hard and then build my confidence.
But as I said before, over time, I've learned that we are not in the business of having to be right; we are in the business of generating returns for clients. The reality is that the market's perception can be wrong for a much longer time. I remember we all learned about the "efficient market hypothesis" in school; I actually think they should throw that theory out because it's completely detached from the truth. I think the market is wrong often, but you have to survive because by the time the market theoretically corrects itself, your capital might already be depleted. So I try to stay in the market. When people oppose me, I'm not very good at doubling down because that hurts confidence, but I try to hold on to the positions I have and then think more deeply about my ideas. It's like telling myself: This will definitely work.
Host: I think at least Keynes said, 'The market can stay irrational longer than you can stay liquid.' As a sell-side analyst, asking this might be a bit self-serving, but do you find it more helpful to read articles from people who generally agree with you to confirm your thoughts, or to seek out those who disagree with you to stress-test and find where you might be wrong?
Rieder: The most mature answer would be: challenge yourself with different perspectives, but I really don't do enough of that. There are people I respect and trust, and I like to read their analysis whether they are right or wrong. But when the situation is very contrary to consensus, I try to read a lot from those who share the same views.
Everyone tends to move together. I think social media has intensified this phenomenon. Everyone is going in the same direction, and when you get older and have been in this business for a long time, you realize there is a moment when everyone is moving, prices are changing, and then you realize, "Okay, now the move is over; it's time to reverse." I think the market has largely become a casino mechanism now; you see everyone crowding on one side, and as a contrarian going against the consensus, I think the profits become richer. Especially when the news flow is very intense, it becomes a pretty good trading strategy: when the market leans to one side, you short it; when it leans to the other, you reverse again. You realize you are stepping on the track of the trend.
Host: But I have to say, if the entire market is already on one side, it's harder to make money this way because the price has already reflected everything. So what do you plan to do? Maybe sometimes you've scrutinized all the details, but the trade still doesn't work out; maybe the consensus is right for a reason. When you think back on those experiences that didn't work out, what comes to mind first?
Rieder: Those trades I got wrong immediately come to mind because I feel you learn much more from mistakes. People tend to forget or hope that the result of a lifetime of training is being right more than wrong. But I remember about 20 years ago, not long after I graduated, in a bond coupon trade, I thought I was definitely right and wanted to buy more. It was an extremely painful lesson: the whole world thinks you're wrong, you have to exit, or you have to reduce your position size so that one security doesn't ruin your entire career. This was my first lesson: You must manage your risk; you must manage your position size. This is a small industry, and everyone can sense when you're in trouble. It was a very bad situation, and it's a rather brutal industry; when people feel you're on the wrong side, they will pressure you.
I will always remember Peloton (the fitness equipment company). I was one of its earliest investors; it was incredible at the time. I watched their technology develop, then the pandemic hit, which was a lucky situation for them, and the stock price exploded. Then, you become even more immersed in its ecosystem. This is also one of those situations that makes you feel uncomfortable: you feel your view of it is correct, but suddenly it starts to reverse, and many people discuss why it's falling. I learned a few things in this process: How do you manage cash flow? The company grew too fast; people said it was because of COVID, maybe partly, but "cutting losses" is a very good habit. And I have a theory: if you are right three-quarters of the time, and then you make a mistake, well, it's time to cut losses and move on. Because in this industry, just one mistake can hurt you in an extremely extreme way. So, I firmly believe this, especially in bonds: Diversify, ensure you have liquid assets. It's okay to have a 65% or 60% accuracy rate. For illiquid assets, a 70% accuracy rate is good. I really feel that as long as you are right more often than wrong, it's okay. It's like running a casino.
But in the stock market, the reason I remember those major mistakes so vividly is that in stocks, you experience explosive profits and crashes, and these are what you must think deeply about. You know, you have to nurture the investments you profit from and handle those you make mistakes on. Make sure you keep your positions at a size where you can afford the losses.
Host: For the Peloton trade, do you think you were fundamentally wrong, or was it just a timing issue?
Rieder: Frankly, I think the company could have changed course, changed direction, but they didn't. I think they were too slow to change course. As someone with a credit background who later ventured into stock investing, the most important thing I learned is: in credit, you look at cash flow, interest coverage, collateral, and all these metrics; for companies, you think about their business model and how they generate cash flow. But one thing I learned is: The people managing the company are extremely important, not just the individual but the team running the company. Because companies always evolve, industries evolve, technology evolves, and you must know how to transform. Some of the most successful companies were completely different when they started. Then they transformed and entered a field full of opportunities, and what they did initially might have been a good idea at the time but later had to change. Now, I spend more time talking to CEOs, getting a feel for whether they understand data? Do they understand the business? Are they good operators? For me, that's the key to everything.
Host: What gives you the ability to sift through these details to make such distinctions?
Rieder: In technology, some people have sharp insights and can think about where the world is heading, then adapt their business to it. But there are also people who, as you said, are disorganized and chaotic, trying to do too much or chasing hot trends, only to fall behind. Over time, my research has found that there are some very unique people who are very good at positioning their company advantageously before the wave hits. Some people are at the top of the wave and can talk big, but the ones who can truly understand what is happening in the chaos and know how to adapt are the key.
Host: I think this skill is actually universal across many different fields.
Rieder: That's true. But I'll tell you one thing I've done very poorly throughout my career, and that's reading. There is too much analysis and research, too many smart things to read. If we divide the work and say, "You read this, you read that," I feel I must read as much as possible myself. I hold meetings every month; I think we have a great team, we brainstorm, and then I have to lock myself in a room and figure everything out personally. I hope AI will do this work for me in the future. But I guess I will still use AI to help me clarify my thoughts, but it will allow me to absorb more information faster.
Host: Yes, a prediction I firmly believe is that AI will present all the information to you, but you still have to go through it yourself.
Rieder: I think that's right. The decision-making process should become more efficient because I find that as humans, you can only think on a limited number of levels. When I look at our portfolio and think about risk, if you can think multi-dimensionally and use technology for stress testing, scenario analysis, and combining different parts, I think that will be very valuable.
Host: When you look back on your entire career, what were the most painful lessons?
Rieder: For me, the financial crisis is absolutely the most painful lesson, ranking first, second, and third. Because I started a hedge fund before the financial crisis. Imagine financial assets; when all assets fell with high correlation, and we also used some leverage, suddenly everything was moving down in sync.
Host: You launched the hedge fund during the financial crisis?
Rieder: Or a few months before the crisis, I actually thought it was a good time because things were becoming volatile, interesting, etc., but I didn't anticipate the chain of events that followed. We started off okay; business was good, everything was smooth, and then suddenly, the whole world was disrupted in a way I found incredibly, extremely unexpected (including policy directions, etc.). I will never forget the stress of that period. Some days, when I walked into the office, down a long hallway, I remember I would say to myself, "This is going to be very tough, this is going to be very tough." I tried to psych myself up until I reached the door, but the fact is, it was still very tough. I will never forget that period. But as you said, it taught you a lot and changed how you think. To this day, I still think about liquidity, leverage, and tail risk. People always think that extreme tail risk will never happen. But I think, what if that extremely unexpected situation occurs and knocks me out? Of course, I also have to fight this fear throughout my career, telling myself, "Okay, that probably won't happen again tomorrow. We have to be in the investment business, we have to generate returns, we have to take risks." So you have to think: Where is my escape hatch? For almost every asset, every position, every portfolio structure, how do I think about the exit strategy? If you know what your exit strategy is, know where your escape hatch is, it helps you plan, and once something happens, you can execute Plan B. That said, we are in the risk business. I have to say, I like stress, though not too much, but I think anyone in the investment industry must enjoy stress.
Host: Regarding crises, perhaps the extreme risk version, it lets you see exactly how bad things can get. This is often attributed to a quote from Churchill: 'Plans are worthless, but planning is everything.' I feel like this is your daily state.
Rieder: Absolutely agree. You'll find that in the investment industry, a large part of what drives valuation is emotion. Markets usually fall five times faster than they rise. People make money slowly but lose it extremely quickly. Look at the moves in some commodities recently; money is made slowly, and then suddenly, "bang," it's gone. You experience situations where suddenly a piece of news or an event completely disrupts your investment logic and structural positioning. So, investment is not just about judging whether an asset makes sense; it's equally important to predict how people will interpret that asset two or three months later. This adds a bit of psychology, which I learned poorly in school but picked up some in investment practice.
Related reading: Conversation with a16z Co-founder Marc Andreessen: Founders Better Not Introspect; Human Response to New Things Always Comes with Panic
