Richard Rainwater’s background

Richard Rainwater graduated from university as a physicist, but instead of embarking on an academic career, he took a job at Goldman Sachs on a whim. He worked there for just over 2 years and excelled as a salesman. Then he was recruited by the wealthy Bass family to set up and run a private fund to invest their fortune. In 16 years, he took their fortune from $50 million to $5 billion, or 100x.

Quotes from Richard Rainwater:

“Sometimes people aren’t convinced. I always felt I was doing the right thing, but they didn’t. I would sit and look at these industries and realize other people were seeing the same thing, but they were frozen. People with the same level of knowledge, and used to the industry, with chaos raining down on them, being frozen or crushed. They became despondent and didn’t want to leave the office.”

Richard Rainwater’s strategies for value investing

Rainwater was one of the earliest VCs (Venture Capitalist), investing in small unlisted companies. He is also known for orchestrating Disney’s turnaround by appointing Michael Eisner as the new CEO.

Here are some characteristics and tips from his strategies as a value investor:

• Read widely about different investment styles and try to learn the big ideas. At the beginning of his career (the first 2-3 years of the Bass family fund), things went badly, because Richard Rainwater lacked a clear investment framework. After he learned the basics of value investing from Benjamin Graham, Philip Fisher, and Charles Allen, among others, he did much better.
• Find a big industry that is about to encounter a big change. Preferably consolidation. Richard Rainwater did this with great success in oil rigs, real estate and hospitals within the US.
• Identify a particularly good or unexplored sector within a larger industry.
• Don’t invest alone, but find other investors to complement you.
• Set up a private investment company in a particular industry, run operationally by an expert.
• Turnarounds: Look for large, good companies that are leaders and profitable in one or more of their product divisions, then go in as an active investor and convince them to exit their less profitable or losing product divisions. (This is a common tactic among strategy consultants, most easily explained via the Boston Box.)
• Look for industries or geographies that have grown too fast (unsustainably fast) and then resulted in many bankrupt companies. There may be good takeover candidates among both companies and real estate; companies that just need more money to survive and then become profitable, real estate that can be bought up at a bargain price.
• As a VC or angel investor, you need to have rigorous guidelines, which allow you to quickly say no to 100 ideas to more easily find the company that fits your investment criteria.
• As a VC or angel investor, networking and deal flow are very important.

Perhaps the funniest thing about Richard Rainwater

He averaged a 66% CAGR on his passive investments, while he averaged a 43% CAGR on the investments where he entered as an active/activist investor.

Read about 20 other famous value investors and their strategies.