The book is rated as the best business book by both Bill Gates and Warren Buffett.
It consists of 12 chapters, with one story each, most of them from the Wall Street of the 1960s. On the surface, the stories will appear completely unrelated but the underneath the idea is to touch all aspects of the business. The stories can roughly be divided into two parts
- R&D – The story of Xerox is a company’s dangerous bet on making photocopying work
- Product – The story of Ford’s Edsel is about the failure of overhyped products
- Communication – The story of GE is about illegal price fixation and intra-company communication
- Trade Secrets – The story of Goodrich engineer leaving the company for a competitor is about the role of trade secrets
- Insider Trading – The story of Texas Gulf Sulpher is about employees ability to trade on insider information
- Public vs private sector – The story of Lilienthal is about the role a person coming from the public sector played in the private sector
- Market manipulation – The story of Piggly Wiggly is about how publicly traded companies have to face market manipulation
- Market fraud – The story of Haupt is about the role of exchange in protecting customers of the exchange member firms against fraud by those members to increase confidence in the market for the retail investors
- Market Crash – The story of the small market crash of 1962 is about the role of exchange and the mutual funds to prevent the irrational behavior from causing wide swings in the market.
- Currency crisis – The story of British Sterling’s fight against its devaluation is about the role of central banks in preventing a currency crisis.
The book also contains a general discussion on Federal Income Tax and the role of the stockholder meetings. Both of these, in my opinion, can be skipped.
Carlson and Kornei came up with basic photocopying process in 1938 at a non-profit industrial research Institute Battelle Memorial Institute, Columbus, Ohio. Carlson patented it and sold it to Battelle, who resold it to Haloid for royalty. From 1947 to 1960, Haloid spent $75M (twice its earnings) on the photocopy process, more stock issues were raised, employees were paid in stock. By 1960, the fortunes were completely turned around. The investment, not only made Xerox employees richer but produced tremendous value for Carlson and University of Rochester which invested in Haloid (now Xerox) in its early days. (ashishb’s note: This is worth contrasting with how Xerox being analogous to photocopying prevented Xerox from ever succeeding in the PC business since consumers never associated Xerox with PCs)
In 1955, Ford wanted to come out with a new compact car for the emerging middle class of the US, they did except by the time car came out it was too late to the market and the compacts had taken over. Edsel is the name of Henry’s son and that didn’t bode well with the employees either who felt that it had dynastic connotations. This was further followed by high-handedness in selecting the dealers. In July 1957, the stock market took a nose dive. It was introduced in the last quarter of 1957 with a lot of fanfare only to be criticized for its poor manufacturing quality, bad appearance, and high price. Eventually, the Edsel division was folded into other divisions and the car was removed from the market. Overall, loss to Ford was about $250M.
From 1956 to 1959, 29 companies selling heavy electrical machinery engaged in illegal price fixation. In 1961, these companies, with GE as the ringleader, were prosecuted for both civil and criminal violations. Two things went wrong, employees in sales were reminded that price fixation is illegal with a wink and employees who were engaged in such meetings (referred with code words) were being rewarded.
I receive my business guidance from the communication, oral and written, and through a more visceral medium of “impacts” – a GE manager during Senate testimony on price fixation
The actions of people in managers in GE were the impacts which influenced the thinking and taught many what the true attitude of the company is. As the senior managers tried to cut down on these price-fixing meetings, they faced another problem, employees would simply ignore such instructions thinking that what’s being communicated is the opposite. Many were fined, lost careers, and sent to prison eventually.
In 1961, A Goodrich engineer Wohlgemuth working on space suits decides to leave and join International Latex Corporation (ILC), which has recently won a govt contract for space suits. Goodrich took this to court claiming that the engineer knew too much about the trade secrets and if he joins the competitor he will leak them. ILC fought back the case. Media attention was on the case since the decision implied whether companies can enforce proprietary trade secrets from leaking or can they just steal it. The other implications were on the career of these researchers who could become a slave for life for a firm if they weren’t allowed to join the competitor. The final decision went in favor of the engineer and consisted of two arguments.
- One free bite – Every dog has one free bite before it is considered vicious. Wohlgemuth would be assumed to be not leaking secrets unless proven otherwise.
- With the number of co-workers, the engineer has, if something is leaked then there is a high chance someone will inform Goodrich.
Texas Gulf found huge Sulpher mines in Eastern Canada. As the discovery for being confirmed, many insiders bought shares. After the public announcement of the news, a director immediately called his family members to buy shares. SEC bought cases on both counts. In the first case, the judge decided that the confirmation was not strong enough, so, information was not material enough. In the second case, the judge decided that as soon as the news is made public, taking actions on that is legal and SEC is welcome to change rules for the future but not retroactively.
Public vs private sector
(ashishb: The chapter focuses too much on a private individual, Lilienthal and is not of much use except for a few beautiful quotes)
Lilienthal was heading Tennesse Valley Authority and left that to start working in the private sector, he had a great career.
Business has its man-eating side, and part of the man-eating side is that it’s so absorbing.
Making a million – I was surprised of course. It’s like when you are a boy and you try to jump six feet. Then you find you can jump six feet, now what?
Piggly Wiggly stores were started in Memphis, Tennessee. Once successful, they went in with a franchise model, when some of the franchise closed in 1922, then some players on the Wall street decide to short the share. Adamant at beating the pros at their game, the founder, Saunders decided that he will “corner” the market by buying all the stocks which were being traded and then lend it for short selling and once no publicly trading stock is available will demand that his stock is returned. Since he will be the only one holding the majority of the stock, he can charge whatever price he can for that. The plan was great, except, the pros had better connection them him. The exchange suspended the trading of the stock. And the pros figured out that many widows and pension funds are holding the stock which cannot be traded anymore. They happily sold those stock certificates. Saunders who borrowed the money to buy this stock was in the deep red (badly under debt). New York stock exchange apologized by stating that the public harm was more dangerous than keeping the southern pride alive. Saunders had to file bankruptcy and his future entrepreneurial attempts were failures.
Haupt, a member of the New York Stock Exchange, was doing Cottonseed trading on behalf of a client, Alliant. The account was not only leveraged and largest for Haupt, but it also turns out later that the collateral receipts were fake. The company was bankrupt and the exchange took a major step of ensuring that the innocent customers of Haupt, should not lose anything in the process. The exchange convinced its members to put the money, it even convinced European banks who were the creditors to let the customers get to the “whole” first. The event was lauded as confidence inspiring by major newspapers. Eventually, customers got everything, creditor banks got about 50% back.
Psychological gestures on the Wall Street work when they are neither really needed; nor intended.
In 1962, the stocks were trending downwards and the biggest theory was that the small investors were losing confidence and during the panic were pulling money out of the mutual funds which were forced to sell stocks to raise cash for redemption. What turned out is that most of the selling was due to margin calls, so, most sellers were playing the market on the borrowed money. And downward trending forced them to sell. Eventually, a fund manager spotted a deal for Telephone (AT&T) and decided to buy it, as it started trending upwards, the other stocks moved upwards as well. And the market changed from seller dominant to buyer dominant. And as the stocks keep climbing upwards, the mutual funds cashed out on the profit leading to more stabilization. Overall, mutual funds acting in their selfish interest provided stabilization to the market.
In 1964, the British pound was guaranteed to trade in the range of $2.78 to $2.82, if it is trading closer to $2.78 than Bank of England will buy it off the market by making payments in Gold, and in the reverse scenario Bank of England will accumulate Gold. But the balance of payments was against Britain and the pound was tilting closer towards $2.78. As the bank lost more and more Gold, many central banks came together to prevent the collapse of the British pound by pledging $2.85 B. This pushed the speculators back but since the balance of trade was broken, 3 years later, Britain was in the same situation, with the earlier loans unpaid for. This time the market won and the pound was devalued to $2.38 to $2.42 range. This immediately was followed by buying of Gold (or selling of Dollar) in many parts of Europe including London. It became clearer that France has a hand in this to cause the devaluation of the Pound and the Dollar. Members of the Gold Pool met, introduced many sanctions to cut down the shortage and then introduced special drawing rights for the paper gold (ashishb’s note: The book was published in 1969 before the US govt. in 1971 decided that convertibility of Dollar to Gold won’t be allowed anymore).