How and When a Great Fortune Gets Made (Tech & People vol #5)
I’ve been reading this spectacular book about Rockefeller by Ron Chernow called Titan, which you should totally read too. As an aside, Chernow is the great biographer of our times, not Walter Isaacson. All of his books are freaking awesome. You should read him not me.
But where was I? Ah. Rockefeller. The greatest of the Robber Barons. On an inflation adjusted basis, the richest man or woman who ever lived. At least twice as rich as Bezos or any of the other contenders. He is so interesting for so many reasons, but the main reason is of course the fact that you, reader, and I, and almost everyone else - we also want to be rich. We are just not as good at it as Rockefeller was. So it’s interesting to get into the details of how he did it.
John D.’s rise and rise has some really interesting lessons to teach us about how a really great fortune gets made. Let’s go over them now:
Lesson 1: A gamble needs to pay off
One of the common patterns for getting really wealthy is to spot an early trend, often a new technology that comes to be right in front of your eyes, and to be the person who corners or brings to market the new technology. This is what happened to Rockefeller and the new technology was Oil, or more specifically Petroleum. Not for cars, mind you - for lighting. Cars were still half a century away.
Rockefeller was very clever about a lot of things. First, he realised that the real money was going to be made refining oil, not drilling for it. Then he was the first person to grasp the microeconomics of the petroleum market. When people drilled a lot and were lucky to strike a lot of oil, there would be an over supply and low prices, and refiners would go bust. The genius (some would say evil genius) of Rocky was that he had the bright idea of making acquisitions and deals so that he could have some control over supply. Long before the Saudis, Rocky was telling the world how much Oil it could have, and for how much.
But in order to do all this, he had to make massive investments in plant and equipment, which was necessary for him to become the refiner with the lowest cost basis, which he then used to threaten his competitors into selling their companies to him. He would simply undersell them. That massive investments (mostly with borrowed money) were the foundation over which the whole house of cards was built.
What we sometimes forget is that when Rocky made those investments, the whole world pretty much had one working oil well, somewhere in Pennsylvania. Nobody had any idea how much oil was in it, or how long before it dried out, or how many more such wells could be drilled. Rocky gambled that there would be more oil, which no geologist at the time was willing to underwrite. If he had lost the gamble, he would have been lost to history as a bankrupt small time Cleveland commodity trader. As it happened, the gamble paid off.
When we read history or go to some museum named after a fabulously rich dude (alas, they have mostly been dudes), it has an element of survivorship bias. Up on the building, we see the name of a gambler who called the coin toss right.
Lesson 2: You have to get an early start
When Rocky (He would of course mind greatly my calling him that, but I don’t think he will be reading it) was 15, he went out and got a job to support his family. Being a driven accounting-obsessed man of business, he eventually got a job in the commodity trading business and worked his way up. He was still a teenager when he set up his own firm and started making money for real. And he reinvested. The Buffet story is similar in that Warren also started investing pretty early and with a similar single-mindedness. Getting an early start means you have more years to compound your wealth. And you know what Einstein said about compounding…
Lesson 3: The Philanthropy is not just an act
Rocky would go on to have this long career driven by an ideology he called cooperation and we call monopoly or trust. We also call it illegal. But no one is a villain in their own mind, and certainly Rocky thought of his business practice as correct. By ensuring cooperation between oil refiners (which he did by owning most of them) he made sure the market and supply were stable and actually pretty affordable. The customers benefited by having access to the commodity at a good price, if not the best price that competition would have produced, and many advantages besides. And ultimately the plan was always to use the money wisely to benefit the greater good. The Rockefeller foundation has put the oil profits to work remarkably well, as far as these things go. You could cynically say they still kept a lot of ill-gotten gains to themselves, but the point is - the philanthropy is not greenwashing, it’s not a tactic to lull the public. The plan was always to make money and then give it back.
Lesson 4: Don’t under-estimate random chance
John D. Rockefeller sr. has a forgettable boss when he was still an employee, who kept raising his pay to recognize his great performance. One year Rockefeller asked for a raise to a salary of $800 a year. The boss would only go as high as $700. Rocky quit and started his rise to greatness. IF that firm caught a break that year and could afford $100 more on the payroll, we might never have had Standard Oil, and that nice part of New York City would be named some-other-name center.
Lesson 5 - You don’t do it by playing nice
If you ever meet a nice billionaire, take a selfie and send me. I don’t think those who make it are ever nice people. Rocky certainly wasn’t. He had manners, faith, good grace, much generosity. He was by all accounts a magnificent employer. People loved working for him. But there are ample examples showing he didn’t play nice. He was not above forcing smaller refiners to sell to him by driving them out of business first, and then making a generous offer, much more than the business was worth. In the decade or so of consolidation, he left many people bitter. Some were bitter because they took cash in stead of Standard Oil shares for their compensation. But others had good cause to be bitter.
There’s more in the book. Go read it or listen to the great Audible edition. We 21st century folks like to think we invented things. But nothing is new. Before any tough business person did anything, Rocky did everything there is to do in business. I for one am not sure Teddy Roosevelt was right to take him down. But that’s for another day. Oh and by the way, he also lived to be 97, in a world that was medically less advanced than today. It’s good to be king, if you are willing to pay the price, have what it takes, and more than a bit of luck.