Les Schwab (Charlie Munger recommended this book)

1. 0:00 – 1:50

   Why Revisit Les Schwab: Munger's Recommendation

   1. DSDavid Senra0:00

      I wrote this in November and December of 1985. I did write this 100% with my old 40-year-old typewriter. I didn't have a ghostwriter. I wanted it in my own words. I hope to pass on some of my theories of business to our people, and I hope these theories are used in our business for as long as the Les Schwab company continues. Should we fail to follow these policies towards customers and employees, I would prefer that my name be taken off of the business. There could be some interest in this book with people who are interested in business. If so, you're invited to read it. I hope in some way this book might help you in the business world. If you are not interested in business, this book will bore you, and if I were you, I wouldn't waste my time reading it. That was an excerpt from the book that I'm gonna talk to you about today, which is Les Schwab Pride In Performance Keep It Going. It is the autobiography of Les Schwab. I wanna tell you why I decided to reread this book. The first time I read this book was four years ago. I was going through all of Charlie Munger's book recommendations back then, and he said something that was fascinating, and he said it at the Berkshire annual meeting. And he said, "If you wanna read one book that will demonstrate really shrewd compensation systems in a whole chain of small businesses, read the autobiography of Les Schwab, who has a bunch of these tire shops all over the Northwest. And he made a huge fortune in one of the world's really difficult businesses by having shrewd systems, and he can tell you a lot better than we can." And so last week as I was going through the new Stripe Press edition of the updated and abridged, uh, version of Poor Charlie's Almanac, in one of the talks Charlie Munger actually analyzes what caused the success of Les Schwab based on his reading of the autobiography. So at the very end, I'm gonna give you Charlie's interpretation of the book that you and I are gonna go over right now. So let's go ahead and jump into the book. As you can probably tell from that excerpt, that came from the forward of the book. Les' personality jumps off the page. The whole book is like that. He just speaks very clearly and directly. So he says,

2. 1:50 – 8:08

   Poverty, Newspaper Routes, and Early Work Ethic

   1. DSDavid Senra1:50

      "Father was not there. He was drunk again. I was born on October 3rd, 1917. School was just a railroad boxcar with somewhat crooked windows cut out in one side of the boxcar. There were three of us in the eighth grade. We had to take state exams to graduate from the eighth grade. We all failed. The family farm wouldn't sell as it was the start of the big depression. The bank took the farm. My mother thought it might help my father's drinking problem if we moved back to Oregon. That didn't help. It caused the Schwab family many heartaches. We were taught to work at a very young age. It seemed the normal thing to do." So all these sentences that I'm reading you, they're spread over a, a few different pages, but I, I feel these sentences tell entire stories. Uh, he's gonna get his first job. He's 12 years old. This is a job he's gonna... He's gonna work in the newspaper industry up until he try- up until he buys a tire shop in his 30s. But I wanna tell you this background 'cause you'll get an idea of who we're dealing with and the kind of work ethic he had. Look at this sentence right here. "I soon got one of the newspaper routes. Before long, I got all three routes. My family lived in a small two-room home. There was no running water." They're living in a logging camp. "Water was hauled by train from town, and you took your bucket to the tap, filled it, and carried it to your home. There was one community shower." So he's living in poverty on the outskirts of town. His mom decides, "Hey, both your brother and you, I have..." She, she had a strong desire for both of her sons to attend high school. They... By this time they made the decision. He hadn't been in school in two years, and so this is what happens when he goes from the outskirts of town into town. "We would come into town early Monday morning and return to the logging camp on Friday after school. We missed much of the school activities and pretty much felt like outsiders. One of my biggest fears was that my father would come to school on Friday drunk. It would haunt me all week as I was proud. Poor, but I had a lot of pride. Many a Friday evening, we would have to sit in front of some old moonshine joint until 9 or 10 PM until we could get our drunken ride home to the log camp." So think about what's happening there. The rest of the family's back in the logging camp during the week. They're staying, uh, in other people's homes so they could go to school. They have to get a ride back to the logging camp from their dad, and the dad thinks this is a good idea to get smashed at a moonshite joint- moonshine joint, then drive drunk with his two sons in the car back to the logging camp. And here's another example of two sentences that tell an entire story. "This was killing my mother. It was sad times for the Schwab family." Eventually, Les stays in town on the weekends, and he goes back to the one profession that he knows. He goes back to delivering newspapers, and this again, this gives you the idea. I was texting a friend about this book yesterday, and what I was saying is like the book is 40 years old. This guy, I don't think he ever finished high school. He had a, a, a middle school and eighth grade education, yet he's a business genius. He winds up building a multi-billion dollar company selling tires, and there's no way you could look at his childhood and predict that outcome. But you could look at his childhood and the way he approached everything as like this guy's gonna succeed at whatever he does, maybe not to the degree of making, you know, um, a multi-billion dollar company, but he was not gonna end up a loser like his dad. Uh, so he says, "I immediately started to deliver newspapers. I remember my... so well my first route. I didn't know how to ride a bike. We never had one." So all the other young kids delivering newspapers on a bike, right? He's got no money, doesn't know how to ride one. "I ran my route for two months in order to get enough money to buy my first used bike. I'd run nine or ten miles a day. I was too proud to complain." That is the second time that something he says over and over again, the fact that he had a lot... He was poor. He, he knew, he knew he was raised in poverty, but he was very proud person, a very cocky person, and I think he used his pride and his cockiness as fuel, and I actually think it served him. So now in the story, he's 15 years old. January 1933, "Our mother became ill, and she was in the hospital. She died ten days later from pneumonia but as much as anything from complete exhaustion." With Dad's drinking problem, the rough log camp life, teaching school, and raising babies, it all amounted to just much more than she could handle. A year later, my father died almost to the day of my 16th birthday. He was found dead in front of a moonshine joint. He had gone so far downhill, and he was working for 50 cents a day for a rancher. It sounds like my father was all bad. This isn't true. Why and how a man can let this happen, the Lord only knows. But he was a hardworking, extremely strong man, a gentle man, but a raving maniac when drunk. It certainly brought sad days to our family. Back to this idea that this can't be my life is a very powerful motivator. You see him being embarrassed by his current state of affairs and willing to work incredibly, incredibly hard to change things. I rode my bike during the week even though I was getting to the age where a boy didn't like being seen delivering newspapers. But money was much more important than pride. And this is another example of why I said I believed Les Schwab was inevitable. There were eight or nine routes in the town, and I took over the whole town during the summer. I was now making about $175 to $200 per month, and I wasn't even 17 yet. This was the middle of the Depression. My high school principal only made 150 per month. I thought I was already a man. And so the note I left myself when I read this the second time was, he's a money maker his whole life, just like Sam Zell. Uh, it reminded me, if you read Sam Zell's autobiography, which I covered all the way back on episode 269, Sam had this natural instinct to make money when he was a kid. One of the things that blew my mind, obviously, when he was, you know, close to the end of his life at 81 years old, he was one of the best entrepreneurs and investors, uh, alive. But even when he was in law school, he was making the equivalent. It's like you and I going to law school right now, we'd be in our early 20s and making millions of dollars a year while going to law school. Sam Zell did the equivalent when he was in law school and a much younger man. So he would... You see when you read his autobiography, it's like, oh, this guy just has a, he's a moneymaker from day one, and he has that skill.

3. 8:08 – 12:11

   Newspaper Circulation Career and Buying a Tire Shop

   1. DSDavid Senra8:08

      So now we see that Les is technically an adult. He's 18 years old. He winds up getting married, and he says, "We will soon celebrate our 50th anniversary. I was lucky. We have been very much in love, and we've had a happy marriage." They wind up having two kids and having to deal with and endure the worst thing that every- anybody ever has to go through. I'll get there, uh, later on. So he goes back to, again, he's gonna stay in the newspaper industry for the next 15 years. He works from one newspaper to another. He winds up getting recruited. And so there's, there's this, uh, newspaper in Bend, Oregon, that wants, that recruited him away from another newspaper to become their circulation manager, and this is where he realizes, oh, actually, it's possible that you can know more about something than anyone else, and it gives you a massive edge. I rem- uh, it makes me think of that one of the main themes in this excellent talk that the investor Bill Gurley gave, which is called Running Down a Dream: How to Survive and Thrive in a Career That You Love, was the fact that you don't have to be smarter, but you can just, uh, you can know more about something than anyone else just by accumulating more information. And you see that Les, uh, did this. Not only, uh, this is very, Rockefeller was the same thing, where he actually knew more about the business than his bosses when he was, like, 18 years old. So there's, like, a kind of an echo between Rockefeller and Les Schwab at the same age. The one thing I did know was newspaper circulation work, and I knew more about it than the two other minority owners who were technically, uh, his bosses. There's three bosses. The circulation end of the newspaper work is usually regarded as the lower end of the prestige ladder. It's essentially a sales job. So that's another, I think, key which we'll get to in Charlie Munger's analysis of this book later on, is the fact that Les had a fundament- as you'll see, right? He had a fundamental understanding of human nature. He had magician-like powers with sales, persuasion, and incentives. So back to this. I attempted to put some pride. There's that word again. I attempted to s- put some pride into the circulation work. Didn't matter to him it was low status. He's gonna make a ton of money doing this. Ton of money for his day. I attempted to put some pride into the circulation work for myself and for others. I was young. I was cocky. But the same cockiness helped me a lot in going through life. Fast-forward 10 years is a very common situation. I was now 28 years old. I had ambition. I wanted to go into business, as I'd always wanted to be a businessman, but I didn't have any money. I was going through a period at this point of not knowing just what I wanted to do. Five years later, still working in the newspaper business. I was 33 years old now, and I still wanted to go into business for my own. Money was the main thing holding me up. My brother-in-law told me to find a business, and he'd help me finance it. That was all I needed, and I started to look seriously, as I knew time was running out. I believed if you didn't get started in business at a fairly young age, you would get into a rut and never make the big decision to jump. And this is so wild. He picks an industry. Wait till we get to this. He picks an industry where he has no experience. He's like, "All right, well, there's this, like, little tire shop." They're all, um, franchises at this point. So it's called OK Rubber Welders. It's a franchisee of OK Rubber Welders. And he's like, "All right, I thought the tire business had a future. I remember telling my wife I thought I was a salesman and a pretty good one, and maybe that ability could be used in the tire business. This small shop retreaded tires, sold new tires, and fixed flact- flats. It was hard, knuckle-busting, dirty work. The price of the business was $11,000 plus inventory." And we're gonna see Les had a burn the boats mentality. It is now or never. I'm going all in. I borrowed $11,000 from my brother-in-law. I sold my house, and I borrowed on my life insurance. With all the expenses, he's gonna spend about $17,000 acquiring this small tire shop. This is the tire shop. This is gonna be in 1952. I was just reading about this yesterday. The fifth generation, his fifth generation just sold the company to a private equity firm for a rumored $3 billion. It is going to start in 1952 with $17,000, m- all of it borrowed.

4. 12:11 – 15:17

   Profit Sharing: Getting the Incentives Right

   1. DSDavid Senra12:11

      And so the very first sentence describing his very first day in business is mind-blowing. I had never fixed a flat tire in my life. And then this next paragraph, this is one of the reasons that Charlie Munger recommended this book. Charlie says over and over again, "Never ever think about something else when you should be thinking about the power of incentives." Multiple times in Poor Charlie's Almanac, you see ideas just like that. Incentives rule everything around you. Never ever think about something else when you should be thinking about the power of incentives. The most important rule in management is get the incentives right. This is something that Munger repeated over and over again, and it's something that Les understood and did a masterful job. "I remember telling my wife many times that if I ever got a chance to go into the business, I had some ideas about sharing with people and about sponsoring people. There are a lot of people who could run a business but never get a chance due mostly to a lack of startup money," speaking about himself, right? "I was going to furnish the money and in some way share with them in the promotion of our business." You and I are gonna get to why this is so important, but I wanna give you an overview 'cause it's, it's gonna happen a little bit later on. He says multiple times, even at the very end, he writes, I think this is the third edition of the book, so he's constantly writing, like every five or six years he writes like an updated like epilogue, and he, he constantly talks about the fact throughout the book and in the updated versions that if I failed with the first store, there was never gonna be a second store. And if I failed with the third store, there was never gonna be a fifth store. And if I didn't fail with the fifth store, there was never gonna be a seventh store. And now I think, uh, at the end of the book, they have, you know, hundreds of stores. And so one problem he's gonna run into right away is, one, he buys this shop. You know how many people work in that shop? Him. One person. And he does such a fant- fantastic job with it, which we'll get to in a minute. It's, it's crazy how g- how good this guy was at growing businesses. But then he's like, "Okay, well, I'll do a second shop." Now, here's the problem. I can only be in one shop at a time, and then eventually, obviously, he's going through, like just visiting shops. He's no longer running them. And so he's like, "I need an incentive structure so these people do their best damn job possible, because I can't be there every day." And that's where he realizes, "Hey, what if I make them, uh, it- essentially a partnership?" Because incentives drive behavior, and if you're the other-- They start out as one-person shops, but then eventually, you know, they might have seven or eight people in there, whatever the case is. But you'll see how powerful that one insight was, where I was like, "Listen, I'll just bring you in. I'll share 50%. That way, when I'm not there, you are heavily incentivized to grow and manage the business to the best of your capabilities." And so when Charlie's saying, "Hey, this guy made a huge fortune in a really difficult business selling tires, for God's sake," and he did it because by having shrewd systems, this is one of the most important systems that he puts in place, and he does it from the very beginning. So let's go back to this. "The first month, we did $2,800 in sales. I made a small profit the first month. February was even less in sales, but in March, I started going, and by June and July, I was doing $10,000 or more per month in sales. At year's end, I had $150,000 in sales. The man I bought the business from did 32,000 per year in sales the year before." Les is the only person in the shop, and he 5X'd the sales. The note I left myself on this page is, being good at sales is like being a magician.

5. 15:17 – 22:56

   Fighting the Rubber Companies and Riding the Japanese Tire Wave

   1. DSDavid Senra15:17

      And so right away, he realizes that the tire business is a bad business because there is complete collusion at this time that he's getting started. All the rubber companies are American, and they dominate the entire market, and they also c- collude on pricing. And he's competing against... The big tire companies also have their own stores, and of course, uh, they are gonna give a better price on the tires to their own stores than they give to Les. And so when he brings up this point to them, this is what they say. "They called it meeting a competitive situation. I called it milking the dealer of his profit." And the great thing about Les is he realizes, oh, this is a problem, and it actually produces the greatest opportunity. This is one of the waves that he rides to success, which we'll go into, uh, a little bit later on, and Charlie talks about a lot. And so Les says, "I had to contend with this," essentially this, this completely dominated and cu- colluded market, right? "I had to contend with this until I made connections with the Toyo Tire Company from Japan. I say thank God for the foreign tire supply. It helped the independent tire dealer," which is exactly what he is. He's an independent tire dealer. And this wave he surfed, to use the terminology of Charlie Munger, was a massive one because the Japanese go from like 0% market share, and I think within like a decade, maybe even less than two decades, they essentially own the entire market. And so he's gotta find a way to survive, and he's like, "Okay, well, if I sell new tires, I'm not gonna make any money." There's no profit. All of his profit is coming from retreading tires. And so retreading is very common, especially on large truck tires. And so essentially, it's taking a tire that is worn out and then removing the remaining layer of old tread and then just applying a new tread so that the tires has fresh tread again. Th- this saves you from having to buy new tires. This is where all of his profit, this is going to actually bridge the gap. This is how he's gonna be able to survive until he gets a reliable and, uh, better tire supply, tire supplier, and, and Toyo Tire Company from Japan is, uh, the first. He, he's gonna diversify into other suppliers, but he ri- definitely rides the Japanese, uh, tire trend. He says, "It was impossible to make a reasonable profit on new tires. Uh, I usually got the retreading, and I could make a decent profit on that. By handling the business as a one man, on a one-man basis," he did the sales, the service, the credit, the whole works, "I could operate very cheaply. I had a theory that went like this: Never take advantage of a customer. Never take advantage of an employee. But take all the advantage you possibly could over a rubber company because they were not being fair and honest. Today, in 1985, I don't feel the same way towards rubber companies as I did 25 to 30 years ago." This is a very important point, right? Because they try to screw him, they try to put him out of business, he decided to fight back. So this is what he's talking about. "There are much better people today. Today, I don't want my company to take advantage of anyone, even the rubber companies, but I certainly won't apologize for anything I did in order to survive 25 to 30 years ago. I am proud that I had the guts to fight..." This goes back to this cockiness, this pride thing that's very apparent from the p- from the very first page of this book. "I am proud that I had the guts to fight hard enough to survive this period. I feel strongly that the rubber companies were very unfair to their dealers during the early days of my tire business. But really, in many ways, this proved to work out in our favor." What is he talking about? Problems are just opportunities in work clothes. You're gonna screw me over so bad, you're gonna mistreat me, so what am I gonna do? I'm not gonna sit there and take it. I'm gonna look for better options, and he found the better option with the Japanese, and then he rides that wave, and he destroys the people that were trying to screw him over. And he says so here, "The five major American rubber companies have received their just awards, as two of them have dropped, dropped truck tires entirely, and the other three are doing very well with truck tire sales. It serves them right. They earned their failure." So he immediately starts to expand. He winds up opening a second, uh, store a l- a year later. It, that second store also has one employee, and that employee shares in the profit. And looking back 30 years later, this is what he says. "This was a big day in my business career. This was the start of the profit-sharing program that we still use today." But this is what I meant, that he repeats something over and over again, that, "Hey, if I messed up on the first store, there is no second store. If I wind up messing on the second store and I'm not there, there's no, you know, fifth store, there's no 200th store, and so I have to get the incentives right from day one." Uh, "I told Frank," that's his, the, the first hire, "I told Frank that if this store was successful, I planned to build more. If this store failed, I would go back and just run one store. There wouldn't be the chain of Les Schwab Tire Centers that we have today if we hadn't been successful in that second store." So he's gonna open a third store. In this third store, he wants to be independent because the first two are actually franchises of the OK Rubber Welders, and he's got a contract with them. And [laughs] I'm telling you, it's very, it's, it's impossible, uh, to read this book and not love Les as a person. And he's like, "No, I'm, I'm gonna be independent, and I, I'm gonna fight because I don't think what you guys are doing are right." And he also has, he was really, um, Charlie's gonna talk about this later, but he thought he was a, an artist, like he was really gifted with marketing and advertising as well. So he goes to the franchise, uh, company, and he's like, "Hey, uh, I'm gonna open an independent tire store." And the guy goes, "You, you can't do that." [laughs] And Les goes, "Let's not argue. I j- I just wanna be open about it." [laughs] And so he's like, "You can't do that." He's like, "Yeah, we're not gonna argue. I'm just gonna do this anyways. Like, I'm not here for a discussion. I'm just letting you know 'cause I thought it would be the right thing to do." And so he's like, "All right, now I gotta figure out a new name." And he's like, "Maybe I'll just call this a tire center." And then he goes, "But that seems too plain." And then he goes, "Well, what if I just call it Les Schwab Tire, Tire Center? I'll just name it after myself." And that's exactly what he does. And so then he's like, "I know I have a, have a fight, so we're just gonna have to, like, we're just gonna have to fight about this. Yeah, I really did have a fight now with OK. They were threatening to take all my equipment away from me and cancel me as a franchise member." And this was his response when they told him that. "I lost my temper, and I told them hereafter I didn't want any more harassment from them. If they had anything more to say, say it in court. I walked the floor nights." So, okay, this is a very important, uh, term that he uses over and over again. He, [laughs] he talks later on how stressful founding and then expanding the company over three decades to hundreds of stores and thousands of employees were. And so many times in this book, he's sharing with us not just the wins, but times where he's almost, like, depressed and extremely stressed. In fact, he talks about everybody blew their top. I think their three top executives all had a heart attack, including him. And so he, when he's, when he's under stress and he's trying to figure out what he does, he says, "I walked the floor nights." He's walking around trying to figure out what to do. And he says why he is so stressed, "Because if they took my equipment, it would've bankrupted me. I was bluffing, but I was determined. As I think back, I think the reason that they didn't take me to court was due to the fact that if they lost, it would've messed up their franchise nationwide." So, you know, you pay X amount per year to be, to use, uh, to be a franchisee, and they had 1,100 franchises. And so if Les could prove that they were abusing him, that might apply not just to his two stores, but it could jeopardize the contracts and the treatment of the other 1,100 franchises. That's actually very shrewd on Les' part, and then this is just funny. They keep sending him letters. So it says, "Every time they tried to cancel me, I would send them a registered letter back telling them that I will not accept the cancellation." [laughs] And it winded up working. Like, he winds up getting out of this later on, but he is in a hell of a trouble at the very beginning of his career. The, the early days were full of struggle, and he d- describes it to you and I here. "The pressure on me was tremendous. My largest account was way behind on payments, and it worried me to no end. My net worth was about the same as what they owed me. If they had gone broke at that time, they would have taken me out with them, and the Les Schwab story would have ended there."

6. 22:56 – 28:21

   Sam Walton Parallels, Lease Terms, and Schwab's Lollapalooza

   1. DSDavid Senra22:56

      There's a lot of Sam Walton-esque kind of behavior in this book. I feel that Sam Walton and Les Schwab are very similar people. In fact, one of my favorite things that Charlie said last week in Poor Charlie's Almanac was that fanaticism and scale combined can be very powerful. Fanaticism and scale combined can be very powerful. Think Sam Walton, think Les Schwab when he says that. "I would call Dorothy," that's his wife, "and say, 'Let's get the hell out of town for at least, uh, one night, maybe two nights,' and we'd do just that. But guess what? I would usually visit other tire dealers." This is exactly, is exactly. It's incredible how, how similar these great founders are to each other, right? Where Sam Walton's kids would talk about in his autobiography the fact that any time they went on vacation, they just had to accept the fact that no matter where they went, Dad was going to go in to visit the retail stores of wherever he was, and we see the same thing here. And it's during one of these trips where Les actually lays out to his wife that his initial modest goals. He says like, "I had no idea how big this could get. I told Dorothy I was gelling on an idea for the future. Maybe in the future I could build six or seven or eight stores someday. I knew I could buy tires better if I had the time," meaning finding better suppliers, which he does. "I knew how to advertise and promote," which he does, "and I wanted to share with the store managers and make them successful." He's really describing what Charlie describes later as, like, this Lollapalooza effect, like all these different things that Les Schwab did smart. And did right over many, many decades that got this nonlinear return. And so the first one was, hey, find a better supplier, ride the wave. That's your Japanese, uh, tire wave. Knew how to advertise and promote. Uh, Charlie says he's an artist at that. I wanted to share with the store managers, that's the incentive superpower. And then the fourth part is that he was by nature expansive. If he gets to six, he's gonna wanna get to seven. If he gets to seven, he's gonna wanna get to eight. When he gets to 199, he wants to get to 200. That's just how he is. Uh, this is how, more on how he set up the corporation at the very beginning. Each store operates as a separate entity, and each store operates as a separate business. The store employees share only in the profits of the store they work in. I'm sure you already know this, but just in case you don't, if you read Warren, uh, Buffett's shareholder letters, he talks about executive compensation a lot, that the fact is the individual businesses that Berkshire owns, the person running that business is only incentivized and paid and rewarded or punished based on the performance of that individual business and not Berkshire as a whole. And Les takes that exact same idea. Or he, I guess he did even before Berkshire, uh, existed, 'cause we're still in the, uh, early 1950s here. Another comparison you could make between Sam Walton and Les Schwab, if you know, if you studied the early days of Sam Walton's career, he winds up building, uh, a great franchise, but he made the mistake of not owning the ground upon which he was building. He was renting, he was leasing his store. When Sam goes to re-up, the guy's like, "Okay, yeah, I'm not going to re-lease it to you," winds up kicking Sam out of his store, uh, opening up his own... Essentially just copying what Sam did, and then running both, owning the building and running the retail shop. And there's this great, um, there's this great scene in, uh, this is actually not in Sam Walton's autobiography. There's another biography of Sam Walton I read. Uh, I think it's called Sam Walton: Richest Man in America by this guy named Vance Trimble. I think it's episode 150, if I'm not mistaken. But I, uh, I- it's one of my favorite scenes. And when I say scenes, it's like when I'm reading the book, in my mind, I can actually see this happening. And his, he, Sam goes to his lawyers like, "Surely," like, "you know, this guy can't do this. This is unfair. How do we get out of this?" And, you know, Sam's still, he's just inexperienced. He just didn't know what he didn't know. And his lawyer's like, "No," like, "the, you're screwed here. This guy is going to take... He's not gonna, he doesn't have to lease to you, and he can run, he can essentially just duplicate what you did here." And Sam is, the lawyer talks about this, Sam is clenching and unclenching his fist, and clenching and unclenching his fist, and clenching and unclenching his fist. And he says something like, "I'm not whipped. I built up this store. I can do it again." And so he goes and finds another town. If I'm not mistaken, pretty sure that next town that he goes to is Bentonville, Arkansas. Um, so again, he took, problems are just opportunities in work clothes. "Okay, I made that mistake. That's a big fuck up on my part. I won't let it happen again." And the reason I bring that up is because in his contracts, when he goes and takes, either takes over a store or winds up leasing, uh, sometimes he takes over other people's failed tire stores. Sometimes he's just leasing the location to build his own. He always has, he will not sign, Les will not sign a contract unless he, he does a five-year lease with a five-year option to buy, if I'm not mistaken. And he repeats that over and over again. He's like, "I already seen the, I had already seen the wisdom of owning property, and I wanted a contract so that I would own it someday if I made it." And then he'd also cap his downside. This guy, again, I love, I just love everything about Les, like the way he acts. He's very, you know, clear communicator, will tell you exactly what's important to him, exactly how he thinks. But he also is just really a business genius. And so in e- in every contract, he also would cap his downside. Uh, he called it an escape clause, and he says, "I had an escape clause in the contract that I could turn the property back to him and not have to pay it off if the store failed."

7. 28:21 – 35:24

   Marketing Genius: Walnut and Sawdust Tires, Free Flat Fixes, Tire Showrooms

   1. DSDavid Senra28:21

      And there's just this great line that Charlie uses to describe him later on. He says, "He was a talented fanatic, and he had to get a hell of a lot of things right and keep them right with clever systems." And in this next story, you kind of see that, oh, this guy is actually, understands marketing and advertising. Again, I, I, and I've already said this, but [chuckles] Munger said that he was an advertising and marketing artist. And so y- you see this, all of his stores are in places where it snows, okay? And he winds up going in s- to this company in California, it's called the Mohawk Rubber Company. He actually goes to where the, the manufacturing plant, and he wants to watch what they're doing and see if there's any opportunity to like, uh, for improvement, and he has a product idea that he's gonna use for a very long time. So he says, "I was w- I was watching them make, uh, retreaded rubber, and I noticed that they used a measuring shovel to add the walnut shells and sawdust." So you could buy either, uh, rubber mixed with walnut or rubber mixed with sawdust. They use this in like sleet and snow and, and icy conditions, right? "They add two shovelfuls to each batch of rubber while mixing. Since we had such a hard time deciding which one was best, walnut or sawdust, I asked them, 'Could you put one shovel of walnut and one shovel of sawdust?' They said yes. I told them to make all of my tires that way unless I told them differently. Then I went home, and I started a big advertising campaign. The new rubber, especially designed for the Les Schwab Company. Walnut for ice, sawdust for snow. Many people brought in their old tires and asked us to redo their tires because the new rubber sounded so good, and they wanted that. We used this campaign and this rubber for years and years and years." The power of one idea is the fact that it's, can be valuable and long-lasting for years and years and years. And it took him just going to visit and paying attention, and then one idea pops to his mind, and he winds up using that throughout his company, multiple stores for years. Ideas are, great ideas are like magic. And he's got a lot of time to think about his business because just like Sam Walton when he's driving through those mountain towns be- this is before he gets the plane, uh, the Cessna, you know, Sam's going from store to store to store. Les is doing the exact same thing. Uh, on an average day in the early days, Les would drive 600 miles a day going around and visiting all of his stores. Let's go into more of his ideas about advertising and marketing. So he writes all of the radio ads [laughs] uh, for his company hisself, and he winds up getting expi- inspired by other ads. So Lucky Strike Cigarettes was one of the largest tobacco producers at this time, and they spent a ton of money on advertising, and their tagline was LSFT. That was their slogan. They used it on their ads. They printed it on the cigarette packs. And they would hammer it over and over again, and they said, "Lucky Strike means fine tobacco." And so he heard that, and he winds up telling his wife, who's next to him, and he go, "Look, LSFT. That means Les Schwab means fine tires. I started to use this slogan immediately, and it was very effective." And so he comes up with a campaign for lady drivers, and he says, "Hey, Les Schwab will change your flat and fix it for free. If you're a lady driver in our area, call us. We will drive to your house. A friendly serviceman will come to your rescue." That's the, the tagline on the ad, right? "They'll come to your house. They'll change and repair the flat tire for free." And so this idea over time grew his business. It was very, very shrewd because think about it. If somebody comes to your house and fixes your tire for free, when it's time to get, replace those tires and to get new tires, who are you gonna go to? This is the reciprocity tendency that Charlie talks about in his speech at the end of Poor Charlie's Almanac on the psychology of human misjudgment. Humans have this embedded, innate, and very strong desire that if you do me a favor, I feel the need to repay you. That person is going to the Les Schwab tire center, and they're gonna buy their tires from them. And he says, "I always knew that if we fixed all the flat tires in town, we'd have all the tire business in town." Another one of his ideas that Charlie Munger loves, invert, always invert. You and I have talked about this over and over again. It pops up in a lot of these biographies, very surprising, that you can innovate by doing the exact opposite of your competitors. And so he, this is, he creates the very first tire showroom. And if you go into a tire shop now, this is exactly what they do. They weren't doing it at this time. Most tire businesses had a small showroom, so what the customers see, and all the tires were hidden in the warehouse. My thinking was to reverse, to invert, to make the showroom the warehouse. It would impress people. And that's exactly what he does. This is the end result. I had a lot more tires displayed in the showroom than any other tire dealer in the area, and customers were impressed. On the very next page is this illustration of another idea that Charlie Munger repeats over and over again, understand the circle, circle of your competence. And so he says, "I've often said that I think one, I'm one of the very best tire dealers in America, but without a doubt, I probably am the worst rancher in America." So he wanted to own a cattle ranch. He did this multiple times. He winds up doing it successfully many decades into the future, but this is still early in his career, and he sucks at it. He's very bad. Attempting to be a cattle rancher has cost me millions of dollars. I would undoubtedly be three or four or five million dollars richer if I had never attempted to be a rancher. But really, I don't regret it. This is excellent. As you only go through life once, and I would have hated to go through life without my cattle ranch experience. Another thing that's interesting is that he was obsessed with keeping everything clean. So he has this idea, it's like, well, if we t- instead of putting all the tires in the back where the customers can't see them, put them in the front. It will be impressive. It'll be this, this, like, tire supermarket showcase. And you need... He made sure that you have to clean the tires in the store where all the customers are every single day. The tires on display. Think of how crazy that is. Nobody else was doing this in his business. The tires on display were cleaned daily. And so one of the great things about this book is he does all these, like, memos, these internal comp- company memos, and they're dated, and you can see what he was thinking about, and they're, a lot of them are reprinted in the book. And so I just wanna read two sentences from this memo that talks about his obsession with keeping everything clean because he just was fanatical about doing the best job possible for his customers. A supermarket tire store has tires displayed, a clean showroom, tires waxed, and an appealing appearance, appearance. I sincerely hope I have made myself very clear about the fact that you have to just, you, you better clean this every day. I better not walk into your store, and it better, if I walk into your store, it better be clean. And he's driving 600 miles a day, so you never know when he's gonna pop up. I sincerely hope I have made myself very clear. I love you, but I love a supermarket tire store even more.

8. 35:24 – 38:54

   Promoting From Within and Staying on the Ball

   1. DSDavid Senra35:24

      In another memo, he explains, if you read between the lines, how to get the incentives right. And so he's writing this memo to all the managers. If a bright, young, ambitious man joins our company and wants to make our company his career, does he do it because he likes his manager? Do you think that this man is gonna work 10 hours per day just to help you build your store? Do you think that this man is going to work for low pay year after year just so that you could build your profit share contract into a nice fat nest egg? No, I don't think so. He wants to see results just like you did when you started up the ladder. This man didn't join the company because of the future of the store manager. He understands that you need to appeal to interest, not to ra- to, to reason, right? That we're all inherently self-interested. He just gets it. This man didn't join the company because of the future of the store manager, or for that matter, the future of Les Schwab personally. This man joined the company because of his future. And so what he's talking about is trying to get more of his store managers to pr- he w- he wanted to promote from within all the time. In fact, one of his main directives to his companies, and one of, I think, the main, uh, ideas he used to build such a successful company was promoting from within. It reminds me of the, my, one of my favorite quotes from Sam Zemurray, the banana king. That said, there's no problem you can't solve if you know your business from A to Z. So actually, I wanna r- I'm gonna pause where I'm at in incentives and read something that Les says later on. In our 34 years of business, we have never hired a manager from the outside, nor have we ever hired an assistant manager directly to do that job. Every single one of our more than 250 managers and assistant managers started at the bottom changing tires. They have all earned their management jobs by working up, and they also understand every single part of the business because they did every single part of the business. Another way he reminds me of Sam Walton, Sam Walton had this great line in his autobiography when people asked, like, how he built Walmart. He says, "We just got after it, and then we stayed after it." Les Schwab would say that once you get on the ball, he uses that word all, all the time, like, you gotta be on the ball, that you stay on the ball. And so a directive that he gives to all of his employees that's reprinted in the book is the fact that you have to focus and you have to avoid complacency. If we think there's a free lunch, if we rely on last year's results, then this company will turn a corner, and then we too will start to go downhill. And once you start down, it is mighty hard to turn around. If we become complacent, then brother, it's all over with. And one thing that he repeats throughout the book that I really love is the fact that if you do stay on the ball, you'd be shocked at how bad and how... Especially, like, most businesses are poorly run, and then if you're on the ball, you can beat them. And so he's realizing this because he's dealing with all these monopolistic rubber companies. And so he says, "As a young person, I always thought that the heads of large corporations must be human calculators. As I got deeper into the tire business and met many of these people, I was surprised. So often, all they knew was the policy of the company. Ask them a question, and the policy would flow from their mouth in a stream, but they couldn't think on their own. The good people who could think and had guts had dropped out of the company long ago and went out on their own. I've often said that we should send Goodyear, Firestone, and the other large rubber companies a Christmas card each year and thank them for their policies, as their policies made it possible for us to be successful." He's saying, "Your mediocrity is my opportunity." And so he was looking for... Remember, he starts out from day one. It's like, "I have to fix my supplier problem. This is a big problem."

9. 38:54 – 42:13

   Going Independent and Stopping Theft Through Incentives

   1. DSDavid Senra38:54

      That leads to one of his greatest ideas, and he's had this idea where it's like, well, at this time, tire dealers were, were, like, constrained in who they were buying their tires from, right? And he's like, "Well, how does a supermarket buy groceries?" There's no such thing as a Kellogg supermarket. They may carry Kellogg products if it's the best for their customers, if they get good prices, if they have a good relationship with their supplier. But once they don't, they just move it out, and they tr- and they actually substitute it for something else. He's like, "I'm gonna do the same thing for tires." I was so disgusted with the tire suppliers, I was willing to do almost anything to help my company survive. In 1966, I made a big decision. I decided to go straight independent, to buy tires like Safeway buys groceries, to buy the best ti- possible tire, good quality, and at the lowest possible price. This was a major move at that time, and no one had tried it before. The idea was to be a supermarket tire store. In no way were we identified or affi- affiliated with any individual rubber company. Let's go back to the fact that incentives drive behavior. One benefit, one unexpected benefit of sharing profits with employees is less theft from within. Again, never ever think about something else when you should be thinking about the power of incentives. Uh, he's talking about the fact that they were able to expand. I think at this point they have 163 stores, and people would analyze his company like, "Where are all your controls?" And he's like, "Well, we don't have many controls." Why? Because the incentives are controlling behavior. Uh, we didn't have many controls. The thing that held it together was that we ran each store as a separate entity. As long as we made sure that every tire was billed to them, as long as they made sure that every tire they sold was billed to the customer, we would come out all right, as long as the people were honest. Our contracts with the managers said, another shrewd system here, okay? Our contracts with the managers said that in case of dishonesty, you forfeit all your money in the contract. And so this would accumulate throughout the year. After they had about 20,000 or so in the c- their contract, it helped everyone be honest. Now we share with all the people in the store. Now, this is so important. He's really describing. He, again, he, uh, he just fundamentally understands human nature. If any one employee sees another employee steal anything, then they are a weak kitten if they don't report it. Why? Because this man is stealing from them, from his children. If he won't fight for his children, he can't be very much. For a company as large as ours is today, we have very little dishonesty. Every few pages, he goes back and, and tells more stories about he feels the, the profit sharing he did was the most important thing he did in his entire career, and he can't... Multiple times in the book, he's like, "I don't understand why other companies aren't copying this." And so he calls it being u- unselfish for good reasons, I think is a good way to think about that. My thinking has always been, if I give away half the profits, I still have half. If I share $10 million with people, I still have $10 million. I don't understand why businessmen don't do this, as it's being unselfish for good reasons. It helps other people. And he talks about the fact that you're helping other people succeed actually will provide you a deeper satisfaction than if you just had another $10 million. Success in life is being a good husband. It's being a good father. And then you end up being a second father to hundreds of other men and women. Last night, I attended a wedding of a young man from our office. This young man told me that two men had influenced his life, his father and me. That is worth more than money.

10. 42:13 – 44:26

    Personal Tragedy: Loss of His Son Harlan

    1. DSDavid Senra42:13

       And he's writing these words after he already dealt with the worst thing that a human can go through, which is the death of his son. Les is gonna be... He's gonna have heart attacks. He's gonna be... He drinks. He's, he says, you know, by his own, he's like, "The doctor says I'm in bad health. What he means is I'm fat." Like, Les talks that way the whole time. But somehow he lives till he's almost 90, if I'm not mistaken. But his, his, his daughter's gonna wind up dying of cancer at 52, and his son Is going to die at 31 years old. And so his son works in the business, and he winds up having this accident. He's trying to fix this, this truck tire, and the, the lock ring, uh, was under too much pressure, and the lock ring flies off and hits him in the head. And, you know, he's gonna be alive for a few more years after this, but he was never really the same. And I'm just gonna read part of this to you. His name, his son's name is Harlan. "Harlan stopped by the house one night really broken down. Maybe I was too rough on him, but the only thing I could tell him was, 'Damn it, I told you so.' I wonder now if maybe I was too harsh on him. He was defeated, bankrupt, broke, and really down. The job was too much for Harlan. It was too much for Harlan. He was about to break down emotionally, so I had no choice but to take him off the job. It certainly was hard on me. It made him feel he was a failure, and he was drinking entirely too much. Harlan Schwab would've been a tremendous help had he lived a normal life. He had problems, though, and in some ways, he would have had to conquer these problems sooner or later. At 2:00 AM on October 26, 1971, my doorbell rang. A policeman was at the door. He came in and told me that Harlan was dead. He had run into the back of a log truck. I sometimes have thoughts that he might have done this on purpose, as he was very depressed. He was 31 years old. Harlan left his wife, Jean, his daughter, Diana, 10 years old, and his son, Alan, eight years old." Absolutely devastating.

11. 44:26 – 53:39

    Partner Breakup and Parallels: Kroc and Ford

    1. DSDavid Senra44:26

       And then around this time, he winds up having a falling out with his partners. He had given two of his partners, I think they each own 20% of the company, and they go crazy. Th- they fall out. They have a falling out over money, which is crazy because of how small the amounts wind up they are today, not realizing that you're on this rocket ship, it's working. Just hold on. Don't mess this up. Figure, like, talk it out. There's just something w- with... They're not technically co-founders of the company, but you see this a lot with co-founders. I think Paul Graham said the, the number one breakup of- in Y Combinator is not, like, uh, external factors. It's actually, uh, co-founder conflict, and you just see it a lot in these books. I'm gonna read this whole thing to you and explain to you what's gonna happen, but it, it, it, there, when I'm reading it this time, I couldn't help but think about the, the falling out that Ray Kroc had with the McDonald's brothers. And they're falling out over money and, and, and, uh, disagreement about, like, the direction of the company. It's just like you're shooting yourself in the foot. There's this giant opportunity. So few businesses actually work and get to this scale, and you've ruined it. It's, like, hard enough to start a company, a successful company, and then one that's succeeding more than 99.99% of all other companies, and yet there's something where we just can't help but shoot ourselves in the foot. Reminds me of this, there's this lyric, uh, that 50 Cent talks about, and he says, "Enemies stay enemies, but friends, they change. People go crazy over money, my man." And so this is exactly what happens here. Norm Nelson and Don Miller, these are his partners, were both making tons of money, but a lot of that money was not being taken out of the company. They leave it in there. The salary was, their salary was enough to live on, but the rest stayed in the company to be used for expansion. They each own 20% of this money. But here's what happens. Now they're, they're seeing how much the company's making. Now they're, the money that's in the company that technically they have, they could have access to, it's growing and growing, so their, their wives, the people in their family is like, "Hey, you need to push Les on this. We need to get the money." They and their families saw all the money they were making, and their wives wanted to get their hands on some of it. And so they wind up having a disagreement about this, and so now Norm and Don wind up teaming against Les. So now it's two on one, but even though, uh, Les owns way more of the company, owns 60% to their 20% each. "I soon found out that I had run into a buzzsaw, as both Norm and Don teamed up against me. This is something I never could figure out. This was one terrible mistake on their part, as you can use hindsight today. Money has funny effects on different people, especially the kind of money that these men were now making. I went home, and I was talking to my wife, uh, about nothing else that night. At breakfast the next day, she suggested, 'Why don't you buy them both out? You'll get by some way.' Something hit me. I hit the table. I pounded the table. Dishes fell off, and I said, 'That's the best damn idea we've had in six months,'" 'cause this has been going on for six months, uh, "in the six months that we've been talking about it. The agreements that I had with Norm and Don said that I could buy them out at book value at any time by giving them 30 days notice." And so he goes and meets his partner. "Don, you want a swimming pool?" 'Cause they wanted, like, swimming pool on boats and, and, you know, the stuff people want when they start making more money. "Don, you wanted a swimming pool? Now you can have it. You're gonna get $225,000. Norm, you wanted your money? Now you're gonna get your money. You'll get around $300,000." So he winds up buying out his partners. The, w- what's the value of this decision to his descent, his, the, the fifth generation that winds up selling the company? That's another thing we have to talk about. I don't wanna be, confuse you too much, but over and over again, he talks about, you know, "I want my company run this way," or, "Take my, my goddamn name off it. I don't want the company to go public. I don't want to sell the company." And you could do that all you want, but the guy's been dead for a long time. And then, I mean, not even for a long time. I think it was, like, 10 years later, and they wind up selling the company. Uh, there's just so, this weird thing that we want, like, this legacy to con- continue on. I've been thinking about this my own self. It's like, well, is it even possible to have, like, this multi-generational succession plan? 'Cause now they're five generations out, and they're like, "Oh yeah," you know, "Great-great-grandpa or whatever didn't wanna sell the company, but this company's offering us $3 billion. Uh, yeah, we're gonna take it." So I don't know. It, ju- just this thought that's in the, the, the back of my mind. I, uh, if you're a successful entrepreneur, you're used to having control and influence and, and bending the will, the world to your will, and yet all that [chuckles] is not gonna exist when you're not here anymore. It's just something to think about. So anyways- Winds up getting, he buys out 20% of the company for $300,000, and then the other 20% for 225, okay? Which is one part of their contract, not including a salary or anything else. They were eligible for a 5% cash bonus each year. Today, which, and when he says today, that's 1986, that they'd be making over a million dollars per year just from that 5% bonus. So, if they just held for another 15 years or so, instead of taking the 300 grand that day or 225 that day, they'd be making a million dollars per year. Now, why did I say that that's very reminiscent of this disagreement that Ray Kroc had with the McDonald brothers? They have this huge fight. It's in the book Grinding It Out, which I've made two podcasts on. The last time I made an episode on that was, like, 293. It was ear- earlier this year. Ray Kroc winds up buying out, uh, the McDonald's brothers, and it cost him $14 million and a bunch of interest or whatever, right? And at the time, it was a lot of money, but now he's looking back many, like, maybe, like, two decades after, and he's like, "Oh, this is peanuts." Because their contract said that they would've, if they would've stuck around, they would get half of a percent of all sales in every single McDonald's anywhere, now and in the future. And so even though he's r- I think he's wr- I think Ray Kroc is writing that book, what? That book is probably written in the '70s. Who knows what it'd be worth today. But if they had just held on, instead of taking, so I think it was 12 million to the McDonald's brothers, and I think they d- had to pay, like, two million in transaction costs or interest, something like that. But let- let's say they, the McDonald's brothers made 12 million one time. If they'd just held on, they would be making, at that time that Ray Kroc produced, uh, published the book, $15 million in royalties every year. And that's, now you're, you're not going to work for that money. You're not going to the office. You're not working in a McDonald's store. It's just $15 million this year, and as it grows, 16 million the next year, 25 million five years from now, and just goes on and on and on. So again, people just go crazy. They go nuts. Money has funny effects on different people, and it can cause you to make a terrible, terrible financial decision. And now that I'm thinking about it, let me look for it. Uh, something just popped to my mind. I'm gonna search my Readwise. Uh, there is... I'm doing this while I'm talking to you. There is a li- yep, found it. Okay. Uh, this is nuts. Okay, so I just thought about another, like, investor, founder, partner conflict. Henry Ford, one of his investors invested $10,000. They wind up having, uh, this huge falling out. Now, think about, [chuckles] think about owning a part of the Ford Motor Company, right? Pre-Model T. Okay? So this guy, I'm just gonna read this. I, I'm, like, excited, and I think I've had too much caffeine today. Let me just read this to you. He got $175,000. Hardly a bad ret- this is Henry Ford speaking now, okay? He got $175,000. Hardly a bad return on an investment of $10,000 three years earlier. So that's great. You invested $10,000. Three years later, you get, you, you, you push this issue to get your money out, and you got 175,000. You did great, right? But if he'd stuck it out for a decade longer, he would've gotten $100 million. That is bananas. 10,000 into 100 million in 13 years, and instead, you took the $175,000. Let's go back to his partners. Another thing that he repeats over and over again, "Life is hard." There's no digital version of this book to search through, but if it, if it, if there was, "Life is hard" is probably the thing that he repeats the most. Life is hard, but again, it turned out to be the, the best thing that could've ever happened to the company. Greed was entering into the company, and greed destroys. Their interest today would be worth around $12 million each. So again, their equity interest would be worth 12 million in 1985 when the book came out. Their annual bonus would be another million on top of that. Now, this is bananas, right? Because at the time when they did this, when they pushed the issue, the company was only doing 10 million in sales. Uh, the, I think this was 1967, if I'm not mistaken, okay? 1969, sorry. Okay, so 1967, they're doing 10 million. That's great. 1985, they're doing 180 million. In 2018, they did $1.8 billion. They could've still been alive and having 20% of that company, and instead, they sold it for two, their interest for $225,000 so they could buy a swimming pool. Incredible. This is why I love biographies. There's just so many lessons, and you can, like, th- uh, hopefully that hit you in the head, or excuse me, hit you in the heart. But, you know, that takes place over, like, you know, three, four pages. It's just absolutely incredible, and then it just makes you think of all the other biographies and maybe other episodes of Founders that you've listened to. You can kind of tie it all together, and it really, I think, makes it, uh, resonate much more than just a list of facts.

12. 53:39 – 1:04:25

    Serve the Stores, Pay Well, and Never Sell

    1. DSDavid Senra53:39

       Now, another example. I hate to keep doing this, but I'm telling you, man, Sam Walton and Les Schwab are very similar people. So Sam Walton, his autobiography says, "If you are not serving the customer or supporting the folks who do, we do not need you." This dude, Les is constantly railing against office people, even though he's an office person. He's like, "The store people are the only ones that are important. We have had, over the years, some people in the office that sometimes think that they are more important than the stores. The office serves only one purpose, and that is to serve the stores. The office and accounting people can only tell the stores what they have done. If the store manager runs his store right, he doesn't have to spend hours and hours looking at the office reports. If he's doing okay, the records will show it. In fact, if he spends too much time in his office reading the mail or looking at reports, it is a sure thing that his store will suffer. Sell tires, give service, keep expenses low, watch for leaks. Do these things and you'll come out all right. Our store managers make more than our office people. Some of our office people, especially some with these MBA degrees, sometimes wonder about this, but I've warned them, do not bitch to me because that is the way I want it. If you wanna go out, start at the bottom changing tires and work into a manager job, then hop to it." If it weren't for those men in these stores working their butts off in all kinds of weather, missing meals, and, and working God-awful hours, you wouldn't even have a job. And so that's something that Les repeats, "Get out of your goddamn office." Says it over and over again. Like, stop getting in your office reading reports, go out and help the customers. Serve the stores. And then once you're out of your office, you need to stay out of your office, and he continues this line of thinking again. "I could help another store manager more in one hour than a professional type management person could in a week." Why? Because I had the same problems. He had done the job, right? Uh, the professional type management loses out, and it doesn't take long. If you stay out of a store for 30 days, you've forgotten 50% of what you should know. And when I read that, I thought of this pianist quote that, uh, let me go find the book. I gotta pick up Poor Charlie's Almanac now. And Charlie uses this idea or this story, this quick story, to illustrate an idea. He talks about, like, once you have these skill set, you have to constantly use them or, or you're gonna lose them. And he says, "Skills of a very high order can be maintained only with daily practice. This famous pianist once said that if he failed to practice for a single day, he could notice his performance deterioration, and then after a week's gap in practice, the audience could notice it as well." Les Schwab's version of that is, if you stay out of a store for 30 days, you've forgotten 50% of what you know. And so then Les tells a story about how he wound up winning this competition with what he thought might be a formidable, formidable adversary. This g- this Nelson Tire Warehouses. And they made a mistake. So he will constantly talk about, hey, you need to have a low cost structure. You need to watch your costs. Of course he did, but he didn't f- feel that way about wages. He thought you should pay the highest wages possible because the higher wages you pay, the better quality employee you get. The better quality employee you get, the more, the happier your customers will be. And so there's all these, like, second and third order effects that the people that just cut salaries and think about ca- s- salaries, uh, and wages as a part of their costs ne- like, never, uh, realize, and it'll wind up dooming them. And so it says, "If Neil made a major mistake, and he must have because he went bankrupt, it was in moving too fast, but he had me concerned for quite a period of time. Uh, they were springing up all over Oregon, and he got up to 24 stores." And so he talks about they did really good in advertising. They did good at holding down costs, but the one mistake they did was that they paid low wages. And the flaw here, this is Les talking, the flaw here was that they didn't get, with that low pay, near the quality of employees that we had. And this is the most important part. As he's going through and, like, having this competition head-on-head, he's like, "Oh, sh- like, did I make a mistake here? Like, should I be doing what he's doing?" And so he says, "After thinking about this for a year or so, w- I'm wondering if I shouldn't cut wages and benefits. I finally made a decision, and that decision was, if I couldn't be proud of my company, if I couldn't pay good wages, if I couldn't have good benefits, and if I couldn't have the best employees, then why would I want to stay in business? So we did nothing, and we won. The customer liked us best. Life is hard." This is his summary. This is his summary on the Neil Tice- Neil, Neil Tire Warehouse and what doomed them. "Life is hard for the man who thinks he can take a shortcut." And so this is a f- interesting historical fact buried in this very hard to find book that a lot of people have not read. So, you know KKR? Uh, I think it's like Kohlberg Kravis Roberts and Company. I think they have, like, a trillion dollars under assets under management. It's, like, one of the biggest investment companies in the world, if I'm not mistaken. Well, he, back, this is now what? 40 years ago, he's actually interacting with a bunch of, like, the partners, and the reason is, I, I need to bring this up because th- I, I mentioned this earlier how, like, he could say, "Hey, it's gonna stay in the family business. It's never gonna be for sale." But r- once you die, you really, you know, don't have, uh, a lot of say in this. And so he, he talks about over and over again that the company isn't for sale. All the stock will remain in the family. He wind up turning down Buffett earlier in his career. He winds up turning down Michelin Tire. Uh, they wanted to buy the company, and turns out KKR tried to buy the company as well, and this would've been shortly after KKR was founded, uh, 'cause KKR was founded in 1976. "I'm so glad I resisted the urge to have our stock on the market. I don't want a few investors around the country club asking about our business and questioning some of our decisions. They might even ask, 'How come some of those store managers make so much money? Why they, why do they make as much as I do, and I have a college degree?' I'd probably lose a customer, as my answer would be, 'He is worth twice as much as you, and he has a degree, too. He learned how to be a businessman.' I'd probably add, 'He also learned how to work, something you never did learn.'" There's another company that wanted to buy him, and, uh, he wind up meeting with the guy. He takes the call. It's just for fun. "This company was headed by a man in his 70s who had made a fortune by buying up privately held companies and letting the present management run them." How many people have used that idea successfully? Buying up privately held companies and letting the present management run them. "I told him that I didn't wanna sell. The KKR people also contacted me, and I spent a day with them. I was more curious than anything. Everyone knows about KKR. They have bought companies out in the billions. They are nice people, and if I truly wanted to get out, I would consider them, as they have a good reputation with how to handle the companies and employees after they buy it." And so this is causing him to think about, like, succession plans and what's gonna happen, and he's very concerned because he says, "I've seen companies fail and go downhill, and they dis- and sometimes they disappear entirely after the founder retires or dies. I hope this doesn't happen with our company." Where we are in this point, Les already had way more money ever needed. He could've retired 15 years ago. "I could come out with an asto-" He's talking about selling the company. "I could come out with an astomino- ast- as- astronomical bundle of money if I sold the company, but what would I do with it? What good is money beyond a certain point? I think the biggest mi- misconception about public has-" About a successful businessman is that he's working for more money. You won't find many truly successful ones that are only working for money. Success in my mind... They obviously like the money. He's not saying that, right? Success in my mind comes from having a successful business, one that is a good place to work, one that offers opportunity for people, and one that you can be proud of to own. And he goes right back into the fact that incentives drive behavior, and he's very proud of what he's done. It is very rewarding to create a program and watch it work. There's something in our program that makes a man that's several hundred miles from the main office be at his store at 7:30, and then sometimes have to stay till 9:00 PM if needed. It's not a big thick policy book. It's not a lot of supervisors, which he doesn't have. It's something that our program's created in him right in his heart. He continues on this, and he feels that most companies put the emphasis on the wrong part. We are different from most American corporations, as we think the most important people in the company are the people in the firing line, the ones who sell, the ones who do service work and take care of the customer. Most American corporations have the fat salaries and outrageous bonuses for the top people, and treat the people at the end of the line as peons. I guess that is why if you're on the ball, you can beat them on any type of fair, competitive basis. And he practices what he preaches. The warehouse executive people should be very happy that the store managers make good money. They make more money than anybody else in the company. As it helps them. If jealousy ever creeps in, goodbye Les Schwab company. We have great people, and this won't happen as long as I'm alive. I'll kill them if it does. Again, fanaticism and scale combined can be very powerful. They'll find out that life is hard, and he put life is hard in caps. It's almost like his motto, life is hard. And then he continues on this theme over many, many pages about the importance of taking care of the store. If you take care of the customer, take care of the store, then the office is automatically taken care of. There's this great line. I need to do her, uh, biography. Mary Kay, the one-- Uh, she's the founder of Mary Kay Cosmetics. She has one of the best... I- In terms of like, um, how to win friends and influence people, if you wanna think about it in those terms, she has one of the best lines I've ever heard. She says that Mary Kay said that everyone goes through life with an invisible sign hanging around their neck that says, "Make me feel special." This can be applied to customers, but it can also be applied to your employees. This is what Les says. Most men are starved for personal recognition. Any boss who, unknowingly or otherwise, destroys an employee's self-esteem also destroys the employee. Truly work to make this man a successful man, and then you have done something great, great for the man and great for you. Les believed in building up and empowering, something he repeats over and over again. Keep your decision-making as low as possible. Keep decision-making lower. A company starts, it grows, and as it grows, more and more of the decision-making tends to move up to the main office, and this is one hell of a big mistake. The decision-making should be always be made at the lowest possible level. Give your manager the authority to make his own daily decisions and let him run his show. Keep your decision-making at the lowest possible level. And then I wanna close on this book before we get to Charlie's analysis of this book. I love what he talks about here. Keep the main thing the main thing. Focus on doing the job to your best of your ability today that gets you to tomorrow, and then continue that process over a long career, and you'll be surprised where you end up. So he's looking back and talking about if he didn't do the day-to-day things correctly, they would have never got this far. Most companies that have go- grown large must have had as many of the same problems that we've had.

13. 1:04:25 – 1:10:25

    Munger's Analysis: Four Causes of Extreme Success

    1. DSDavid Senra1:04:25

       I think many times of the many things that have happened that could've stopped us from growing. If Frank had failed with that store in Redmond, this is when they expanded, the second store. If the large commercial account I had that owed me so much money had gone broke at the wrong time, if I hadn't won my fight with the OK franchise, if the foreign tires hadn't been available to us, if I had not been able to get through the period of the blowup between my partners and me, if any of my first five or six stores had failed, if I hadn't gotten out of ranching and got my mind on my business, and the many, many, many more ways that could've stopped the growth of the Les Schwab company. The parting advice that he has reminds me of one of my favorite Edwin Land quotes. Edwin Land said, "There's a rule that they don't teach you at Harvard Business School. It is, if anything is worth doing, it's worth doing to excess." The Les Schwab version of that, looking back on his career, he says, "Whatever you do, you must do it with gusto. You must do it in volume. It is a case of repeat, repeat, repeat." And so with that, I pick up Poor Charlie's Almanack. I go to talk number nine, and that is where Charlie analyzes the book that you and I just went over. And so he says, "Now I'll give you a hard problem. There's a tire store chain in the Northwest that has slowly succeeded over 50 years. It's the Les Schwab tire store chain. It just ground ahead. It started competing with the stores that were owned by the big tire companies that made all the tires, like the Goodyears and so forth. And of course, the manufacturer favored their own stores, and those stores had a big cost advantage. Later, Les Schwab rose in competition with the huge price discounters like Costco and Sam's Club, and before that, he competed against Sears. And yet here is Schwab, now with hundreds of millions of dollars in sales, and Schwab is in his 80s with no education, having done the whole thing. How did he do it?" And so this is where Charlie's going to analyze how he did it. And so he says, "Let's think about this with some microeconomic fluency. Is there some wave that Schwab could have caught?" So if you listened to last week, this is something that Charlie talks about over and over again, his, uh, his surfing model. If you get at the beginning of something, and it's working, and you're riding the wave, stay on the surfboard. He's like, "You would be shocked at how... If you just stay on the surfboard, it's gonna take you a long way. A lot of people jump off, right, and they get mired in the shallows." That's what Charlie says. And so he says, "Was there some wave that Schwab could have caught? The minute you ask the question, and the answer pops in. The Japanese had a zero position in tires in America, right? Zero." And they got huge. So this guy must have ridden that wave in the early times. But his slow following success has to have other causes. And so this is where he goes into this Lollapalooza result that Les gets. This is something that Charlie was intensely interested in. He would collect a bunch of instances. He would constantly read about this. And so he says, "And that's probably what happened here. This guy did a hell of a lot of things right, and among the things that he did right is he must have harnessed the superpower of incentives. He had a very clever incentive structure driving his people," which again is why Munger said at the annual meeting, "You should buy the book. You're managing people. Just read it just for his incentive structure." There's a bunch in the book. "And he must be pretty good at advertising, which he is. He's an artist. So he had to get a wave in the Japanese tire invasion, and then a talented fanatic had to get a hell of a lot things right and keep them right with clever systems. Again, it is not that hard of an answer. We hire business school graduates, and they're no better at these problems than you were. Maybe that's the reason we hire so few of them. Well, how did I solve this problem? Obviously, I was using a simple search engine in my mind to go through checklist style, and I was using some rough algorithms that work pretty well in a great many complex systems. And those algorithms run something like this." And so he's saying this applied to Les Schwab, but it also applies to a lot of these other super successful companies, and he gives, uh, four factors here. And he says, "Extreme success is likely to be caused by some combination of the following factors. Number one, extreme maximization or minimization of one or two variables. Number two, adding success factors so that a bigger combination drives success, often in a nonlinear fashion, as one is reminded by the concept of breakpoint and the concept of critical mass in physics. Often these results are not linear. You get a little bit more mass, and you get a Lollapalooza result. And of course, I've been searching for Lollapalooza results all my life, so I'm very interested in models that explain their occurrence." And so Charlie's also explaining not just Les Schwab. He uses Costco as a, uh, uh, as, as an illustration of this point, Toyota as an illustration of this point, and Oracle. Some of- just some of them, but he mentions many more in Poor Charlie's Almanack. Number three, an extreme of good performance over many factors. That is l- ju- right, jumps right out of the book if you read the Les Schwab book. And finally, four, catching and riding some sort of wave. So that is where I'll leave it. Highly recommend that you... If you can get a copy. They're very hard to get. Again, limited. There's only 20,000, I think, in the entire world. If you can get a copy of the book, highly recommend you do so. It's fascinating, and it doesn't really matter what or- order you do this in. You could read the Les Schwab book first and then read Charlie's analysis, 'cause I, I read this book for the, for the first time four years ago, but then I read Poor Charlie's last week. I'm like, "Oh, shit," like, "I should go back and revisit Les Schwab." And then reading his analysis and then reading the book was really cool, and then going back to his analysis after I think really adds to it. So anyways, in any case, I will leave the links down below for both of those books. And if you buy them using that link, you'll be supporting the podcast at the same time. That is 330 books down, 1,000 to go, and I'll talk to you again soon.

14. 1:10:25 – 1:34:11

    Bonus: How History's Greatest Entrepreneurs Thought About Hiring

    1. DSDavid Senra1:10:25

       Okay, so what you're about to hear is this question I was asked a few months ago. I actually recorded this a few months ago. They asked, "How did history's greatest entrepreneurs think about hiring?" Uh, all the answers. People think I have a better memory than I, than I actually do. You know, if people say, "Oh, y- David, you have a great memory," my wife would laugh at that [chuckles] 'cause I forget things all the time. It's not that I have a good memory. It's I reread things over and over and over again. Every single answer, every single reference you're about to hear in this 20-minute mini episode came from me searching all of my notes and highlights. That option is now available to you. If you like what you hear, if you think it's valuable, if you're already running a successful company and you want an easy way to reference the ideas of history's greatest entrepreneurs in a searchable database that you can go through at your convenience anytime you want, then you can go to foundersnotes.com and sign up. I wanna start out first with why this is so important. There's actually this book that came out in, like, 1997. It's, uh, called In the Company of Giants. I think it's episode 208 of Founders. It's two Stanford MBA students, if I remember correctly, and they're interviewing a bunch of technology company founders. And in there, Steve Jobs is one of them. This is, you know, right b- I think even before he came back to Apple. And they were talking about, "Well, yeah, we know it's important to hire, but in a typical startup, a manager or a founder may not always have time to spend recruiting other people." And St- I, I first read this, uh, Steve's answer to this, you know, I don't know, two years ago, and I never forgot it. I think it's excellent, and I think it sets up why, uh, this question's so important, and you should really be spending, especially in the early days, like, basically all your time doing this. Uh, in a typical startup, a manager may not always have the time to spend recruiting other people. Then Steve jumps in. "I disagree totally. I think it's the most important job. Assume you're by yourself in a startup and you want a partner. You take a lot of time finding a partner, right? He would be half of your company." I'm gonna pause there. This idea of looking at each new hire as a percentage of the company is genius. [chuckles] "Why should you take any less time finding a third or a fourth of your company or a fifth of your company? When you're in a startup, the first 10 people will determine whether the company succeeds or not. Each is 10% of the company. So why wouldn't you take as much time as necessary to find all A players? If three," three out of the 10, "uh, were not so great, why would you start a company where 30% of your people are not so great? A small company depends on great people much more than a big company does." Okay, so to answer this question, the advantage that, um, that I have making Founders and that you have as, as a byproduct of listening to Founders- Is not only that I've read, you know, 300 something biographies of entrepreneurs now, but I have all of my notes and highlights stored in my Readwise app, and that means I can search for any topic. I can look at the past highlights of books, or I could search for keywords. So what I did is, first of all, like what I've started to do with these AMA, um, questions is I read them, decide which ones I'm gonna do next, and then think about it for a few days. I don't put any-- I just literally that, that I know that's the next question, just let my brain work on it in the background for a few days, and then I'll go through and start searching all my notes. And so that's what I did here. And so there's a bunch of, you know, I don't have-- I might have like 10 or 15 different founders talking about hiring. The first idea is the most obvious, but I think probably works best when you're already established. So Steve Jobs is talking about, hey, you know, great way to, to hire is just find great work and find the people that did that, and then try to hire them. When you're Steve Jobs, [chuckles] that's a lot easier, right? Than if you're just somebody that doesn't have a reputation, maybe you don't have resources, maybe your company's rather, uh, new or not as well known. David Ogilvy, I just did Confessions of an Advertising Man a couple episodes ago, I think 306 or something like that, 307, and he did the same thing. But he's David Ogilvy at that point, so he would find... He'd go through magazines, find great advertising, great copywriting, and he'd write the person a letter, and then set up a phone call. And he says he wouldn't-- He was so well known, and you know, he's one of the best in his field, that he wouldn't even have to offer a job, just the conversation, then the person would-- The, the-- He'd wanna hire the person, never mention it, and the person would apply to him. Um, and so again, I think if you can do that, then of course it's straightforward. F-who-- Find per- somebody who does great work. Usually, you can do this. I actually have a friend that I can't say who it is. He's doing this right now, actually. Um, I have a friend that's really good at doing this. He's finding people that do great stuff on the internet and then just cold, cold DM-ing them and then getting, convincing them to work on things. And that usually works, especially with people, like younger people early in their career. There's a bunch of different ways to think about this and a bunch of different ways to prioritize. So the first thing that, that c- that came to mind that I found surprising is you read any biography on Rockefeller, and he had a couple ideas where he felt the optimization, uh, you know, table stakes, that you're intelligent and you're driven and you're hardworking, right? We don't even have-- Like if you're listening to this, you already know that. But he prioritized hiring people with social skills. And so this is what he said: "The ability to deal with people is as purchasable a commodity as sugar or coffee, and I pay for-- I pay more for that ability than any other under the sun." There's a two-- The second part to this, though, and this is also works well if you have access to more resources. He, he-- Rockefeller would hire people as he found, as he found talented people, not as he needed them. It's not like, okay, Standard Oil has six open spots. Let's go find six candidates, right? He'd come across what he considered a talented person. It didn't even matter if he didn't know what they were gonna do. He's like, "I'm just gonna stack his team." And if you really think about the, the-- his partners at Standard Oil, he essentially built a company, an executive team of founders of c- 'cause he was buying up all their companies, so it's very rare. But, um, there's a line from Titan I wanna read to you. "Taking for granted the growth of his empire, he hired talented people as found, not as needed." And then I found another idea in the hiring, like the actual interview process. So there's this guy named Vannevar Bush. I did two episodes on him. I think it's 270 and 271. He is the most important American ever, uh, in history, uh, in terms of connecting the scientific field, private enterprise, and the government. The most important person to keep alive for the American war effort was FDR. The second one was Vannevar Bush. Vannevar Bush, uh, is like the Forrest Gump of this historical period. He is involved in everything from the Manhattan Project to discovering like a young Claude Shannon to building a, a mechanical computer. Like this guy literally has done-- He just, he pops up in these books over and over again. If you were reading about American business history during World War II and post-World War II, you are going to come across the name Vannevar Bush over and over again. Uh, I read his fantastic autobiography called Pieces of the Action, and I came across this weird highlight, and so this is his brilliant and unusual job interview process. And so he's talking about this organization he's running called AMRAD. "At AMRAD, I hired a young physicist from Texas named C.G. Smith. The way I hired him is interesting. An interview of that sort is always likely to be on, on an artificial basis and somewhat embarrassing. So I discussed with him a technical point on which I was then genuinely puzzled. The next day, he came in with a sol- uh, with a neat solution, and I hired him at once." Here's another idea. This is from Nolan Bushnell. Nolan Bushnell is the founder of Atari, founder of Chuck E. Cheese, and Steve Jobs' mentor. He hired Steve Jobs when Steve Jobs was like 19 at Atari. He would ask people their reading habits in interviews. This is why. Uh, one of the best ways c- his whole thing was he wanted to build, uh, all of his companies laid on a foundation of creative people, so that's what he's looking for. He's like, "I need creative people." One of the best ways to find creative people is to ask a simple question: "What books do you like?" I've never met a creative person in my life that didn't respond with enthusiasm to a question about reading habits. Actually, which books people read is not as important as the simple fact that they read at all. I've known many talented engineers who hated science fiction but loved, say, books on birdwatching. A blatant but often accurate generalization, people who are curious and passionate read. People who are apathetic and indifferent don't. I remember one... That-that's such a great line, and I obviously agree with it. [chuckles] I remember one... I'm gonna read it again. A blatant but often accurate generalization. People who are curious and passionate read. People who are apathetic and indifferent don't. I remember one particular woman who, during an interview, told me that she had read every book that I had read. So I started mentioning books I hadn't read, and she had read those too. I didn't know how someone in her late 20s found that ti- this much time to read so much, but I was impressed. I was so impressed that I hired her right there and assigned her to international marketing, which was having problems. This is why. This is why I'm reading this whole section to you. A job with a lot of moving parts benefits from a brain that has a lot of moving parts. It wouldn't be possible to have read that many books without such a brain. So do you see what I mean? Like, we start with Steve Jobs saying this is the most important thing that you, your role as the leader of the company and the founder to do, right? And you are... And it's so important to study, and this is why I'm glad this, this question exists, and why I'm glad that I've, I took the time and I had, like, the foresight to be like, "Hey, I should really organize my thoughts and notes," 'cause there's no way I would've remembered all this without being, being able to search my Readwise, right? But you have Rockefeller saying, "This is what's important to me." You have Bush saying, "This is how I hire." Now you have Nolan Bushnell saying, "Well, here's another weird thing that I learned." Um, let me go through, uh, what Warren Buffett says about this. So this is about the quality. One thing that is consistent, whether it's Jobs, Buffett, Bezos, uh, Peter Thiel, this just pops up over and over again. They talk about the importance of trying to find people that, that are better than you. The, the hiring bar constantly has to increase. Now, obviously, the larger the company gets, that's impossible. Uh, Steve Jobs has this great quote where he's like, you know, "Pixar was the first time I see-- I saw an entire team, entire company of A players." But they had 400 player- they had 400 team members. He's like, "At the time, Apple had 3,000." It's like it's impossible to have 3,000 A players. So there is some number that your company may grow to where it's just, you're just not, you're not gonna have thousands of A players. In my argument, I don't even know if you could have 400. I guess you... I mean, I'll take Steve's word for it on there, and Pixar definitely produced great products, but it's probably a lot lo- lower than that as well. So Warren Buffett would tell you to use David Ogilvy's hiring philosophy. And so Warren said, "Charlie and I know that the right players will make almost any team manager look good." Again, that is why it's the most important function of the founder, maybe directly next to the product or right above the product, actually, 'cause those are the people building your product. "We subscribe to the philosophy of Ogilvy & Mather's founding genius, David Ogilvy." This is what Ogilvy said: "If each of us hires people who are small- smaller than we are, we shall become a company of dwarfs. But if each of us hires people who are bigger than we are, we shall become a company of giants." David, or Jeff Bezos, rather, used a variation of Ogilvy's idea too. Jeff used to say in Amazon, "Every time we hire someone, he or she should raise the bar for the next hire so that the overall talent pool is always improving." And they talk about this idea on Amazon, where the, the, the future hires that we do should be so good that if you had applied for the job you already have at Amazon, you wouldn't get in. That's a very interesting idea. Take your time with recruiting. Take your time with hiring. There's this great book on the history of PayPal. It's written by... Actually, I've, I've recently become friends with the author. His name is Jimmy Soni. Um, and this is in his book. The, the most fascinating thing that I found was that PayPal prioritized speed. So from the time they're, they're founded to the time they sell to eBay, it's like four years. Jimmy spent more time researching the book than, [chuckles] than for-- He spent six years researching the book. And I always tease him 'cause, like, you took longer on a book than they took to start and sell their company. [chuckles] It just speaks to, like, the quality he's trying to do. But the, as a byproduct of that, like, obviously, they move fast, but they prioritize speed over everything else except in one area, recruiting. Max Levchin kept the bar for talent exceedingly high, even if that came at the expense of speedy sa- staffing. Max kept repeating, "A's hire A's. B's hire C's. So the first B you hire takes the whole company down." Let's read that again. "A players hire A players. B players hire C players. So the first B player you hire takes the whole company down." Uh, additionally, the team, the company leaders mandated that all prospects, here's another idea for you, all prospects must meet every single member of the team. Now, the next one is the most bizarre. [chuckles] It makes sense if you study... I did this three-part on Larry Ellison, three-part series on Larry Ellison. I should read those books again 'cause the, the podcast is, like, 50 times bigger than, than when I, uh, published those episodes, and he's just, [chuckles] he's crazy. So he would hire based on the confidence, the self-confidence level [chuckles] of, of the candidate. Listen to this. I have tears in my eyes. I don't know why I'm laughing. Okay. [chuckles] This is just so... 'Cause this is... You read about Larry Ellison, and he's one of these people that's, like, really easy to interface with 'cause he just, y- you just know exactly who he is [chuckles] and what's important to him. That's why I think it's so funny. Ellison insisted that his recruiters hire only the finest and cockiest new college graduates. When they were recruiting from universities, they'd ask people, "Are you the smartest person you know?" And if they said yes, they would hire them. If they said no, they would say, "Who is?" And they would go hire that guy instead. I don't know if you got the smartest people that way, but you definitely got the most arrogant. Ellison's, and this is why, w- the personality of the founder is largely the culture of the company. Apple is Steve Jobs. Apple is just Steve Jobs with 10,000 lives, right? I was just te- texting a, a founder friend of mine. Uh, he listens to the podcast. I actually met him through the podcast, and he's going through this, like, uh, process of self-discovery. Like, he's already started a bunch of companies that are really successful, but he's like, "I think I'm more of this type of founder than the other type of founder." And that's good that he's doing that because he's, he's... Hopefully, his next mission is, like, his life's mission, you know? And you can't get to your life's mission unless you, you figured out who you are. Ellison knew who he was. Ellison's swaggering, combative style became a part of the company's identity. This arrogant culture had a lot to do with Oracle's success. Here's another odd idea for you. Izzy Sharp, the founder of Four Seasons, actually could... figured out that in his business, which was hotels, right? That hiring could a-- hiring the right p- person could actually be a form of distribution for his hotel. He gave me the idea because of what? What do we know? What do you and I know in our bones? That history's greatest founders all read biographies. [chuckles] They all read biographies of people that came before them and took ideas from them. Izzy Sharp is trying to build Four Seasons. What do you think he did? He picked up a biography of César Ritz, the guy that, uh, Ritz Carlton is named after, the great, arguably the greatest hotelier of all time. And when he realized that, oh shit, Ritz... He, he says, uh, "Remembering that Cesar Ritz made his hotels world famous by hiring some of the foremost chefs, we decided to do something similar." So what is he talking about? Cesar Ritz went out and partnered with Auguste Escoffier. What Cesar Ritz was ho- to hotel, to building hotels, Auguste Escoffier was to French cooking. And so what happened is you partner with world famous chefs, people come into your restaurant that's in the hotel because of the world famous chef, and now they know about your hotel. That leads to more gu- that me- leads to more activity in your restaurant that you own, but also leads to m- more brand recognition of your hotel, and then by, as a byproduct of that, more people staying at the hotel. So hiring as a form of distribution. This is fascinating. That is a fascinating idea. Okay, here's the problem. You can identify great people, right? Maybe they even want to come work. Like you've identified them, you've sold them, "Hey, uh, this is what, this is our mission. This is what we're, we're doing." And yet humans have complicated lives. They have spouses. They have kids. They have a reason maybe they can't move across the country to work for you even though they want to. So there's a problem-solving element that you see in these books on you have to solve, like you've already identified the person, you've recruited them, they can't go for some other reason. Okay. Well, the great founders are not gonna take no for an answer. I read in, um, in this book called Liftoff, which is about the first six years of SpaceX. This is what Elon Musk did. They had anticipated his friend's issue. Having convinced Musk they needed to bring this brilliant young engineer from Turkey on board, it became a matter of solving the problem. His wife had a job in San Francisco. She would need one in Los Angeles, right? 'Cause that's where SpaceX is at the time. They... These were solvable problems, and Elon's better at solving problems than almost anyone else. Musk therefore came into his job interview prepared. About halfway through, Musk told the guy that he wants to hire, "So I heard you don't wanna move to LA, and one of the reasons is that your wife works for Google. Well, I just talked to Larry and they're gonna transfer your wife down to LA, so what are you gonna do now?" To solve this problem, Musk had called his friend Larry Page, the co-founder of Google. The engineer sat in stunned silence for a moment, but then he replied, given all that, he would come to work at SpaceX. That's really smart. There is another idea when you're promoting. Are you gonna promote from within or from without? You know, that's dependent on you, depending on what, what's going on. I do think this is interesting though. There's this guy named Les Schwab who built this, this really, uh, valuable chain of, uh, t- like tire companies in the Pacific Northwest. I actually found out about him 'cause Charlie Munger's like, "Hey, you should read this biography." He said it in, um, [clears throat] he didn't say it to me personally. He said it to, uh, in like one of the Berkshire meetings, that to study... Les Schwab had one of the most m- uh, one of the smartest, uh, financial incentive structures of any company that, that Charlie Munger had come across. So this is what Les Schwab did. He did not want to hire from... He didn't wanna hire other people from other companies 'cause they might come with bad habits. He liked to train his own executives. And so he says, "In our 34 years of business, we have never hired a manager from the outside. Every single one of our more than 250 managers and assistant managers started at the bottom changing tires. They have all earned their management job by working up." And then another thing, if you're gonna hire the best of the best and A players, they're... A players don't like to be micromanaged. Um, and so this came in Larry Miller's autobiography called Driven. He owns like, he owned like 93 companies all throughout Utah, car dealerships, movie theaters, all kinds of crazy stuff, but he also owned the, the, the NBA team, the Utah Jazz. And what was fascinating is he's trying to recruit Jerry Sloan as the coach at the po- at, at the point, and Jerry Sloan would only take the job on one condition, and I really like it. I really like this idea. If you hire me, let me run the team and business, right? That's what you're hiring me for. One of the best things we had ever done was hire Jerry Sloan as coach. At the time he said, "I am only gonna ask you for one thing. If I get fired, let me get fired for my own decisions. If you hire me, let me run the team/business." Here's another idea from Thomas El- uh, Edison that I think is fascinating. Really, the, I, the way I think about a founder is like you're developing skills that you can't hire for. You, you're gonna hire for everything else, but you shouldn't be hireable, and Edison wasn't. Edison, expressing his views on the preeminent role of applied scientists, which that's what he considered himself, coined the expression, "I can hire mathematicians, but they can't hire me." And so when I read that paragraph for the first time, the note I left myself was, "Develop skills that you can't hire for." Capitalism rewards things that are both rare and valuable. Uh, Estée Lauder would give you advice that you need to hire people aligned with your thinking and values. Hire the best people. This is vital. Hire people who think as you do and treat them well. In our business they are t- a top priority. So this idea is like that seems kind of weird, like hire people who think like you. There's obviously not one right way to build a business. I think that your business should be an expression of your personality and who you are, who you are as a person at the core. And so I think there is an art to the building of your business. And the reason I use the word art, I don't mean in like a hoity-toity, you know, pretentious manner. That's not me at all. I don't even care about [chuckles] I don't... art at all really. I mean that you're making decisions not just based on economics. Like there are non-economic important decisions based on how you're building your business. Like you could probably make more money doing a decision A, but decision A is, goes against who you are as a person, or you just don't like it, or it's just not as elegant or beautiful, and so therefore you don't do it. So that's what I mean about, you know, hire people who think as you, you do. And what, for whatever reason when I read Estée Lauder say that, I was like, okay, that there's like this art to what she's doing. One thing that's gonna be helpful in recruiting, uh, this comes from Peter Thiel. I think this is the book Zero to One. Understand that most companies don't even differentiate their pitches to potential recruits into hiring, so therefore like they're just gonna buy... As a byproduct of that you're gonna wind up with a lower overall talent base. And so he says, "What's wrong with valuable stock, smart people, or pressing problems? Nothing, but every company makes this, these claims." So they won't help you stand out. General and undifferentiated pitches to join your company don't say anything about why a recruit should join your company instead of money-- instead of many others. So that idea of like your pitch, your actual-- He would tell you, you're-- you shouldn't be building an undifferentiated commodity business. But even above and beyond that, like your-- the, the, the mission that you're trying to engage everybody to join you in, that pitch, that sale, sale you're trying to make to a potential recruit should be differentiated, should not... If that person's applying to five other jobs, there should not be like-- It's like they may not like your mission, they may not like your pitch, but they shouldn't be able to compare it to anything else. Uh, another quote from Nolan Bushnell, "Hire for passion and intensity." That's what he would do, or that's what he did when he found Steve Jobs. If there was a single characteristic that separates Steve Jobs from the mass of employees, it was his passionate enthusiasm. Steve had one full-- one speed, full blast. This was the primary reason we hired him. And one thing all these founders have in common is that they know how important hiring is, and when something's important, you do it yourself. This is again Elon Musk on hiring. He interviewed the first three thousand employees at SpaceX. That's how important it was. One of Musk's most valuable skills was his ability to determine whether someone would fit his mold. His people had to be brilliant. They had to be hardworking, and there could be no nonsense. "There are a ton of phonies out there and not many who are the real deal," Musk said of his approach to interviewing engineers. "I can usually tell within fifteen minutes, and I can sure-- I can for sure tell within a few days of working with them." Musk made hiring a priority. He personally met with every single person the company hired through the first three thousand employees. It required late nights and weekends, but he felt it was important to get the right people for his company. And then the close on this, we started with Steve Jobs telling us why it was so important and why it should be a large part of how you spend your time, and now we'll close with what you do after. What do you do after you hire the person? This is what he says: "It's not just recruiting. After recruiting, it's building an environment that makes people feel they are surrounded by equally talented people and their work is bigger than they are. The feeling that their work will have a tremendous influence and is part of a strong, clear vision." So that is the end to that twenty-minute mini episode. I just re-listened to the whole thing, and it, it really does-- I think it's a perfect explanation and illustration of why I think Founders Notes is so valuable. 'Cause that-- Some of those books I haven't read in five, six years, and just the ability to have a searchable database of all this, these ideas, like this collected knowledge of some of history's greatest entrepreneurs to reference and then contextually apply to our own businesses, it's nothing short of... Like, it's magic. Uh, that's really the way I think about it. I think it's a massive superpower. It gives me a massive superpower. I couldn't have made the podcast without it. I also think if you have access to it, it'll make your business better. And so if you're already running a successful business, I highly recommend that you invest in a subscription, and you can do that by going to foundersnotes.com.

Episode duration: 1:34:12