Founders - #105 Les Schwab (Charlie Munger recommended this book)

Starting point is 00:00:00 I wrote this in November and December of 1985. I did write this 100% with my 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.

Starting point is 00:00:27 There could be some interest in this book with people who are interested in business. If so, you are invited to read the book. 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. All right, so that's from the foreword of the book that I read this week and the one I'm going to talk to you about today, which is Les Schwab, Pride and Performance, Keep It Going, and it was written by Les Schwab. All right, so I want to talk first, before I jump into the rest of the book,

Starting point is 00:00:57 how I discovered, like how I found out about this book. So at this point, by this point in time, I've done, I don't know what, three or four podcasts on various books that I've read about Charlie Munger. I've done a podcast on every single shareholder letter that Warren Buffett has ever written. And I did a podcast on two other books on Warren Buffett. These are all in the archives. If you haven't listened to them yet, obviously you have access to them anytime you want. Go back and listen to them. But they bring up Les Schwab over and over and over and over again. So it's very simple. I've learned a lot from both Buffett

Starting point is 00:01:31 and Munger, especially Munger. And they always talk about the operators and other business people that they admire and they respect. And then if there's books on them, they explicitly say, hey, you should go read this book. So let me just read some of the various little quotes that I've collected in this regard. So here's Charlie Munger. It's at the Berkshire meeting in 2004. And he says, if you want to read one book that will demonstrate really shrewd compensation systems and a whole chain of small businesses, read the autobiography of Les Schwab, who has a bunch of tire shops all over the

Starting point is 00:02:05 Northwest. And he made a huge fortune in one of the world's really difficult businesses by having shrewd systems. He can tell you a lot better than we can. Warren Buffett on the book says, it's an interesting book, you know, selling tires. How do you make money doing that? Then he talks, there's a different speech. This is a speech back in 2003 at the University of California. I'm going to read a few paragraphs from this. This is Charlie Munger talking. And he says, there's a tire store chain in the Northwest, which has slowly succeeded over 50 years. 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, the Goodyears and so forth.

Starting point is 00:02:47 And of course, the manufacturers favored their own stores. I'll talk to you more about Les' view on that later. Their stores had a big cost advantage. Later, Les Schwab rose in competition with huge price discounters like Costco and Sam's Club, and before that Sears and so forth. And yet here's Schwab now with hundreds of millions of dollars in sales. And here's Les Schwab in his 80s with no education having done the whole thing. How did he do it? I don't see a whole lot of people looking like a light bulb has come on. Well, let's think about it with some microeconomic

Starting point is 00:03:26 fluency. And he's going to talk about a brief summary of what he believes led to some of the success that Les had. So he says, is there some wave that Schwab could have caught? The minute you ask the question, the answer pops in. The Japanese had zero position in tires and they got big. So this guy must have ridden that wave some in the early times. Then the slow flowing success has to have some other causes. And what probably happened here, obviously, is this guy did one hell of a lot of things right. And among the things that he must have done right is he must have harnessed what Manquil calls a superpower of incentives. He must have had very clever incentive structure driving his people and a clever personnel selection system, etc. And he must be pretty good at advertising, which he is.

Starting point is 00:04:21 He's an artist. So he had to get a wave in the Japanese tire invasion, the Japanese being as successful as they were, and then a talented fanatic, remember that word fanatic, had to get a hell of a lot of things right and keep them right with clever systems. Again, not that hard of an answer, but what else would be a likely cause to this peculiar success and then now we have another quote from it's one of uh buffett's shareholders i don't know which year but he says um it's it's extra tough when a fanatical there's that word again fanatical small competitor like rose blumpkin that's the 90s the the lady that um she ran nebraska furniture Mart until she was like 103,

Starting point is 00:05:06 wound up doing hundreds of millions of dollars a year in revenue. Warren Buffett famously bought her business, and he talks a lot about her in his shareholder letters. Anyways, so he says it's extra tough when a fanatical small competitor like a Rose Blumkin or a Les Schwab or a Sam Walton sets their sight on your particular marketplace, Buffett said. How do you compete against a true fanatic? You can only try to build the best possible moat and continue to attempt to widen it. So I wanted to bring that up at the very beginning because I think it gives you a good introduction into who Les Schwab is or was, I guess, and helps understand a lot of the things I'm going to go over in the book.

Starting point is 00:05:45 All right. So let me go back to the book. And we're going to, I'm going to start at the very beginning. And what I love about Les is that he was, he had a very strong opinion that you should not have a crab in the bucket mentality and that you, that you're, you need to share everything that you learn and know with other people. And in his particular thing, he's like, I need to constantly educate my employees because the only way we're going to be successful is if I can work through them. And a way to work through them is to instill them with all the ideas and theories I have on how we should be running this business. So he says, this is his main thing that he talks about over and over again in the book,

Starting point is 00:06:18 the one that Charlie Munger and Warren Buffett always talk about, is that he understood human psychology. They said he wasn't educated, right? He's an orphan at 15. I'll get there in a minute. But he understood how humans behave and what motivated them. So he famously, every single store that he had was run as an individual business. And then the workers in that store got 50% of the profits. So that's what Munger and Buffett are talking about, that you need to study his compensation systems. This is where we're going to start here because Les talks about it. He says it's the single most important thing he ever discovered in business. So he says, I encourage you to share profits with your employees.

Starting point is 00:06:56 I encourage you in every way possible to build people. This is good for America. It is good for you. And it is good for your employees. If you do share, do it openly and honestly. And don't get jealous if they start to make some money. That's the whole idea. If you make people under you successful, what happens to you? Aren't you also then successful? But if you think of yourself first, it just won't work and there's no use in tempting it. What nicer thing can you do in your life than to help young people

Starting point is 00:07:25 build their lives into successful people, not just in money, but in all ways. The older I get, the more proud I am of the profit sharing programs and other programs that I've created. These are the ones that Munger just referenced, right? Or that I've helped create. I believe so strongly that America is such a great country and that capitalism is the best form of government. I think we owe it to America to do our share to see that it continues. The best possible way to make it succeed is to share with people, to help people be successful people. So when I'm reading this, first of all, this is why founders can even exist because for some reason towards the end of the lives of entrepreneurs, they love writing down

Starting point is 00:08:09 everything they learn. So all their knowledge from decades and decades of experience doesn't get lost, and then we can use their ideas moving forward, right? But when I read that section, something jumped out of my mind. And so I want to talk to you about that. I'm going to put the book down for a minute. Another person that Munger and Buffett constantly refer and that a lot of people admire, a lot of entrepreneurs that are alive today, talk about all they learned from James Sinigal, which is the co-founder of Costco. OK, and what Les is talking about here is like, listen, you need to forget your crab in the bucket mentality, like share everything you have and build people up. James Sinigal did this with Jeff Bezos. And I read, this is going to come from the Everything Store. I read the book, what, two years ago? I don't even know how long ago. And I've never, ever, ever forgotten this. I think about this all the time.

Starting point is 00:08:54 So I'm going to talk a little bit about what, like James is something like 30, I think he's like 30, 32 years older than Jeff was. So in the book, it talks about in 2001. I think about the company Amazon today is vastly different, right? 19 years or whatever it is later. 2001, you know, it was a much, much smaller company. So they wind up having a meeting. They meet, funny enough, they meet at Starbucks inside of a Barnes and Nobles. But anyways, so it says,

Starting point is 00:09:21 Cynical explained the Costco business model to Bezos. It was all about customer loyalty. Through the selection of products in individual categories is limited, there are copious quantities of everything there and is all dirt cheap. Costco buys in bulk and marks up everything as standard across the board 14%, even when it could charge more. It doesn't advertise at all and earns most of its gross profit from the annual membership fees.

Starting point is 00:09:46 So he says, he's continuing the conversation he's having with Jeff. James is talking. He says, the membership fee is a one-time pain, but it's reinforced every time customers walk in and see a 47-inch television that's $200 less than any place else. This is a really important sentence here. It reinforces the value of the concept. Customers know they will find really cheap stuff at Costco. Now, why is the word value so important?

Starting point is 00:10:10 Because James built his entire career off of that. He says, my approach has always been that value trumps everything. The reason people are prepared to come to our strange places to shop is that we have value and we deliver on that value constantly. The Monday after that meeting, Bezos met with his senior managers. Now, this is another example. I always reference that, you know, same thing we're doing here. We're studying from entrepreneurs to the past. You see that every single other entrepreneur we've ever covered does the same exact thing. Jeff is no different. Now, he didn't just have a conversation with James. Well, that, well, that's nice, and went home. He actually implemented those ideas into his business, and it fundamentally changed

Starting point is 00:10:51 what Amazon is. Think about that. There was no Amazon Prime before this. Okay, so he says, the Monday after that meeting, Bezos went, met with his senior managers, and announced that Amazon would immediately be cutting prices on books, music, and videos by 20 to 30%. Later during a conference call with analysts, he observed there are two kinds of, this is one of his most favorite quotes. There are two kinds of retailers. Those are, there are those folks who try to figure out how to charge more and there are companies that work to figure out how to charge less. We are going to be the second full stop. Now that's not, that's not the end of what he learned from this. So, uh, I'm going to quote from another, this is now an article quote, uh, analyzing like the meeting

Starting point is 00:11:31 between James and Jeff. So it says, um, uh, let's see. Okay. So now this is quotes. Uh, this is actually an interview with James. Sorry. Uh, he's a tough business person talking. This is James talking about Jeff. He wanted, uh, to, He wanted to buy from us at three to four percent less than we paid for the merchandise ourselves. Those talks went nowhere. Instead, Bezos came away from their conversation with some deep insights about Costco's success in keeping markups small and prices low. When Amazon eventually launched its Prime membership program, the parallels to Costco's own paid memberships were easy to spot. Now, this is how it ties all the way back to to less. He says, was Senegal too candid with Bezos?

Starting point is 00:12:14 The Costco co-founder is unrepentant about his willingness to talk shop with a younger entrepreneur trying to build a business. Perhaps that's because of his desire to see best practices spread throughout American business. Okay. So this is something that Les talks about over and over again. He's laying out his theories. He's talking about all the success he's had with these. Like, and then he says over and over again in the book, why are you not doing this? Why are more American business people doing this? What are you doing? Like take this good idea over and over again. So I just could not help the entire time of reading this book, tie it to other things that I've learned in studying all these entrepreneurs. And you just see these main themes over and over again. All right. So first, I'm going to go back to the book. I'm going to talk a little bit about his early years. Now, he less talked about the very beginning. He didn't have a he didn't have a ghostwriter. He never wrote a book before. As a result, the book I have in my hand is very, it's put together very bizarrely. And I love the way it's just, there's no fluff. He just writes

Starting point is 00:13:11 simple short sentences and then he'll just go on to the next thing. I mean, it's not separated. You have like headings and stuff, but there's no like, it's not like he's, it's not even a narrative, I would say. He's just whatever happened to be on his mind that day he was writing. So I want to talk about his early life. And this is a sentence that, two sentences that kind of sum up his father. Father Bishop was not there. He was drunk again. Talks about, they grew up on like a, like a camp, like a log, I don't know if it was a logging camp. Essentially they lived, okay, let me just tell you.

Starting point is 00:13:42 The schools, he's in eighth grade at the time. The schools were just a railroad box car with somewhat crooked windows cut in one side of the box car. There were three of us in the eighth grade. So they're in this camp with other families that work for the same company. In those days, we had to take state exams to graduate from the eighth

Starting point is 00:14:00 grade. We all failed. So it says there's a lot of ranchers. He grew up in central Oregon. He considers himself very much like a rancher, a Western person. So it says the farm wouldn't sell as it was the start of the Great Depression. And the bank finally took the farm back from the debt owed. So he's talking about what's happening to his family. My mother thought it might help my father's drinking problem if we all moved back to Oregon. We were taught to work at very young ages.

Starting point is 00:14:29 It seemed the normal thing to do. Now he's going to describe his, I mean, I guess you call it a home. I mean, it reminds me very much of like the podcast I did on Jim Clayton, who grows up in a log cabin with a sibling and his two parents, no electricity, no running water, and then winds up selling his business for $1.7 billion to Warren Buffett like 40 years later. So we have a similar situation here with Les. He says, he's describing it.

Starting point is 00:14:54 Small two-room holes, a two-holer with no running water. Water was hauled by train from town. Spigots from town. Spigots were spotted around camp, and you took your bucket to the tap,, filled it and carried it to your home. Today, that would be poverty, but the homes were clean and people had fun. There was one community shower. And so he called, he's living in a log camp. Okay. So he says, now a lot of people, you know, good, good, you know, like, oh, poor, like, you know, woe is me. Look at this environment. He didn't look at it like that at all. In fact, he thought that even though the people were poor and they have a lot of money, they were good. They were still good people. So he says, I've been around

Starting point is 00:15:30 the people of the log camp for the past 50, 50 or more years. And the people and the children of these people have turned out to be much, to be much above the average citizen, both in success in business and in being a good all-around citizen. So he's living in a logging camp, but then there's no like high school. So he has to take a bus of some sort to high school, and then he has to be boarded by another family during the week, and he comes back to the logging camp on the weekend. So this is a lesson in high school. He says, 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.

Starting point is 00:16:16 And he talks about the effect that alcoholism had on his family. This was killing my mother. It was sad times for the Schwab family. So he realizes he's taught to work for at a young age and he wants to make his own money so he starts to immediately deliver newspapers and he's extremely good at it so he says I immediately started to deliver newspapers I remember so well my first route I ran the route for two months in order to get enough money to buy the first my first used bike okay so that's how poor he was. Most people are delivering, most other boys of his age were delivering bikes, newspapers on a bike, later he gets a car,

Starting point is 00:16:50 but he builds this entire newspaper. This is an important part of his life to understand him as well. He built this entire business while he's in high school. Right? And then he starts off just like he does his tire business. Okay, well, I don't have a bike. I gotta use what I have.

Starting point is 00:17:03 You know what I have? I have two legs and a lot of youthful energy. So I'm going to run down and deliver the papers, right? Then I'm going to save my money. I'm going to buy a bike. Then I'm going to get so good. I'm going to start adding other routes. Oh, wow. Now I have other routes. I'm making more money. I buy a car. He eventually starts making more money from his newspaper delivery business than his high school principal made. He says, my father died almost to the day of my 16th birthday. He was found dead in front of a moonshine joint. Now there's some crazy sentences here. We thought there might've been foul play, but it didn't really matter.

Starting point is 00:17:35 He had gone so far downhill and 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. Being a person who took one drink and couldn't stop until he completely gave out, he ran downhill from there on. 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. His mom's going to die very soon after this as well.

Starting point is 00:18:07 Going back to what I was just talking about, how he was able to make a lot of money in high school, he says, I rode my bike during the week, even though I was getting to the age where a 16-year-old boy didn't like being seen delivering newspapers, especially on a bike. But money, in this case, was much more important than pride. So he winds up taking over all these routes. He says, there were eight or nine routes in the town and I took over the whole town during that summer.

Starting point is 00:18:28 I was now making about $175 to $200 per month and I wasn't even 17 yet in the middle of a depression. The high school principal only made $150 per month. I think I thought I was already a man. He doesn't hide the fact that he's extremely confident. He calls himself cocky over and over again. And I'll talk more about that in a little bit, but he thinks it's a huge asset actually. Actually, it's on the very next page. So this is, know that if myself was being cocky, it was helpful. And then I want to talk to you about Les's ability to study more than anybody else did. All right. So he says, uh, the one thing I did know was newspaper circulation work, and I knew a lot more about it than the two minority owners.

Starting point is 00:19:10 So he's saying he studied, uh, uh, he studied this particular aspect of the newspaper industry more than there was three people that owned the main newspaper he's working for, which is called the, I think it's called the Ben Bulletin. And they had one main guy and then two minority partners. Well, let me, you know, before I get there, let me, I'll go back to that. Let me read, finish this, this paragraph. So he says, the circulation, this is important to know his personality too, because he talks over and over again how he's a master at analyzing other businesses and seeing what they do wrong. And then just avoiding that. It's very similar to like Charlie Munro says,

Starting point is 00:19:47 I'm not trying to be brilliant. I'm just trying to avoid being stupid. Les did the same thing. So he says, the circulation end of the newspaper work is usually regarded as the lower end on the prestige ladder. But it's also closest to the money, right? I attempted to put, because he's selling subscriptions to newspapers too on his routes. I attempted to put some pride into the circulation work for myself and for others.

Starting point is 00:20:10 I was young, sometimes cocky, but this cockiness helped me a lot going through life. Les had an abundance of confidence in himself. And think about it. Think about with the access to information and tools that you may have if you haven't started a business yet compared to less. Parents dead at 15 or 16 years old. He's on his own. They try to give him guardianship. He winds up saying, no, I'll just rent a room and figure it out myself. Really no education to speak of. And builds a company that in 2018 did $1.8 billion in sales. Okay. So there's another thing that I want to go back to here.

Starting point is 00:20:51 He says, I knew, the one thing I didn't know was newspaper circulation work. So he's essentially saying I focused on one thing and I got really good at it. I knew more about it than two minority owners. So when I read that part, I thought about one of my favorite speeches I've ever seen. It's on YouTube. If you have access to my notes, it's in there. It's a speech by Bill Gurley. He's a partner at Benchmark. It's called Running Down a Dream, How to Succeed and Thrive in a Career You Love. You can read my notes or you can just search in YouTube. I'd recommend watching the whole talk. I think it's about an hour. But he says something in there that I always think about. And first of all, he's essentially giving a speech to, I think, University of Texas MBA students about running down how to succeed and thrive in a career you love. Essentially what I just said, don't waste your life doing something you hate.

Starting point is 00:21:36 That's what Bill's saying. How do you figure this out? So he says something that directly relates to what we're talking about here with Les. I'm going to get to that. Actually, you know, before I get there, I'm going to share some of the other highlights from this talk because it's so interesting. He talks about how he learned from three other people and what they did. So he says a dream job is a career where you have immense passion. Life is a use it or lose it proposition.

Starting point is 00:21:58 That's kind of what I was just echoing there, right? Most humans take one career path. If you only have one shot, why not do what makes you happy? That's the entire speech that's the entire reason why he's giving the speech because he obviously sees people that don't do this he talks about uh he uses the the lives of bob dylan uh bobby knight and danny meyer as examples so i'm not going to cover all that i'm just going to cover some highlights um so he talks uh talks he's like he studies. He takes a ton of notes.

Starting point is 00:22:27 He's watching The Chef. He talks about this. He talks about one of his favorite quotes. I spent nearly two years doing the best work ever as a student. That comes from Danny Meyer before he opened his restaurants. And what Bill is saying, he's like, he's most proud of the studying he did on his own, not the studying he did in college.

Starting point is 00:22:47 So now Bill says, pick a profession about which you have immense passion, a deep personal interest. Nothing will make you more successful than if you love doing what you're doing. You will work harder than anyone else because it will feel like fun. Remember what Buffett and Munger just told us. How do you compete against a fanatic? You really can't. Less is a fanatic. Bill Gurley is a fanatic. Everyone has the will to win. People don't have the will to practice. So what is he talking about here? He's saying, be obsessive about learning in your field. Hone your craft constantly. Understand everything you possibly can about your craft.

Starting point is 00:23:16 This is a crazy sentence. Consider it an obligation. Hold yourself accountable. Keep learning over time. Study the history. Know the pioneers. Exactly what we're doing here, isn't it? Strive to know more than anyone else

Starting point is 00:23:29 about your particular craft. What did Les just tell us? Les just said, I knew more than these guys and they own the company. You should be the most knowledgeable person. It is possible to gather more information than someone else. Now that brings me to the most,

Starting point is 00:23:43 in my opinion, probably Bill's most important point. Okay. And he says the good news. I think about this in terms of less than all the people we've studied. The good news. If you're going to research something, this is your lucky day. Information is freely available on the internet. The bad news. You have zero excuse, zero for not being the most knowledgeable person in any subject you want. The information is right there at your fingertips. If you adapt that mentality, it is impossible, impossible that you are not going to succeed at what you want to do. And the whole time I'm reading this and thinking about this and tying all this together,

Starting point is 00:24:18 I've been, I was rereading some of my notes on, excuse me, the highlights I took when I read Sam Walton's autobiography. And Sam did this exact same thing. He'd studied everything. I think in the book it says there's no, there's not a person alive that walked in more stores than Sam Walton, even when he was vastly more successful than everybody else. He's like, no, I could still learn from these people. All right. So I'm going to skip, go back to the book. I'm skipping ahead. He winds up working in the newspaper business for quite a while. So this is Les at 28. I was now 28 years old. I had ambition. I wanted to go into business as I'd always wanted

Starting point is 00:24:51 to be a businessman, but I didn't have any money. So the story of Les Schwab is he's got to do the best possible job at whatever job he has in front of him. And he knows if he keeps at it, eventually the opportunity is going to present itself to get his real goal. So he talked about wanting to be an entrepreneur when he was like 16. Now we're fast forward 12 years. He's still not there yet. Right. He doesn't know what kind of, he knows that he wants to be in business, but he doesn't know what kind of business. So he says, I was going through a period at this point of not knowing just what I wanted to do. I bring that up and I highlight that because everybody feels this way. I felt this, I felt this way in the past many times.

Starting point is 00:25:27 Les feels this way. Going back to Sam Walton, you know, Sam, his manager told him when he's working at JCPenney, he's like, Sam, you've got to find a different career. You're not cut out for retail. Like, think about how ridiculous that is, right? He just didn't know what he was going to do. And it's no different. I'm sure you feel the reason I bring this up because I'm sure you've had this own feeling in your life

Starting point is 00:25:45 Right, so I'm gonna fast forward. This is now less at 33. Remember he wanted to be an entrepreneur. She's 16 He doesn't do it to use about 33 He says I was now 33 years old and still wanting to go into business of my own money was the main thing holding me up So his brother-in-law winds up making some money at like the timber industry, right? So it says my brother-in-law winds up making some money in the timber industry. So it says, My brother-in-law told me to find a business and he would help me finance it. That was all I needed, and I started to look seriously as I knew the 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.

Starting point is 00:26:19 There was a tire business for sale in Prineville. So this is going to be the very first Les Schwab tire company right here. He winds up getting a loan. Let's see. The price of the shop was $11,000 plus inventory. Let's call it 15 grand. Okay. I've seen other people analyze this and they said he did it for 3,500.

Starting point is 00:26:39 That's not accurate. I mean, the book, it says the price of the shop was $11,000. So it says, I thought the tire business had a future. Remember, he doesn't know anything about the business though. But again, this is where I go back to like having a belief. You can't just have a false belief. I don't mean be cocky or be confident and not do the work necessary to justify that. But what he did, having a career now, started working essentially full-time since he was 15 years old.

Starting point is 00:27:03 Now he's 33. Okay. So it So 18 years. Like he knew he could learn, like he didn't know anything about the newspaper delivery business. Learned that. Didn't know anything about working. And then he winds up working inside the, for the actual newspapers. Didn't know anything about it. Did well at that. He was like, I don't know anything about the tire business. I want to figure it out. So he says, uh, I thought the tire business had a future. I remember telling my wife I thought I was a salesman. Oh, that's an understatement. A pretty good one.

Starting point is 00:27:27 That's an understatement. And maybe that ability could be used in the tire business. It was a hard, knuckle-busting, dirty work. I got $11,000 from my brother-in-law, sold my home, and borrowed on my life insurance. Altogether, I raised $3,500. So what's that? Just under $15,000.

Starting point is 00:27:44 Just shy of $15,000. Okay. Now this is, he talks about his first day in business. This, this is the first sentence on the first day. I had never fixed a flat tire in my life. He had no experience with tires whatsoever. Okay. But, but from a very early age, he thought a lot about business. Cause I told you, he constantly analyzed. He's like, why are they making the decision they make? That's so weird. You can do this too. Go patronize a store or a service.

Starting point is 00:28:10 You're like, this is really sloppy. This is not, I would do it differently. I'm sure you've had these ideas. All of us have had these ideas. Why are you doing this? This is very bizarre. Les is full of ideas like this. So he says, one of this is that if he ever went into business, he was going to share the profits.

Starting point is 00:28:23 I remember telling my wife many times that if I ever got a chance to go into business, I had some ideas about sharing with people and about sponsoring people in the business. There are a lot of people who could run a business but would never get a chance due to mostly the lack of startup money. I was going to furnish the money and in some way share with them the promotion of our business. So what's unique about the structure, the incentive structure, and I would say the organizational structure of Les Schwab is each individual store is its own entity, right? And the employees that are in, that work in that store have partnership agreements.

Starting point is 00:28:56 So they don't own stock, but they own access to the profits, okay? So he says, and that's what he means. Like they may never be able to run a business on themselves, but if they look at their individual store as a small business and they own 50 of it and maybe there's you know at start there's one guy running the store you know um and then you know you might have 12 or 13 people in the store over time as it grows so the first month we did 2800 in sales uh feb that's january february was even less in sales

Starting point is 00:29:25 but in March I started going and by June and July I was doing $10,000 more per month in sales think about this contrast at the end of the year I had $150,000 in sales the man I bought out meaning the previous year

Starting point is 00:29:44 they did $32,000 in sales the note of bought i bought out meaning the the previous year they did 32 000 in sales the note of myself is being good at sales is like being a magician because less would go out and he wouldn't sit down and wait for people to come to his store he'd go out and sell tires that's what he did all the time he was a fanatic to use that word. Okay, so now he's going to get into like he, so Munger talked about like he less rode the wave of the Japanese tire importing, right? And why did Japanese, why the Japanese have an opening to make so much money in the American market? You had a bunch of huge American rubber companies. And you're going to see like like, because they treated their dealers and the people buying from them terribly.

Starting point is 00:30:27 So it says, the pricing policies of the major rubber companies to their dealers was most unfair. They were all the same, all five of the American rubber companies. So he's saying there's essentially like a cartel. There's collusion. There's price fixing here, right? This was called meeting a competitive situation this is the term that that the company's told their dealers right what and so less is gonna

Starting point is 00:30:52 translate this for us into english i called it milking the dealer of his profit um and so he's going to continue talking about like that you know you're milking the people you're supposed to be helping it's the opposite theory that less has on business you should be helping the people that can make you because helping the people make you more successful you're milking the people who are supposed to be helping. It's the opposite theory that Les has on business. You should be helping the people that can make you, because helping the people make you more successful. You're doing the opposite. So he calls this earning your failure. That's a really interesting idea.

Starting point is 00:31:13 He's like, they earn their failure. I had to contend with this until I made connections with Toyo Tire Company from Japan. I say, thank God for the foreign tire supply. It helped the independent tire dealer. 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 of a rubber company because they were not being fair and

Starting point is 00:31:35 honest. So he's giving it back exactly. He's not just like, okay, you're going to take advantage. You'll take all my profit. I'll go to business. No, I'm going to fight you back. You want to be unfair with me? I'm going to be unfair with you. Les is a very hard dude, as you could imagine. He says, today in 1985, I don't feel the same way towards rubber companies as I did 25 or 30 years ago. They are much better people today. Today, and so he's saying, like, this is the theory, this is the theory I had when I was in the beginning. I don't obviously hold that theory now. He's talking about growth he had. 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 or 30 years ago.

Starting point is 00:32:11 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 years of my tire business. And they could be unfair because they had a cartel the five and now what do you think is going to happen over and over again we see examples of this when you take your eye off of and you stop having a maniacal focus on the customer and you start wanting to make more money for yourself or be selfish or just think hey i i've cornered this market too bad they have to deal with it what's going to happen i the five major american rubber companies have received their just awards as two of them have dropped truck tires entirely

Starting point is 00:32:47 and the other three aren't doing very well with truck tire sales. It serves them right. They have earned their failure. So he's got, is this his second store? I think he's about to open his second store. But this is something that Les was very adamant about from the very beginning. And he says, I had made my mind up to do it very differently. This just comes from his, his analysis of, uh, of like studying businesses, seeing where they, they make mistakes and then collecting more information. Oh, I never

Starting point is 00:33:22 finished my, my, my, um, my point on Bill Gur bill girley there's a book out there i'm going to eventually read on the founding of benchmark and the original founders like the summary of the book says that um they eventually go out and hire people that were very strong in areas they were weak and i don't remember like i know girley was an analyst and that he was taking his own advice and collecting more information being the most knowledgeable person than anybody else was and so analyst and that he was taking his own advice and collecting more information, being the most knowledgeable person than anybody else was. And so they saw that he was strong where they were weak. So they brought him into the company. That advice that he's giving us in that talk made Bill Gurley a billionaire. He got into Benchmark. Benchmark succeeded and he's a partner now. And that's how much studying and learning the craft and taking what you're doing during the day seriously.

Starting point is 00:34:06 Like that's what it could lead to. That's a pretty crazy outcome. So anyways, back to Les. My theory in the small store was that all other large tire dealers had, oh, so this is interesting. This is a weird thing. So they're selling truck tires. Remember, there's a lot of like lumber and ranch

Starting point is 00:34:23 and like think of like, you know, very rural production here. And truck tires are extremely expensive. So the other businesses would go out and they'd have like these large, they bring the service to you, right? So he says, and he's like, well, I'm going to do the opposite. They're going to come to me.

Starting point is 00:34:41 He says, my theory in the small store was that all other large truck dealers, large tire dealers had big service trucks running all over the country. They called on mills, commercial accounts, garages, and service stations. But I had made up my mind to do it differently. I would advertise to the ranchers and other people telling them to buy direct from me. The other tire dealers had 6,000 plus invested in service trucks. So one truck would cost six grand right for them. I put in a whole store for 10 grand and we were there six days a week. dealers had 6,000 plus invested in service trucks. So one truck would cost six grand, right for them. I put in a whole store for 10 grand and we were there six days a week.

Starting point is 00:35:09 They only used, they only called once a week, meaning like you could only visit using the trucks, one customer once a week. He's got people coming to him. It worked. People did come directly to my store and business was picking up constantly. And he did it for a fraction of the cost. Like how many trucks, like $6,000 a pop, you have a bunch of trucks, you're spending way less than he'd spent on one store. This is when he started profit sharing. And then this is a very smart move he did on his part. He didn't ever think that Les Chois would be as big as it got because he treated everything as an experiment, right? So he says, a big day in my business career was on January 1st, 1954. This was the start of the profit sharing

Starting point is 00:35:49 program that we still use today. We still share 50% of our profits, but we share it with all employees in the store. So he's sharing it with this guy, Frank, who's going to be managing of his first store so he can open a second store. He says, I also told Frank that if this store was successful, I plan to build more. If this store failed, I would just go back to Prineville and just run one store. There wouldn't be a chain of Les Schwab tire centers that we have today if I hadn't been successful in Redmond. Okay, so his first two stores to get started, he was like a, he sounded like a dealer contract. This is how he knows that dealers were, were very unfair. Uh, and it was this, it's called okay tires. And he was determined to be independent and he was, he was honest almost to his fault. So he starts meeting with the person,

Starting point is 00:36:36 like the person that I guess you'd call it. Someone was like a franchise, I guess is how I would describe this. But he says, I was going to open my, my own, uh, independent tire store. And then the person that he has a contract with, he said, he said, I was going to open my own independent tire store. And then the person that he has a contract with, he said, he said, I couldn't do that. And my reply was, let's not argue. I just want to be open about it. Now I had a fight with OK Tire Stores. They were on my back, but we charged ahead. And he says, I did really have a fight with OK. They were threatening to take all my equipment away from me and cancel me out as an OK Rubber franchise member. I lost my temper and told them hereafter I didn't want any more harassment from them.

Starting point is 00:37:11 If they had anything more to say, say it in court. I walked the floor nights. He uses this term over and over again, walking the floor at night, because if they took my equipment, it would have bankrupted me. I was bluffing but i was determined uh he says as i think back i think the reason they didn't take it to court would due to the fact that he comes up with a really good insight here due to the fact that if they lost it would have messed up the friend their other franchises nationwide so he only had he's on the 1950s uh the fee was like $12 per year and

Starting point is 00:37:46 they had like thousands of these everywhere. So yeah, they may, uh, let less like slide out of a contract. He shouldn't have been, uh, he shouldn't have gotten out of, but it costs him $24 for the year at a, at a risk of, uh, voiding their franchise contract with thousands of others. Uh, so he says every time they tried, and this is hilarious. So then they tried to cancel me. He says, every time they tried to cancel me, I would send them a registered letter telling them I wouldn't accept the cancellation.

Starting point is 00:38:14 He's like, no. It's like somebody breaking up with you. No, I don't think so. We're not going to break up. This is a reminder that the early days of his company were full of struggle and that he had, you know, modest initial goals. The pressure on me was tremendous. My largest account was behind on payments and it worried me to no end.

Starting point is 00:38:31 He'd extend credit to his customers. 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 down with them. And the Les Schwab story would have ended right there. I told Dorothy, this is his wife, I was gelling an idea for the future. Maybe build six or seven or eight stores someday. I think today they have like 600 or something like that. I was already visualizing ahead, but we certainly went past the six, seven, or eight numbers. Skipping ahead a little bit, we're going to see Les, like many of the

Starting point is 00:39:06 entrepreneurs that we study, are masters at capping their downside and then leaving their upside uncapped. And then also he has, again, no education, but a lot of street smarts and a lot of people, good with people. And he just instinctively knew, hey, I don't want to build a business on someone else's property. So he says, I had an escape clause in the contract that he's talking about expanding now. Now he's up to a seventh store and expanding like larger buildings, larger land. He says, I had an escape clause in the contract that I could turn it back to him and not have to pay it off. He wanted to lease it to me, but I'd already seen the wisdom of owning property. And I wanted a contract so that I could own it someday if I made it. So he has this standard operating procedure where he'd do a five-five

Starting point is 00:39:49 and he would do a five-year lease with a five-year option to buy. And so now actually I was just reading, there's actually a piece of news on Les Schwab company recently where it was a private company. I'll talk to you more about that and they might put it themselves up for sale. Les is dead, his kids are dead and unfortunately so this is different multiple generations now and they're gonna sell it they think they'll get about three billion dollars for the company and they own a big chunk of that value is they own a lot of real estate and it comes to what Les is doing here back in the 1950s um and then this idea about don't build on someone else's property you what is it like the modern day equivalent it's people that build uh businesses on top of like facebook google uh youtube i just saw

Starting point is 00:40:36 somebody they were like they built a business on youtube they hired a bunch of people and then i guess youtube either changed the algorithm or just decided hey you can't make money like demonetize them and they went to twitter and understandably listen this is heartbreaking to me like somebody's gonna lose their business right on the holidays whatever the case is it was just like rule number one don't build a business on someone else's property uh okay here we go i love this part um so okay so remember at the beginning he talks about how these these these tire companies would just screw their dealers so he has an agreement about like a some like a five percent um stipulation in the contract which is essentially his profit margins at the time when he was just starting out and they agreed to to keep it in even though they were going to take it out from other tire dealers

Starting point is 00:41:21 and then they renege like a few months later they renege on that agreement. And so this is Les' response. He says, I called the vice president at night and got him out of bed. He later told my wife that I called him at 2.30 in the morning. It was not quite that late, but I was mad. I got the 5% back. And so the takeaway from this experience he's having, he says, it's hard to comprehend today why big companies treat their dealers and employees the way they do. And so in the sense, less is their customer. And the lesson here is maintain a maniacal focus on the customer. And just if you do that, we see, and I know that myself is like, why is this so hard why do so many people spread across all different countries different time periods eventually lose sight of who got them there to begin with

Starting point is 00:42:10 what got them there was a maniacal focus on the customer and the businesses succeed over a long period of time never lose that focus this is the company's called general tire i think they go out of business actually um or at least they go out of the business they were in at that point. It's like, it's not a surprise. Les is like, he's just very, again, a lot of common sense. It is hard to comprehend today why big companies treat their dealers and employees the way they do. Because he knows long term that when you treat people like that, like they're going to go elsewhere.

Starting point is 00:42:41 They have other options. It only works if you have like a monopoly. Even then, do you really want to be that kind of person? Here's an example of his fanaticism. It is not unusual for me to drive 600 miles or more in one day and make many stops. So he'd be out in the field constantly visiting the stores, constantly checking up to make sure that they're actually following through on the ideas and the theories and the way he wanted the businesses run.

Starting point is 00:43:10 He's also studied people like from other businesses and adapted. Essentially in this section, he's learning from other, from the advertising practices of other people. He's studying Lucky Strike cigarettes. So he, Lucky Strike cigarettes were tremendously heavy advertisers. He was advertising on the radio at the time. LSMFT was their slogan. I don't know how that even worked. It says, it was on their cigarette pack and they hammered it constantly. LSMFT, Lucky Strikes, means fine tobacco. So it's an acronym. So he's watching this. He's like, wait a minute. he's like, I told Dorothy, this is his wife again, look, L S M T M F T. That means less Schwab means fine tires. I started to use it immediately and it was very effective. There's this huge section I'm going to skip, but I want to tell you the,

Starting point is 00:44:01 the, the key takeaway here. He's one of the first company, I think they still do this to this day. He decides that even if you're not his customer, he'll fix your flat tire for free. And he starts putting that in his advertising. And over time, this tactic grew his business. So he'd lose a little bit on the front end, you know, because he's dedicating maybe 25 minutes, whatever, however long it takes to fix the flat. But when it was time for new tires, they'd go back to the business that helped them. And that's just, again, fundamental aspect of human nature. And he started fixing flats just because he thought it was the right thing to do. And then eventually he's like, oh, wow, this is helping.

Starting point is 00:44:38 He discovered this by accident because they come in and like, oh, yeah, you know, six months ago or whatever, you fixed my flat tire. Now I need two rear tires. I decided to buy it from you. So any way you can adapt that to your own life, you might find a way that if you do something for somebody, when the time comes, they reciprocate. It's the reciprocal tendency, I think, is the psychological term. There's a lot in this book where once you read once you like i feel i've read enough about charlie munger and then read also the people he admires and you start to see like what he admires in other people is the stuff he wants to see in himself and probably does see

Starting point is 00:45:14 in himself and uh one of his most famous ideas is the invert always invert like you can solve a lot of problems if you work backwards uh this is Les saying, my thinking was to reverse it. It says, most tire businesses had a small showroom and all the tires were hidden in the warehouse. My thinking was to reverse this, to make the showroom the warehouse. It would impress people, but I had to wait until I can get the right buildings to work out of. I did the best with what I had. And even then I had more tires displayed than any other tire dealer in the area. People were impressed. And now this is another example of how you can be great at one business and that doesn't equal that you're going to be great at any

Starting point is 00:45:57 business, right? And a lot of people think this, that's why you have like this phenomenal serial entrepreneurs. They have a great idea. They sell the company and then they try and sometimes they're successful in the second or third time, but most cases they gave away their best idea. And now you're just working on your second or third best idea. It's very bizarre. So he wants to start a ranch and ranch is supposed to be able, it's a business that like it's supposed to sustain itself. He says, I've often said, I think I'm one of the very best tire dealers in America, but without a doubt, I'm, I probably am about the worst cattle rancher in America. Attempting to be a cattle rancher has cost me millions of dollars. I would undoubtedly be three, four, or $5 million richer if I'd never

Starting point is 00:46:37 attempted to be a rancher. But then you also see his idea where he repeats it over and over again, but I don't really regret it as you only go through life once and I would have hated to go through life without my cattle ranch experience. He says that over and over again. You only go through life once. You only go through life once. Why aren't you taking the risks that you want to take? Kind of what we were talking about at the beginning of the podcast, right? This is another example of his fanaticism. He was obsessed with keeping everything clean to the point that he insisted that, remember, he said that I'm going to do the opposite of what people do. I'm going to have this huge tire showroom and people are going to be really impressed. I can see how much selection I have. It's going to look like I have

Starting point is 00:47:12 more tires than all my competitors. He made sure that the tires on display were cleaned every day. So he says a super, he calls it a supermarket tire store. A supermarket tire store has tires displayed, a clean showroom, tires waxed, and an appealing appearance. I sincerely hope I have made myself very clear. And this is also an insight into his personality. So he talks about you have to, the tires are cleaned daily with a dust cloth. And they're cleaned so nicely because of the clean lacquer. And he gives instructions. One, I want to tell you where he's writing this. In the book, he reprints a bunch of, he calls them company bulletins,

Starting point is 00:47:51 think of like internal company communications, like a memo. And I would pay for a book that just had every single memory ever written. I think that'd be fascinating. But he shares a bunch of them. And at the end of this this memo you see an insight into his personality i this is this entire memo about keeping your store clean i sincerely hope i have made myself very clear i love you but i love a supermarket tire store even more this guy man his personality like jumps off of uh the page for real so another example of his uh another example in his bulletin is how to get the incentives right. And so this was people,

Starting point is 00:48:31 he wanted people, like if he's investing in leadership, they have to then in turn invest in their people, right? So he says, to all stores, if a bright, young, ambitious person joins our company

Starting point is 00:48:44 and wants to make our company's career, does he do it because he likes you? Do you think that this man is going to work 10 hours per day just to help you build your stores? He's picking up that we're all self-interested. It's in our nature, right? So he says, again, appeal to interest. Don't say, hey, buy my product because it's better for me. Talk to your customer about what's the difference it makes in their lives, right? So he's doing this in an internal management perspective.

Starting point is 00:49:10 Do you think this man is going to work for low pay year after year just so you can 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 of the future of the store manager or for that matter for the future of less schwab personally this man joined the company because of his future with the less schwab tire centers not you personally um so he talks about don't block these people hire them he wanted them to um he wanted them to hire assistant managers and they would they would

Starting point is 00:49:46 uh resist because it would take away some of their money so he says and not realizing that they'd make more money in the long term because the system manager would make the overall business which they have a percentage of more successful so he says and this program in spite of this bulletin and my urging never did work until we made a change since our managers didn't volunteer i made a rule the manager's contract was going to be changed to 45 if he didn't have an assistant manager the company got 55 so he's like you don't want to give up an extra few points fine the company will take it do you know something we never had a problem after that and having an assistant manager for each store um on the next page he's reminding us reminding us the importance of being focused.

Starting point is 00:50:26 And I think this is more important today than it was in Les Schwab's day because there's just way more things to steal away our focus. And then we have entire companies with some of the smartest people in the world figuring out how to steal away more of our time. So I think, again, Les, a bunch of people that we studied all talk about you have to have dominion and control over your focus. Because if you're giving it away, it's the most powerful thing you have. And the thing that will make your business or your life more successful on your personal level, monetarily, any, literally anything that you want to improve, the way to improve it is to focus on it.

Starting point is 00:51:02 All right. So he says, we must constantly remind ourselves as to just why we are successful, and we must do something, and we must do, and what we must do to continue to be successful, because if we become complacent, brother, it's all over with. That's another thing. That's hilarious. He calls the reader brother over and over again. Brother. It's like Hulk Hogan over here. Oh, so here we go. This is the, now, so there's no really structure to the book, right? Which is really enjoyable. I really liked it. But now in the middle of building,

Starting point is 00:51:32 he's talking about how he builds his business. He flashbacks to building his first business, which is like the newspaper delivery business, right? And this reminded me, this moment that I'm about to describe to you is if you experience this, this is the day you become to describe to you is, if you experience this, this is the day you become an entrepreneur. This is the same thing last week.

Starting point is 00:51:49 I covered Ingvar Kamprad. Did you know IKEA was founded when he was 17 years old? He worked on it till he was 91, owned 100% of the company, died with a net worth somewhere around $58 billion, even though he had a weird ownership structure later on, for tax and estate purposes. He had a very same experience. I forgot what he was selling now. I think it was fountain pens. But anyways, he made like a 300% return. And he was like, young, young, maybe under 10. He's like, oh, wait a minute. I worked all week. I got whatever a dollar, whatever it was. And then I just did

Starting point is 00:52:22 this business. And in one transaction, I made five. So we're going to see the same thing, similar thing happening here in the early days of Les Schwab's life. So he says, I guess as I think back, I've always been interested in business. Stores and the people working in stores interested me. That probably is the reason I was successful with my newspaper routes. The newspapers in the 1930 period were very competitive. And if you had ability, you could make good money. Remember, he made more in his high school principal. There was about 25% unemployment during the depression period. My folks died when I was 15, but I never took a dime of welfare money. I could always find more work than I could do. I think one thing that convinced me to be a salesman and a businessman

Starting point is 00:52:59 was a job I had one summer along with my newspaper route. So he worked in a restaurant and he was a dishwasher. I got $1.50 per week plus dinner. But it was hard work with the paper route early in the morning, school all day and working until 8.30 at night. So I quit the restaurant and started working harder on my newspaper route. We got 50 cents for each new subscription we sold. I could make more in a few hours selling newspaper subscriptions than I could all week at the restaurant. That convinced me that selling in business would be my career.

Starting point is 00:53:31 So that's what I mean. That's the moment when an entrepreneur is born. This is the, we now are flashing forward back into his life and he's building his business. And this is where he just gets tired of the bs and he decides i'm going independent so it says i was so disgusted with the tire suppliers that i was willing to do almost anything to help my company survive about 1966 or thereabouts i made a big decision i decided to take down all the rubber company signs to go straight independent to buy tires like safeway buys groceries. This is important. So he took, he calls it, the concept that he introduced to the tire industry,

Starting point is 00:54:10 the supermarket of tires. And this is also why, you know, the company's called Les Schwab Tires. They don't manufacture their own tires. They buy the best from other people and sell them, but he's not tied to one individual. Like there's a lot of, there's a lot of contracts where it's like, okay, I'm a Bridgestone dealer. I'm a Firestone dealer. I'm a Michelin dealer. tied to one individual like there's a lot of um there's a lot of contracts where it's like okay i'm a bridgestone dealer i'm a firestone dealer i'm a michelin dealer less is like no no i'm i'm gonna be in control here not you uh so he says uh i decided to buy tires like safeway buys groceries i'd buy the best possible tire good quality and the lowest possible price this was a major move at the time. No one had really tried it.

Starting point is 00:54:47 All right, so he's continuing to grow, skipping ahead again. He designed his company with not a lot of policies, right? He had systems, which is what Munger would say, but he didn't have a lot of control. So he hires, the company's growing like crazy. So he hires a controller and the controller quits. He's like, this is ridiculous.

Starting point is 00:55:06 You don't have enough like controls in place. You can't run a business like that. And so why would it work? Like how did this, this is possible, right? He's got a bunch of stores. He can't be in the stores all day, but he has an incentive structure that's very smart. So he talks about, listen,

Starting point is 00:55:21 there's a con, you're going to have a contract and your money's going to go into like, that's like a lot of the profit sharing would go into like a retirement plan, but you would forfeit that money if you were ever caught being dishonest. And in a sense, like stealing from the company, which a lot of people would do in other companies that didn't really happen here because let's say, are you going to steal $400 from the cash register? If you have $20,000 bank that you're going to forfeit and that says, if you've, if you're caught stealing are you going to steal $400 from the cash register if you have $20,000 banked that you're going to forfeit? And that says if you're caught stealing, is you're going to forfeit that?

Starting point is 00:55:48 Well, some people still will, of course, but a lot more are like, oh, that's a bad deal. So he says, this is why he says, this is less describing why he can run a company with so many stores but so few controls. So he says, now that we share with all people, remember there's ownership involved, if any one employee sees another employee steal anything, 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.

Starting point is 00:56:21 For a company as large as ours is today, we have very little dishonesty. And again, that's just less understanding the way humans think. Okay. Oh, this is, okay. So there's going to be some heartbreaks here. He has two children. Both of them, he wants, he wants like the family business to continue he wanted this business to continue for hundreds of years within the family we obviously now know that that's probably not going to happen now but uh both his his son and his daughter um work in the in the business okay and this the general life myself is something i'm talking to myself here uh is be kinder because we're all temporary and it just it just it just you're gonna regret now there's some people that

Starting point is 00:57:14 are gonna do you wrong even in that situation um like maybe as i get older i'm just like you know just it's not worth it just remove this person for your life, but don't, you know, fight or it's just, there's other ways to direct that attention. So he was pretty hard on his son. And you're going to see why this is going to be a big regret here. He says, this is his son. He 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 told you so. I wonder now if maybe I was too harsh on him. He was defeated, bankrupt, broke, and really down. So his son is in a really dark, dark place in his life. And, you know, life is hard enough to get through without having, you know, somebody you really love, like your father or maybe a close friend, be extremely, you know, not helpful in that situation.

Starting point is 00:58:10 His son knows he made a mistake. So a short time after, this is what happens. It was 2 a.m. October 26, 1971, when the doorbell rang. Policemen were at the door. They came in and told me Harlan, that's his son, was dead. He had run into the back of a log truck. I sometimes have thought he might have done this on purpose as he was very, very depressed. He was 31. Harlan left his wife, Jean, daughter, Diana, 10 years old and son, Alan, eight years old. And so I'm sure that night he was harsh with his son. Like, I'm sure he didn't

Starting point is 00:58:46 think, you know, maybe we're going to, maybe I'll be mean, maybe we'll make up whatever the case was. I'm sure he didn't think his son was going to die at 31 years old. And I think the way Les wrote about this is like, you know, if he had known that he would have did things differently. And so I think like just in general, be kinder as much as we can. It's probably good life advice. Okay, now I want to tell you about an experience that he's going to go through that a lot of entrepreneurs deal with, and it's falling out with partners over money. Sometimes it's not just over money, but the falling out of partners is what happens a lot. So he started the company by himself. Over time, it got so complex that key employees were given like large, decent percentages of the company to help out because he's like, I can't do this all alone.

Starting point is 00:59:31 And so he says, Norm Nelson and Don Miller were both making tons of money. But as always, I never paid too much salary. The salary was enough to live on and the rest stayed in the company to be used for expansion. So what happened is they wanted they um, they wanted to take their money out. Les wanted to leave it in to expand and continue to grow the company. It's something he did the entire time he was running the company. I soon found out that I run into a buzzsaw as both Norm and Don teamed up against me. This is something I could never ever figure out. So he goes, I think this hurt him a great deal because he talks about

Starting point is 01:00:05 it a lot in the book, but this one section is like really, really long and he doesn't write long chapters. So I'm just going to hit like the highlights here. And he says what, like what he's learning from the situation, money has funny effects on different people, especially the kind of money these men were now making. So he's fighting about this for like a long time, months and months and months. Um, so he says, I went home and Dorothy and I talked about nothing else that night. At breakfast, Dorothy suggested, why don't you buy them both out?

Starting point is 01:00:31 You'll get by some way. Something hit me. I hit the table, dishes fell off, and I said, that's the best damn idea we've had in the six months we've been talking about it. So he goes, he says, okay, the contract says at any given time, if I give you 30 days notice, I can buy you out. So I'm not going to argue with you. I'm still the one who's going to run the company. I'll figure out how to do it myself.

Starting point is 01:00:52 He says, Don, you wanted a swimming pool. Now you can have it. You'll get your $225,000. Norm, you wanted money. Now you're going to get your money. You'll get around $300,000. Okay? I'm skipping large parts of this. He says, it turned out to be by far one of the best things that could have happened to the company. Greed was entering into the company and greed destroys. Their interest today would be worth around 12 million dollars each. So again, Les took an extremely, extremely long-term view in his company. He optimized for the long term, as anybody that is good at running companies does, to optimize for the long term. I'm going to delay my compensation or my consumption now because I'll make more money in the future, right? This is just basic tenets of business, right? At the time he's writing these words,

Starting point is 01:01:50 the company was doing $10 million in sales. I'm wrong. The company was doing $10 million. This is in the 1960s when they have this falling out, right? So they're fighting over a couple hundred grand, right? They couldn't see the long-term vision like Lescott. So the company's doing $10 million in sales at that time in 1985. So let's call it almost 20 years later, they were doing 180 million in sales. That's the time he's writing the book. Now, fast forward again, in 2008, 1.8 billion. Could you imagine what that percentage of Les Schwab tires would have been if they would have kept it? They got bought out for 200 and 300 grand. If they waited 20 years, that 200, 300 grand is $12 million. Who knows what it would have been if they waited even longer. That's crazy. So there's a lot more to that story, but I'm going to skip over it. He's got a motto, unselfish for good reasons.

Starting point is 01:02:47 Unselfish for good reasons has been a slogan of mine for nearly 34 years I've been in business. I never could understand why more business people don't share with their employees. So there's a lot of sentences in this book that start like that. I could never understand why more business people don't do X. So he says, I don't understand why they don't share more with their employees. What nicer thing can you do with their profits? You can't take it with you. And then he talks about like, he's got strong, strong points of view and strong criticisms for how a lot of American businesses were being run at the time. Have you ever, have you ever been to or read about a ribbon

Starting point is 01:03:21 cutting ceremony by a wealthy man whereby he had built a wing on a hospital, built a museum or church or something for the community? Oftentimes his own employees were in the crowd and some of them couldn't even afford to buy new shoes for their kids. I believe in sharing with those who help me and thinking about and thinking about unselfish for good reasons. Oh, so now we're going to see more of his his member. I told you his viewpoint was that the people that were doing the actual work were way more he did he thought very much in the opposite manner as most people running companies did especially this time this this belief is probably still true he's like no no you give all the bonus money to the people in the office the people in

Starting point is 01:03:59 the office are just telling us how the people in the front lines did and they're doing it after the people after the fact he's like that's nice people in the front lines did. And they're doing it after the people, after the fact. He's like, that's nice. People in the office, you're going to tell me next month what the guys and the girls working in the stores did last month. Like those are the most important people. And so this advice is something I talk about a lot, where if you're in the position where you're working for somebody else right now, in your long-term interest, it's better if you stay closer to the money. If the position you're working in is close to how the company makes money, the further you get away from the money, the easier it is for management in a downturn to say, oh, we don't need that department,

Starting point is 01:04:32 close it down. And he says over and over and over again. So he says, we have had over the years, some people in the office that sometimes think they're more important than the stores. The office serves only one purpose, That is to serve the store. So Sam Walton, his autobiography says, listen, you are either serving the customers or you're serving the people that serve the customers. If you're not doing one of those two things, you will not be employed by me.

Starting point is 01:04:55 Henry Ford thought similar things too. He says, our store managers make more money than our office people. Some of our office people, especially some people with MBA degrees or CPA certificates, sometimes wonder about this. But I've office people, especially some people with MBA degrees or CPA certificates, sometimes wonder about this. But I've warned them,

Starting point is 01:05:08 don't bitch to me because that is the way I want it. If you want to go out, start at the bottom changing tires and work into a manager job, then hop right to it. If it weren't for those men in those stores working their butts off in all kinds of weather, missing meals,

Starting point is 01:05:23 got off for hours, etc., you wouldn't even have a job he's very adamant i think there's a lot of this has to tie with like his roots like growing up the way he did realizing like how where the value is actually created in other people's lives it's not with people sitting in the office doesn't mean they don't like they can't add valuable um contributions to a company but a company, but don't get it twisted why that company is actually successful. That's just one quote. He brings this up a lot and a lot. Okay, here's a story.

Starting point is 01:05:57 Okay, so this is him, again, analyzing other businesses. In this case, it's a competitor, right? And so his main takeaway is life is hard for people who think they can take a shortcut. So there's this new upstart in the tire business in Oregon that's going to go and compete with him. They might have actually been in existence before he was, but they were expanding more rapidly than he the guy, the guy running is called, uh, Neil. And it's the son of the founder, actually. Uh, it says if Neil, so this business was indeed started before Les Schwab, but it didn't expand rapidly until the son takes over. Right. And now we're going to see the difference between a founder and a CEO. If Neil, and he talks about this a lot, he talks over and over again,

Starting point is 01:06:40 that he's worried about the future of his company because he'll say, you know, company X, their founder ran, did a fantastic job. The founder dies. Look at the company X now. Company Y, founder did a fantastic job. Look at the company now. Over and over again. The Lester's just obsessed with this. 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. The Nelson Tire warehouses were springing up all over Oregon. I think they got up to 24 stores. They were heavy on advertising. They always advertised they had the lowest prices in town. Now, Les is going to say this is a stupid

Starting point is 01:07:18 idea. I personally think it's very foolish and poor business to say we have the lowest prices in town. He says that because first of all, prices change all the time. And so sometimes he'd have customers come into his store and be like, I'm going to pay your prices to this ad I saw that says they have the lowest prices in town. I discovered, oh my God, they don't have the lowest prices in town. So that customer's first impression of the business was they're freaking lying to me. They're not going to go back to your store. You just waste all your advertising money. Why'd you do that? So he says, he didn't like the way they were in their ads, but he also said they were very smart cost-wise, right? So they thought, okay, I'm going to have an advantage by having a lower cost, but they cut costs in the wrong area. They cut costs in

Starting point is 01:08:00 what they paid their employees. Les is making his employees rich. Moreover, the flaw here was that they didn't get with their low pay near the quality of employees we had. And so the problem was Les almost followed them and would have led to his demise. He says, after thinking about this for a year or so, wondering if I shouldn't cut wages and benefits, I finally made the decision. That decision was if I couldn't be proud of my company, if I couldn't cut wages and benefits, I finally made the decision. That decision was,

Starting point is 01:08:25 if I couldn't be proud of my company, if I couldn't pay good wages, if I couldn't have good benefits, if I couldn't have the best employees, then why would I even want to stay in business? I already had all the money I wanted personally. So we did nothing and we won. That takes a lot of restraint. Understanding that, hey, this person looks like they're succeeding from the outside, but I can identify flaws that over the long term will take care of themselves. So we did nothing and we won. The customer liked us best.

Starting point is 01:08:55 Life is hard for the man who thinks he can take a shortcut. She's talking, it's like, I'm going to grow methodically, slowly over a long period of time. This new guy is going to come in, he's going to outgrow me. Everybody's going to give him adulation and think he's fantastic and then guess what who's gonna be around a decade from now i will he's not um so he talks he he was tempted to go public at one point so um this is a quote from an art from an interview i saw right before he died in like 2004 he says the company isn't for sale all stock will remain in the family uh he also turned down acquisition offer offers from warren buffett and then the um the owner of michelin tire uh actually the owner of michelin

Starting point is 01:09:34 tire became a billionaire off of this and uh he wrote a book that i just um that i just downloaded so he's gonna wind up being a future founders episode. Anyways, this is Les talking about how he resists today. He says, 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. You can probably pick up from now that he's a control freak in the sense that he wants his business run the way he wants his business run. And he says, they might even ask, how come some of those store managers, oh, and then you're gonna see his personality here too.

Starting point is 01:10:10 He says, how come some of the store managers make so much money? Why they make twice 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

Starting point is 01:10:25 i'll probably add he also learned how to work something you never did learn um and then he talks about like he still goes on about you know i want control you know i can make a he said i can make a ton of money but what am i going to do with the money um this is interesting because while i was researching or reading about James Senegal, Sam Walton, let me see if I still have that quote, actually, so I don't mess it up. Sam Walton attempted to buy Costco in the early days of Costco. And he came a couple times, he spent visiting and James was like, No, I don't want to do it, you know, whatever. And Sam's like, Listen, I'm interested in buying company, but I'm never going to do anything hostile to you. So he met with them. He said, no, Sam calls him again.

Starting point is 01:11:13 And so Walton phoned again, wanting to know if Costco leaders had warmed up to his idea. Senegal's reply, Sam, we have no interest. We're like you. We're entrepreneurs. We want to build a company that'll be here 50 years from now. Walton's reply was, I understand. You understand? He's the same kind of person. He's like, I don't want to sell Walmart either. So I completely understand what you're saying here. So this is, Les has that thought. He's like, I don't, I'm not doing this for the short term.

Starting point is 01:11:38 He says, I could come out with an astronomical bundle of money if I sold the company. But what would I do with it? What good is money beyond a certain point? He's saying, I'm already stupid rich. I think the biggest misconception the public has about a successful businessman is he is working for more money. You won't find many truly successful ones that are greedy.

Starting point is 01:11:59 Success, in my mind, comes from having a successful business, one that is a good place to work, one that offers opportunities for people, and one you could be proud to own. Success in life is being a good husband, a good father, and you end up being a second father to hundreds of other young men and women as a business owner. Just last night, I attended the wedding of a young man from our office and this young man told me that the two men, uh, that two men had influenced his life, his father and me. That's worth more than money. So I have a lot of

Starting point is 01:12:35 thoughts about this one. I think if I analyze the products I love and the companies I truly love, their founders had the same view that, that Sam had, that Les has, that James has. Actually, one of my favorite quotes, let me read this quote from Steve Jobs' biography to you that Steve Jobs had. He says, I hate it when people call themselves entrepreneurs when what they're really trying to do is launch a startup and then sell or go public so they can cash in and move on. They're unwilling to do the work it takes to build a real company, which is the hardest work in business. That's how you really make a contribution and add to the legacy of those who went before you. You build a company that will still stand for something a generation or two from now. That's what Walt Disney did and Hewlett and

Starting point is 01:13:14 Packard and the people who built Intel. They created a company to last, not just to make money. That's what I want Apple to be. So there's two thoughts here. These are the people I admire most. It's amazing what they were able to do. And the other thought is, I don't know what it would be like to be able to turn down, like, let's say I build a business and someone offers me $200 million for it. Like, hopefully I would have, assuming that I thought this was the best idea I'm going to have in my life and something that's really important to me, I'd have the wherewithal to choose the route that other people like Steve and Sam and James and Les did. I would be lying to you if I was sure for not. Especially if you grew up without a lot of

Starting point is 01:13:54 money. That's very hard. What I'm saying is I don't want to judge other entrepreneurs that choose a different route. You know what I mean? There's a difference like i think so a lot of new entrepreneurship is like really creating financial instruments more than businesses that's different but i i just don't think i'd be in a position to be like oh i can't believe that person sold his company when he could literally set his entire family like give financial stability to his entire family you know what i mean like i understand that and it'd be super hypocritical hypocritical for me to sit here and be like oh yeah i would never do that i would just automatically like no one's ever waived 200 million dollars in front of my face or whatever the number is 60 million whatever like i completely understand that um so i'm just telling you like this is what i admire and i hope if i'm ever in that position like i'd i i would

Starting point is 01:14:44 you know have the courage because I think it's really, really hard to do what they're doing. But admirable. So I don't know if that stream of consciousness made any sense other than like, I understand both sides of it. Back to Les, he says, most companies, essentially this part I'm going to read to you, most companies put the emphasis on the wrong part. He says, we are different from most of the American corporations as we think the most important people in the company are the people on the firing line. The ones who sell, do the 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

Starting point is 01:15:19 the line as peons. I guess that is why if you're, this is hilarious. I guess that is why if you're this is hilarious i guess that is why if you're on the ball you can beat them on any type of fair competitive basis he's saying they have their they're like one i think this is a huge problem society like a society level that if that trend continues if you see that the workers get crapped on and the people that are so far removed from the customers make you know these golden parachutes that we that we've seen a lot in the last decade but i love what james is saying he's like it parachutes that we've seen a lot in the last decade. But I love what James is saying. He's like, it's good that they're putting the emphasis on the wrong part.

Starting point is 01:15:47 That tells you that they're shitty at business. And he says, that is why if you're on the ball, you can beat them on any type of fair competitive basis. Les did not have, there was other competitors that had better relationships with suppliers, had more assets, had more money, more everything. And he's saying, I'm going to beat them because they don't know what they're doing.

Starting point is 01:16:08 They're playing pretend. I know what I'm doing. I mean, he proved that he knew what he was doing. I forgot to tell you this at the beginning. He didn't write it to publish a book. He wrote it for and self-published it. He self-published it and only sold in stores, but it became like a cult classic. I'm holding my hand the third printing and it's the last printing according to this. And they sold 20,000 of them. So it's not a lot in circulation, but essentially he wrote the book for his employees as a guy to, to carry on the, the, the business after he's dead. It just happened to have like, uh, like interest to outside people. So I think it's, um, if you're running a company, you should pick this book up. I mean, you don't have to take my word for it. Hopefully you found this interesting.

Starting point is 01:16:45 But if Munger is telling you to read the book, just read the book. So anyways, he's got a bunch of theories and stuff that I'm not going to cover here. Just obviously picking out things that were interesting to me. So he says, do it with gusto. A mistake a lot of businessmen make is to shotgun their advertising. By this, I mean they spend a few dollars on newspaper ads, a few dollars on programs, a few dollars here and a few dollars there. You can't be effective that way.

Starting point is 01:17:04 Whatever you do, you must do it with gusto. You must do it in volume. So in his case, radio advertising was the first big hit for him. He says, for example, radio. One ad isn't worth a damn, but 10 ads per day for 30 days gets attention. It's a case of repeat, repeat, repeat, repeat. All right, so that's his advice. Do it with gusto. And I love this section. He says, I'm optimistic about the future in spite of everything. If we are smart, if we earn our way, if we do the job, then the future will be optimistic to us. I am 68 years old now. He actually winds up living till about 89. And I've run it in overdrive my whole life. I've been in business for 34 years, and I think back a lot. In writing this book, memories come back,

Starting point is 01:17:52 and you wonder why so many things happened. How in the hell did Les Schwab become the best-known tire name in the Northwest? How did these things happen, and why? Will changes come in the future that will just reverse these happenings? Will it always work out in our favor? And how did we break away from the pattern and go with what we know today as the Les Schwab way?

Starting point is 01:18:17 That wasn't the way the big rubber companies wanted us to do it. We were ahead of the times. The large rubber companies turned out to be our best friends. Why? Because of their ways, their policies broke their dealers, often leaving us as the only dealer in town in a position to give service. This we know for a fact. When we create our programs, when we create our policies, and when we follow our programs and our policies, we will make money.

Starting point is 01:18:48 We will always remain strong as long as we have the ability to create. If we fail to create, then we will die on the vine like so many other companies have done in the past. And that's where I'm going to leave the story. If you want the full story, read the book. And if you want to read the book and support the podcast at the same time, buy the book using the link that's in your show notes or at founders are available at founderspodcast.com. Thank you very much. And I'll talk to you next week.

Your Ad Here

Founders - #105 Les Schwab (Charlie Munger recommended this book)

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.