Founders - #279 What I Learned Before I Sold to Warren Buffett

Starting point is 00:00:00 As I walked past the Plaza Hotel on a glorious May morning in 1994, I heard someone call out, Warren Buffett! Turning in the direction of the voice, I saw a woman stop Buffett on the sidewalk and start a friendly conversation with him. Buffett listened patiently to the woman, who, as it turned out, was a shareholder of Berkshire Hathaway. At the time, the legendary investor was the second richest man in the United States. As it happened, I was in New York that day to meet with our financial advisors at Morgan Stanley to talk about our company, which at the time operated 143 jewelry stores nationwide. Personally, I felt uncomfortable expanding the company beyond my ability to know every single manager

Starting point is 00:00:43 on a first name basis. We had grown well beyond that point, and we were still growing. We had no interest in going public, and we certainly didn't want some financial butcher carving up this jewel and selling it piecemeal. As the woman said her goodbyes and turned to go, and as Buffett prepared to cross the street, I saw my own opportunity. Stepping forward, I thrust out my hand. Hello, Mr. Buffett, I said. I'm Barnett Helzberg of Helzberg Diamonds in Kansas City. I didn't sense any recognition in his face, but he politely shook my hand and said hello, willing to hear me out. Then, right there on the sidewalk, I told one of the most astute businessmen in America why he ought to consider buying our family's 79-year-old jewelry business. I believe that our company matches your criteria for investment, I said, to which he replied simply, send me the information, it will be confidential.

Starting point is 00:01:41 My conversation with Buffett lasted no more than half a minute. My idea, of course, was to grab his attention. How often do you encounter Warren Buffett on a sidewalk and pique his curiosity in your family company? As I walked away, I wondered whether my approach might have seemed abrupt, if not downright presumptuous. Yet I felt certain that our successful three-generation family business made a perfect fit with Buffett's Berkshire Hathaway, which Fortune magazine had repeatedly named as one of the 10 most respected companies in America. In 1994, Berkshire's $11.9 billion net worth was greater than Coca-Cola and PepsiCo combined. It was at the time a collection of 30 businesses, including such signature names as See's Candies,

Starting point is 00:02:28 World Book, and Nebraska Furniture Mart. It was the largest shareholder in Gillette, Coca-Cola, and American Express. Imagine our gut-busting pride when, as the third-generation owners of Helzberg, Buffett later explained why he decided to buy our business. We associate ourselves with some real jewels of the American business world, he said. And I think it's quite fitting that Helzberg joins this collection of jewels. It's just exactly the kind of company that we like to invest in. It's got outstanding management.

Starting point is 00:03:00 I would hate to compete with you fellows. I'd rather be on your side of the fence. And that's the side we're going to be on. My dream buyer for the family business all along was Warren Buffett. I knew we could trust him to keep the headquarters in Kansas City, resist changing the company's character, and retain the jobs of all of our associates. It might have been simpler to sell to the highest bidder, but that notion seemed as sensible as choosing a brain surgeon based on the lowest price rather than on talent and reputation.

Starting point is 00:03:31 That sounds like something Buffett would say himself. But that notion seemed as sensible as choosing a brain surgeon based on the lowest price rather than on talent and reputation. I had purchased four shares of Berkshire Hathaway stock in 1989 just so I could attend Berkshire's annual meetings and pick up some of Buffett's wisdom. So that is five years before he randomly runs into him on the sidewalk in New York City. So he said, I purchased the shares so I could attend Berkshire's annual meeting and pick up some of Buffett's wisdom. His presentations are warm and unpretentious. He genuinely enjoys people. He's often quoted saying, great people do great things. He also likes to say, we only buy companies that we trust.

Starting point is 00:04:14 My first visit to a Berkshire Hathaway annual meeting was quite a revelation and taught me a great deal about Warren Buffett and his philosophies. My notes included, hire seven-footers, that is, hire people with incredible abilities. Another very, very strong impression was obtained through an answer he gave a Kellogg Business School student who asked him, how do I determine which job to take?

Starting point is 00:04:37 Warren's answer was simply, get a job you love at a company you respect. His people orientation was obvious, and since I had been taught from day one by my dad that business is people, this was most impressive. Buffett recounted the story of how he acquired our company to shareholders this way. Barnett said he had a business that we might be interested in. When people say that, it usually turns out that they have a lemonade stand with potential, of course, to quickly grow into the next Microsoft. So I simply asked Barnett to send me the particulars that I thought to myself will be the end of that. In fact, it almost did end there. I promptly went

Starting point is 00:05:17 home and sent Buffett nothing, afflicted with hangups about confidentiality. But one night, I re-read the chairman's letter in the Berkshire Annual Report. And I'm just going to interrupt this real quick. This is another example of why I've repeated over and over again. I've said this many times to you that I think Berkshire's, Warren Buffett's shareholder letters may be the greatest example or the most successful example of content marketing in the history of business. The amount of opportunity, unique opportunity that flows to Buffett or that has flowed to Buffett as a result of this is just remarkable. This is another example of that. But one night I reread the chairman's letter in the Berkshire Annie report.

Starting point is 00:05:53 There was Buffett again inviting companies that meet his acquisition criteria to send him information and he would promise complete confidentiality. While shaving the next morning, I looked at the slow learner in the mirror and began to scold myself for procrastinating. He told you in person it would be confidential. He told you in writing. Do you want it set to music? Send him the information. So I finally did. Not long after we sent Buffett our financial information. So Buffett also talks about the fact that you'll get a response from him really rapidly. Not long after we sent Buffett our financial information, so Buffett also talks about the fact that you'll get a response from him really rapidly. Not long after we sent, and this is another example of that, not long after we sent Buffett our financial information, he called us and told us he wanted to talk.

Starting point is 00:06:34 Soon we were in his office in Omaha negotiating a sale. And this is more on the speed of the process. This can be the fastest deal in history, Buffett said. But what about due diligence, I asked, surprised at how fast the negotiations were moving. Most suitors demand to see every scrap of paper you've ever generated and to interview every top manager. This wasn't Buffett's way. I can smell these things, he said, and this one smells good. That would not be my last surprise. I asked about a non-compete clause. You'll certainly want that, won't you? I said. Buffett shrugged. You wouldn't do anything to hurt this company, he said.

Starting point is 00:07:07 When a guy says that to you, he has you on your honor for the rest of your life. When Buffett buys a company, he's not looking for a quick resale to make a buck. He told us, someone asked one time what my favorite holding period for securities is, and I said forever. And that's exactly the way we feel about our businesses. When we were ready to leave his office and asked if a cab could be called, he insisted on walking us to the elevator, riding it down with us, and standing on the street to wait with us for the cab. Typical Buffett treatment. Warren Buffett's approach to purchasing

Starting point is 00:07:40 companies is very straightforward. He will give you an answer immediately if he has any interest, and he will immediately give you a non-negotiable price. Let me interrupt this real quick. I read another, I read an entire book called Jim Clayton First Dream. It's episode number 91 of Founders about this non-negotiable price. Buffett bought that guy's company as well. And in that book, it was hilarious. I think I talk about it in episode number 91, but they start out, Buffett's like, okay, I'll give you, you know, 1250 bid if I remember correctly. And they're like, okay, what about 16? Buffett's like 1250 bid. Okay. What about 15? 1250 bid. What about 13? 1250 bid. And they're like, okay, fine. 1250 bid. So apparently I'm curious if you, if you have any other examples of, of him,

Starting point is 00:08:23 of Buffett, not Buffett actually willing to negotiate a price. But this is something I've seen a few times, the fact that he will immediately give you a non-negotiable price. So back to this. After buying Helzberg, Buffett explained to his shareholders that our ownership structure enables sellers to know that when I say we are buying to keep, the promise means something. Buffett continued, we like dealing with owners who care what happens to their companies and people. A buyer is likely to find fewer unpleasant surprises dealing with that type of seller than with one simply auctioning off his business. Explaining how he makes this hands-off approach work, Buffett said that it was because

Starting point is 00:09:02 the managers operate with total autonomy and they do such a terrific job, we don't really need anyone to supervise them. Managers of Berkshire's subsidiaries run their own shows. When we get somebody who is a 400 hitter, we don't start telling them how to swing. Now back to Barnett Sr., and my grandfather Morris had still been alive, they too would feel proud and comfortable that our family business, which started in 1915 from a single store in Kansas City, Kansas, had grown by 1994 into a group of 143 stores in 23 states, with total sales of $282 million. Our business was in capable hands. As Buffett himself finally described the deal that began on a New York sidewalk, we weren't talking lemonade stands.

Starting point is 00:09:56 That is an excerpt from the book I'm going to talk to you about today, which is What I Learned Before I Sold to Warren Buffett, An Entrepreneur's Guide to Developing a Highly Successful Company, and it was written by Barnett C. Helzberg Jr. Okay, so I want to jump to the very first page, even before the introduction I just read you, and he has a very unique, I guess you almost consider this like a preface. It says, A Confession of Plagiarism, and he says, I was always taught that many, many people were out there developing ideas that I could use. I have found that to be true throughout my life. These thoughts and ideas have all been borrowed or stolen from many wise people. Therefore, this confession. I have always solicited other people's opinions

Starting point is 00:10:36 and tried to listen intently when they were espousing things. This is such an important part too. Even when I was in pretty violent disagreement. Therefore, I claim only one original idea in my entire life. And with this book, wish only to reveal myself as a plagiarist of wonderful ideas from a lot of great people through the years. Think of the world. I love this part. Think of the world as your garden of marvelous people and ideas with unlimited picking rights for you. Enjoy the flowers. And so it's obviously an idea I very much agree with.

Starting point is 00:11:13 Obviously, I'm dedicating my life's work to uncovering the ideas from people in the past and hopefully like push those ideas and help push those ideas rather down the generations. But this idea of like we all use other people's ideas is something almost every single person you and I study on this podcast also did. I was telling a friend of mine one of my favorite quotes, which comes from poor Charlie's Almanac, which is that he obviously, Charlie Munger is a very an advocate for this idea. He calls himself a biography nut. He said he's read hundreds and hundreds of biographies. He says

Starting point is 00:11:45 if he ever had a chance to teach, I think he said teach finance, maybe teach business, but I'm pretty sure he said if I ever had a chance to teach finance, my entire curriculum would just be studying a hundred different companies that did something right and did something incorrectly. But one of my favorite quotes from Munger is that Cicero is famous for saying that a man who doesn't know what happened before he's born goes through life like a child, right? So you have, now it's me quoting Munger who's quoting Cicero. Back to Munger. That is a very correct idea. Cicero is right to ridicule somebody so foolish as to not know history. And so Barnett Jr., two of the people that he constantly references learning from are his grandfather, Morris, who started the company over 100 years ago, and his dad. And so I'm going to tell you this right

Starting point is 00:12:29 up front, because I discovered this as I went through the pages, almost to the very end of the book, he's constantly talking about what his father taught him. He's the third generation that has been trusted to manage this family business, right? And what's crazy about this is that his dad had been dead for almost 30 years by the time that this book came out. And the book is almost 20 years old itself. And that is a main, this is such an important part. I'm getting like tears in my eyes. I don't even know why. This is such an important part to reading all these books over and over again. And you see this pattern, the fact that I had no idea, maybe it's just because I was younger, but I had no idea how it was possible that the decisions that you and I are making now are going to resonate through the generations.

Starting point is 00:13:17 And in many cases, the people that we study are fixing poor decisions made by previous generations. Like some of them are positive. I was just recently thinking about this because when I read the book Cable Cowboy on episode 268, the founder of the cable company, TCI, that John Malone's gonna come in and try to rescue really, his name was Bob Magnus. It blew me away in that book, right?

Starting point is 00:13:44 Bob didn't have a lot of money. He goes to his father His name was Bob Magnus. It blew me away in that book, right? Bob didn't have a lot of money. He goes to his father and his father loans him $2,500 on a very speculative decision. It's like, hey, I'm going to jump into this new industry called cable and see what happens. And it hit me later on in the book. I'm like, oh my God, that $2,500 loan that Bob's father gives him winds up because the business is so successful. Obviously, Malone plays a part in that. That $2,500 loan turns into hundreds of millions of dollars for his grandsons.

Starting point is 00:14:25 Imagine the difference in his grand, that one decision had on the effect of the lives of people that weren't even born yet. And so the book that I'm holding in my hand is an example of like a great dad that took time to teach his son by example and through action, all of the importance that he learned, the lessons he learned, most of which were how to build and run a successful business that generated unbelievable wealth for that family. And so when I read a book like this and I get to the end, it's not, okay, well, I learned all about Barnett Helzberg Jr. and his dad and maybe his grandfather Morris. I'm like, how do I do that? So that was playing through my mind as I worked my way through the book. I have a lot of highlights, so let me jump into, he gives us the background. He starts off, there's like, you know, 70 miniature chapters, just about lessons he learned. What he said,

Starting point is 00:15:11 what did I learn before I sold to Warren Buffett? But he starts the book talking about what he learned as a young child growing up in this family business. My father was 14 when he took over the family business. My grandfather Morris had a stroke and there was no one else to run this little jewelry shop in Kansas City, Kansas. Because dad was in school, the family persuaded an uncle to watch the store each day until dad arrived from school. I don't believe my father ever questioned the family's decision. So the year that is happening, his dad is 14, has to take over the jewelry shop. That would mean this is the year 1917. At 17, so now three years later, dad moved

Starting point is 00:15:53 the business into a larger, grander building and with high spirits of youth, proclaimed himself a diamond merchant. The shop sold the same mix of rings and watches as everyone else. But that label let the world know that he had big plans for himself and his family business. And so we see his dad through his actions saying, hey, I was forced. I was kind of like thrown in. You're going to teach me how to swim. He threw me into the deep end of the pool. It's like a metaphor for that. He does the same exact thing to his son. So he says he nurtured and demanded that same positive drive to succeed, whatever the challenges in his three sons. He gave me summertime employment when I was 15. Dad knew the importance of learning by doing.

Starting point is 00:16:34 So, of course, he started me off in selling. And so he immediately feels the thrill of making his own money. He starts making his first sale and he says, I began to have confidence that I could do this. It wasn't work. It was fun. And another main theme of the book is like, hey, listen, I didn't start this business. I didn't found this business. People might not even consider me an entrepreneur, but he has founder mentality. And that's the way he thought about himself. He had he thought about even at such a young age, like I'm going to take ownership of this. I was an entrepreneur, a master of my own destiny. I could do whatever I set my mind to. Anything was possible.

Starting point is 00:17:07 Listen to, these are all lessons that he got from his dad. Like, I try to do the same thing with my kids. I try to hype them up. It's like, I don't care what you do. Just know that if you really love to do it, you can do whatever you want to do. I could do whatever I set my mind to. Anything was possible. I can't tell you where other entrepreneurs get their drive, but I'll bet many catch the bug

Starting point is 00:17:25 young like I did. That feeling that you're your own boss, that your future is in your hands is a frightening and thrilling prospect. That's something you and I talk about, euphoria and terror, right? Frightening and thrilling. We are addicted to the ones and the tens. We are not living how most people, like most people live lives of quiet desperation, right? That famous throat, that famous quote, rather. They're range bound between maybe four and sixes. Entrepreneurs, we get a lot of ones, but we also get a lot of tens. I became president of Helzberg Diamonds in 1962 at age 29 when my father became ill.

Starting point is 00:17:58 So think about that. His dad's at 14, has to take over because his father had a stroke, got sick. Now we see that Barnett Jr., 29, his father's ill. So he's like, I need to jump in and do exactly what my dad did. I was nervous and definitely not ready. I made mistakes and had my share of failures. All successful people have failures. And the one thing I love about this guy, he's just super positive. I mean, maybe you could say, yeah, you'd be positive too. You sold your family business for a fat bag of cash to Buffett. But I do love his optimism, his positivity. One of my favorite lessons that his dad taught him, which is actually lesson number one, which I'll get to, I think, indicates the kind of family that his dad set out definitively to try to build.

Starting point is 00:18:43 It's this idea that you're the master of your own destiny. Like everybody has bad shit that happens to them. So what? What are you going to do about it? So he says, I made my mistakes and had my share of failures. All successful people have failures. Despite missteps, entrepreneurs are a special breed who do not give up on their larger goals. And then this is another example of him having positive role models.

Starting point is 00:19:03 He finds role models through books. He finds role models through books. He finds role models through his family. He finds role models through mentors and talking to other entrepreneurs and business people. This is the first one. I got to see if there's a book on this guy because this is remarkable. His name is Ewing Kaufman, who wound up being Barnett's mentor. He says he was a founder of Marion Laboratories and a former owner of the Kansas City Royals baseball team. He became a pharmaceutical. This is why I want to read a book about him.

Starting point is 00:19:27 He's giving us like a one paragraph description of his life. He became a pharmaceutical salesman in the 1950s and turned his love of people into a phenomenal success. He beat every quota and earned more than his boss. The next year, the boss reduced his territory up for the challenge. Kaufman sold even more, again, earning more than his boss. The next year, his boss cut his commission. His boss sounds like a terrible person. By then, Kaufman sold even more, again, earning more than his boss. The next year, his boss cut his commission. His boss sounds like a terrible person. By then, Kaufman had had enough.

Starting point is 00:19:49 He quit and started his own pharmaceutical business, packaging his own products in his basement and selling them from the trunk of his car. That's exactly how Phil Knight and the story of Nike begins. He did the exact same thing, sold shoes out of the trunk of his car. How bad do you want it? In 1989, Kaufman sold Marion Labs for $6.5 billion. And so he's going to bring up some lessons that he learned from Ewing Kaufman several times. That's the first time we hear his name, but that won't be the last. Back to Barnett. No one has an easy prescription to become a successful

Starting point is 00:20:23 entrepreneur. If they say they do, they're fibbing. We just covered this last week in that book when I reread Zero to One. Peter Thiel says, there is no formula for entrepreneurship. No one can teach you how to innovate. The next paragraph is going to echo in Paul Graham's fantastic essay, Relentlessly Resourceful. He mentions the best metaphor to describe like the best founders, just like the running backs. They had like, if you think about the running back has one goal, he's like, I got to get to the end zone, but he's willing to cut to the left, go forward, go backwards, go to the right. He's very flexible on how he's going to get there. We see the same idea here. Entrepreneurs possess an almost naive belief that nothing can stand in

Starting point is 00:21:01 their way. They are mentally deaf to those who belittle their chances. They love to compete and they have the skills of broken field runners who take the bumps and bruises along the way, change course when necessary, and stay focused on the goal. If this is not you, do not try to fool yourself. It is not worth it. Thinking you could start your own business or wanting to be your own boss just because you hate your job when you really have no desire or stamina to go in on your

Starting point is 00:21:25 own is courting disaster. Where there is no real will, there is no way. Some people are more enamored by the concept than by the reality. They would rather contemplate the beauty of the mountain from the base. The entrepreneur wants to climb the mountain first, briefly appreciate the gorgeous vistas from the summit, and then find the next mountain. This is a fantastic line here. If you possess this obsession of seeing your own creative notions succeed and are willing to pay the price, then you have no choice but to pursue the life of an entrepreneur. I'm telling you right now, you already know this. Talk to all your founder friends.

Starting point is 00:22:02 We don't have a choice. I've heard a variation of the statement i think it was even mark cuban who made the point he's like i'd rather make a hundred thousand dollars with my own business than 10 million uh working for somebody else that is irrational but you just have this fire in your belly you must have control over how you spend your time over the work that you're doing and you want the independence and as you and i've talked about before like those kind of people usually have also larger egos or more self-belief. So they feel, okay, if I have the control of the independence,

Starting point is 00:22:30 I will get the money anyways. But I love what he said. This is like, listen, if you possess this obsession of seeing your own creative notion succeed and are willing to pay the price, you have no choice but to pursue the life of an entrepreneur. My own particular motivation included an obsession with proving wrong. This is really fascinating. Proving wrong, the shirt sleeves to shirt sleeves in three

Starting point is 00:22:50 generations myth. He calls it a myth. It is something that's repeated over and over again, because usually this plays out where you have somebody, I call them generational inflection points. Some people say it's like the founder, the family founder, the founder of the family, I think it's probably a better line to use. Usually they come from, you know, not doing too well financially. They're the ones that change their financial trajectory of their family forever. Then you have usually passed on to the next person. But by the by their grandkids time, people that did not have to work for the wealth usually are the ones that squander it. So that is a well-known idea through history that shirt sleeves to shirt sleeves in three generations. You start poor. That one family founder gets you rich. And then by the time you get to their three generations later, they're back to shirt sleeves. The other way I heard this was Dan Carlin talked about this in his fantastic podcast, Hardcore History.

Starting point is 00:23:42 It's like wooden clogs, wooden shoes walking upstairs, glass slippers walking downstairs. It's the same exact idea. It's just a different way to describe it. And then I'm going to finish this section with his mentality on this. You don't have to start a business in order to be an entrepreneur.

Starting point is 00:23:58 I certainly did not. I think having founder mentality is more important than if you actually founded the actual company you're working with. I know a ton of CEOs that did not start their company, but they have founder mentality. So this is exactly what he's talking about here. You don't have to start a business in order to be an entrepreneur. I certainly did not.

Starting point is 00:24:12 Some people inherit small businesses or are a thrust into leadership in them like I was. Others run entrepreneurial departments within larger enterprises. There's a ton of people that listen to founders that this describes them completely. The ideas in this book will help those entrepreneurs too. I just think the idea of thinking of yourself like a founder, thinking of yourself like an entrepreneur is the important part there. It can be the greatest job in the world. Okay, so now we jump into all the different lessons that he learned before he sold to Warren Buffett. Starts out with one that he learned from his father. Says you should only concern yourself

Starting point is 00:24:42 with things that you can control. When growing up, I was intrigued that my father only concerned himself with those business elements that were controllable. He refused to acknowledge the depression and did quite well during that period. He was unwilling to talk about recessions or 20 inch snowfalls. He only thought about and talked about those conditions within his control. Dad was a great believer in not sweating the small stuff. He taught us to concern ourselves only with those things over which we have control. I thought he was unique in this until I realized this is one of the key common traits of highly successful people. Those folks are never victims. They take what

Starting point is 00:25:22 comes and handle the situation. The rest is a waste of time. Then we jump ahead to another lesson. Remember, he started out the book saying, hey, I don't even have any unique ideas. I just listen when other smart people say things. And if it makes sense, I'm going to use that for my business. We see this idea. So the note I left myself is upgrade the herd annually or what is the highest and best use of your time? I guess, you know, I'm going to read you my this Charlie Munger quote that popped my mind when I got to this section. Charlie says intelligent people make decisions based on opportunity costs. So in other words, it's your alternatives that matter.

Starting point is 00:25:57 That's how we make all of our decisions. He's saying that's how him and Warren make all their decisions. Let's jump into this lesson that Barnett learned from another founder. When you're operating a group of retail stores, there's always a usual bell curve of weak to great performing stores. At one point, we were struggling with the store doing $800,000 in volume and through gargantuan efforts trying to get to $850,000 in annual sales. So one store trying to increase it, they're struggling, they're trying to bump it up by another $50,000 a year. Much conventional practice dictates committing great effort to the weakest segment. When I discussed this with my friend Steve Lieberman, he's a hot dog magnate who ran hundreds of carousel snack bars in shopping centers for many years. He said,

Starting point is 00:26:39 you make more money closing bad stores than by opening new ones. His philosophy made sense. We decided we would rather spend time and effort on a $4.5 million store that could ultimately achieve $6 million in revenue than on lower volume store with less potential. So instead of trying to bump up $50,000 and dedicating all these resources, let's focus on something that's already doing well and get an extra $1.5 million is what he's saying here. Did this mean we gave up immediately when things did not work? Absolutely not. If the store lacked great people, proper merchandising, or other controllable variables, there's that word control again, by all means, we fixed it. However, our attitude became to upgrade the herd annually, closing the weakest stores each year. And then he goes into his reasoning behind

Starting point is 00:27:18 this. Each activity you undertake exacts the price of not being able to pursue alternative activities. This is sometimes called opportunity cost. What is the actual cost of sending a highly talented person to create an average performance out of a dry well rather than sending him or her to a gusher that can be turned into a super gusher? Then he extends this idea by talking about something he learned from Warren Buffett. Perhaps one of the key reasons Warren Buffett has been the world's most successful investor. He does not buy turnaround opportunities, something that Buffett spends a lot of time discussing over many years in his shareholder letters. He doesn't believe turnarounds turn turnaround. He does not buy turnaround opportunities, only successful companies.

Starting point is 00:27:58 Focus is your lever to success. Do not underestimate the incredible amount of mental discipline it takes to focus yourself and your teammates. Wonderful alternatives and seductive opportunities abound and temptations to go in multiple directions are unlimited. That is, he's writing these words in 2003. Now imagine how much temptation and distraction we're exposed to on a daily basis almost 20 years later, way more than the world in 2003. This is the last thing I'm going to read to you from the section, but this sings to my soul. Commit yourself to be the best. Define what that means and focus on the head of that pin

Starting point is 00:28:31 like no one in your industry. I got to read that again. Commit yourself to be the best. Define what that means and focus on the head of that pin like no one in your industry. And he's got another great idea. I'll probably reference Estee Lauder several times, episode 217.

Starting point is 00:28:50 If you haven't listened to it yet, I highly recommend you do. She was maybe the best practitioner of Paul Graham's idea that you should do things that don't scale. What Barnett says here is that just providing super service is actually a friend to the entrepreneur. It's something that you can do that giant companies can't. And so he talks about, you know, going to

Starting point is 00:29:08 a locally owned grocery store. He says, I went to the grocery store to get a few items, unloading the groceries. I found that the home phone numbers of the owners, Mike and Libby, were listed right on the sack with the invitation to call if I was not happy with the store. It was clear that the owners took responsibility for good service. What I also liked about the book is at the end of every chapter, he's got all these quotes that he loved, usually from other founders or other interesting people throughout history. You know I'm a sucker for maxims. This one, I actually read a biography on Thomas Watson.

Starting point is 00:29:42 It's called The Maverick and the Machine, Thomas Watson Sr. and the Making of IBM. I did that a long time ago. I think it's episode 87. But he put this at the end of one of the chapters that I really loved. A quote from Thomas Watson, who said, to be successful, have your heart in your business and your business in your heart. Another lesson from his father, the importance of keeping your ego in check, that it could be used to drive you, but you have to, you should hide it. People do not like arrogance on other people. And his father, so his father is quoted a bunch in the book at the end of these chapters,

Starting point is 00:30:16 which is referencing at least maxims he puts in there. And this is the way I could, basically you could summarize the main idea in the entire chapter in one sentence. And it's a quote from his father. It says, big people grow, little people swell. So, again, the name of the chapter is keeping your ego in check. Big people grow, little people swell. So then he talks about another idea that he learned from his father. This is going to happen in the mid-1960s. His father had this idea of, he calls it the two-supplier principle.

Starting point is 00:30:52 And then this is the first time he mentions this, or the first time I mentioned to you, but it's mentioned a lot in the book, that his father and everybody in the company is like, don't burn a bridge. This is repeated, do not burn a bridge. It's repeated over and over again in this book. And so this was the first introduction I heard about the two supplier principle. One bitterly cold January in the mid 1960s, I went to our bank, one of the banks actually, to the First National Bank of Kansas City to make our routine loan. We needed to cover the checks that we sent out the day before to our suppliers for the

Starting point is 00:31:19 immense amount of merchandise we had bought for the Christmas season the month prior. We had a longstanding relationship with First National Bank going back 30 years. We had gotten the usual letter reassuring us that a $500,000 line of credit was available to us when we needed it. We hardly noticed that the last paragraph of the letter, which would rescind the bank's obligation if our creditworthiness changed. To our shock and surprise, the bank refused to loan us the money. One particular director of the bank felt that we were not credit worthy. So they just sent out a bunch of checks. There's not enough money in their bank account to cover those checks.

Starting point is 00:31:51 They're in dire need. And so the bank's not budging, even though they've had a relationship with them for 30 years. We'll come back to that in one second. So what do they do? We immediately drove over to the Security National Bank, where the family that owned the bank had served my dad for untold years. Now, that guy who had worked with his dad, now his son is in the bank. So this guy named Morris Rendenthal Jr. had only one question for us. How much do you want? So back to Barnett. We came to the precipice and we were saved by the two supplier principle. When at

Starting point is 00:32:23 death's door, you may be saved by a relationship. We were. Did we continue to? Now, this is what he means about, you know, maybe other people would be mad. Hey, we were a customer of yours for 30 years. How dare you change our relationship overnight? You put like you could have put us out of business. You know, we're done here. Barnett did not do that. He says, did we continue to do business with both banks? Yes, absolutely. Never burn a bridge was our mantra. And we still wanted two suppliers. And then he has parting advice in this chapter. Get your second sources now when you do not need them. And then he quotes this great African proverb on this chapter that's about the need to test your new ideas. And it says, only a fool tests the depth of the water with both feet. And so in the 1970s and before,

Starting point is 00:33:14 it was a long established idea in their industry that you should handle the financing and the credit, extending the credit to your customers yourself. And then one of Barnett's executives is like, no, I'm pretty sure like we could outsource this and then just focus on the one thing that we're actually really good at, which is selling diamonds. So he says the stakes were high in terms of the loss of interest income and fees from outside providers of credit. So Marty chose one of our best store managers to test his idea that jewelry stores could make more money if they focused on selling diamonds. So this is his hypothesis, right? We're actually going to make more money if we focus on selling

Starting point is 00:33:49 diamonds and left the credit business and interest income to banks and other lenders who were experts in such things. And so one principle at play here, he's like, listen, if you're going to test something you think is important, it's going to be really important to the future of your business. Put one of your best people on it. That's what they did. They picked a great store. They didn't do a test in a crappy store and then couldn't figure out, did it work because it's a crappy store? Did it work because it was a crappy idea? It's like, well, no, this guy's really good. He's really smart. He's one of our best. Let's let him test it. And it wound up being a success. And then this is what they did next. After our test

Starting point is 00:34:18 of outsourcing customer credit, we could now say to the other stores, it had proved to be successful. As each of our stores began to implement the new system, our total focus on buying and selling diamonds. So remember, he talked about the importance of focus. He said in a previous chapter that focus is your lever to success. And the implementation of that is obviously a competitive advantage because I'm not sure humans in general can focus on many things, and certainly not in today's day and age.

Starting point is 00:34:43 So that is also going to be a main theme over and over again. That focus is a lever to success. We just see this here. It says, hey, as each of our stories began to implement the new system, our total focus on buying and selling diamonds and not being in the banking business brought incalculable dividends. And so reducing that lesson down back to that proverb, which is fantastic, only a full test the depth of the water with both feet. And so then Barnett talks about this maxim that he learned from his dad, that business is people. And he actually, if you just treat people better and don't create inhospitable environments,

Starting point is 00:35:16 you wouldn't imagine that companies do this for their customers, but you probably see it every day in your day-to-day lives, that's actually an advantage and an edge that you can have. This is going to remind me of Paul Orfala. I've always pronounced his name incorrectly, but it's the founder of Kikos. I covered his fantastic autobiography called Copy This back on episode number 181. But let me actually read that section from the copy of this book, because I think it's fantastic. And it's going to echo what Barnett discovered with rival jewelry stores and how he actually just did the opposite. And so Paul writes,

Starting point is 00:35:55 Paul essentially just spent his time traveling all over the country visiting Kinko stores, looking for the best and the worst ideas and then spreading those ideas through the network of stores. And so Paul says, some of our partners created an inhospitable climate for customers. Some posted negative signs. Remember this for what I'm about to read to you in this book. At one store, a manager hung a sign in red warning customers that they would be charged a steep fee if they bounced a check.

Starting point is 00:36:20 It said, the bank doesn't make copies and we don't cash checks. That really got me boiling. I jumped on the counter and ripped it down as customers and coworkers looked on amazed. That may sound extreme, but I needed to make the point in a memorable way. I don't want signs like this staring our customers in the face. I told our co-workers, so Paul wouldn't ever use the term employees. He hated that term. He considered everybody co-workers. I told our co-workers that the occasional hit that we took for a bounce check cost far less than we lost and could not quantify by creating a subtly hostile atmosphere. And so this is Barnett's version of that. You've probably seen this

Starting point is 00:37:05 sign everywhere. If you go into like a shop or a store rather, it says, hey, don't bring your food and drink, no food and drink. He's like, well, I'm just going to do the opposite. Bring it all in. Let's go. One of the best things we did was to invite shoppers to bring their food into the store with them. Ice cream cones, hot dogs with mustard, no problem. The standard store sign in a mall says no food or drink. Ours said your food and drink are welcome here. We were trying to say we are here on your terms and we are different. Just a few quick lines here, which I thought was fantastic. He puts a premium on speed and urgency. He says you need to constantly be moving with a sense of urgency. By acting with a sense of urgency,

Starting point is 00:37:46 you are modeling the behavior that you want from your associates. So he's saying this starts with the leader and works its way down. Nearly any action or communication means far more when done urgently. And then he quotes this fantastic, I love this maxim.

Starting point is 00:38:01 This is from Alfred Adler, who apparently was a psychologist and author. And he says, trust only movement. I've been rereading a lot of my highlights from the two or three books that I read on Andrew Carnegie, and I'm pretty sure I'm getting ready to reread his autobiography because it's just been top of my mind so much. I've been spending so much time thinking about it. But he says something very similar.

Starting point is 00:38:24 It's like, I love that maxim. It's like, hey, we're only going to trust only movement. Andrew Carnegie says, as I grow older, I pay less attention to what people say, and I just watch what they do. That makes me think of my favorite, one of my favorite maxims, which is actions express priority. We are only what we actually do, not what we profess to believe. Here is a few great quotes. One person, this is the importance of belief. One person with the belief is equal to a force of 99 who have only interest. And the second one is, this is actually anonymous quote. Quality is never an accident. It is always a result of high intention, sincere effort, intelligent direction, and skillful execution.

Starting point is 00:39:08 It represents the wise choice of many alternatives. Now, I guess I should have told you what that chapter is from. His whole point is that it's the execution that matters. A ton of people have ideas. Execution is actually the key. So I just skipped over that and gave you the two maxims at the end because I thought it illustrates that point better. So I'm jumping ahead a little bit. This I absolutely loved because you and I have talked about this theme over and over again. None of this works. If you can't trust your own judgment, when you're learning from history,

Starting point is 00:39:36 when you're learning from other people, you're going to find conflicting advice. The only one that knows if it's actually going to work is you. So it says, one of my most prized mentors shared his wisdom. You don't need shopping centers. You need business districts. I took that as gospel and did not think things out on my own. Remember, none of this works if you can't trust your own judgment. I took that as gospel. In this case, he's not even using his own judgment, right? And I took that as gospel and did not think things out of my own. The country was about to explode in the mauling of America. We elected to pull out of our lease in one of the first 11 covered malls in the United States. This winds up being his entire business. It takes place almost exclusively in malls. And he's like, hey, we'll just run away from this giant trend that could help our business. So that's what he's describing here.

Starting point is 00:40:27 We elected to pull out of our lease in one of the first 11 covered malls in the United States. This was a nearly fatal error, causing us to waste years of precious time and resources. And he did it because one of his prize mentors was like, hey, get the hell out of malls. Years later, we and our advisor realized that our avoiding malls was not the right posture. We pursued malls locations slowly at first and then vigorously later. And so this is what he learned from that. He who takes bad advice is the one and only culprit in the scenario. Advice is advice, not a command. That is fantastic. Advice is advice. It's not a command. The mall locations later became the success of the company. We nearly put ourselves out of business by staying out of them.

Starting point is 00:41:07 And then he quotes one of my heroes, Benjamin Franklin, who said, the only place where fools may learn is the school of experience. I spent a few hours actually in a used bookstore yesterday. This place was a treasure trove. I left with like six or seven books. I think I got seven books for $100. in a used bookstore yesterday. This place was a treasure trove. I left with like six or seven books. I think I got seven books for $100. And one of them, the most expensive book,

Starting point is 00:41:34 was actually a biography on Benjamin Franklin. First published in 1938. It is a beautiful, like leather-bound book. It was like wrapped in plastic, never been like actually opened and used. And that was for that one book alone was 40. So it's 40% of the cost because it was $40 of the hundred. I can't wait to get to it, though. So I'm almost going to feel bad about taking notes and marking up that book, but I'm going to. And then we move ahead. This is about borrowing wisdom and knowledge about your business. Again, main theme of the book. He's going to talk about his father. He's going to talk about his grandfather, he's going to talk about his mentor, he's going to talk about the books he reads. In fact, he leaves at the very last page, it's just like a reading list of all these books that were helpful for his business. And the main theme of the book is like learning from the experience of others. He talks about the fact that he does not think he was the smartest person in his company by far. And so one way to fix that problem was just find out what people smarter than him had thought.

Starting point is 00:42:29 Humans have accumulated incredible amounts of knowledge over hundreds of years, and it's constantly being refined through experience. This reservoir of knowledge and human experience creates tremendous opportunities and advantages for you as an entrepreneur. You are heir to the discoveries of many entrepreneurs who skin their shins trying something new. It is likely other entrepreneurs before you have experienced the same challenges and problems and found ways to surmount them. You do not need to invent a new industry to start a new business. Study an existing industry and just do it lots better.

Starting point is 00:43:01 Henry Ford did not invent the automobile, did kinkos invent copying that's funny then he mentions kinkos because i just referenced the fact that they had similar ideas uh a few chapters ago you have the experience of thousands of experts and mentors at your fingertips and then he brings up something that steve jobs said that i i've tried to use as well because i think it's just genius advice it's like just reach out and ask somebody. In his case, like pick up the phone and call. That's exactly what Steve would say too. But he's like, listen, maybe you try to get in touch with somebody.

Starting point is 00:43:32 Maybe they're going to be unwilling to talk to you. But what's the worst case scenario? You wasted a phone call? What a fabulous risk reward ratio. Many business people will reach out to share what they've learned. Why not listen to many people, ponder what they have to say, and then follow your own instincts? The incredible, wonderful, and unavoidable truth is that seeking the help of others can put you light years ahead of other people who beat their heads against the wall trying to reinvent the wheel. There's an interview, I've mentioned this a million times.

Starting point is 00:43:59 According to this, I first took notes on this on August 4th, 2019. And Steve was talking about the fact that he just picks up the phone and call. He's just like, I always ask for help. And more times than not, people will help. And he says, I never found anybody that didn't want to help me if I asked them. I called up Bill Hewlett. That's obviously one of the co-founders of HP when I was 12. He answered the phone himself. I told him I wanted to build a frequency counter. I asked if he had any spare parts I could have. And he laughed and laughed and laughed. He gave me the parts, and then he gave me a summer job at HP working on the assembly line putting together frequency counters. I have never, this is his punchline here, I have never found

Starting point is 00:44:32 anyone who said no or hung up the phone. I just ask. Most people never pick up the phone and call, and that's what separates the people who do things versus the people who dream about them. You have to act. And so Barnett's point is like, what's the risk reward ratio, right? They say no, they never answer or they don't want to talk to you. Okay, I wasted, you know, a couple minutes of my time. Or you wind up having a conversation. You learn something valuable for your business. Maybe make you millions and millions of dollars over the course of your lifetime.

Starting point is 00:44:58 And or you develop like a lifelong friend. It's like, that's a fantastic. And I don't mean just go and spam people. I would find a way if I was doing this, I find a way to like provide value to them first, you know, and then ask them the question. I had one of the best cold messages I ever received was from this like, it was like a 21 year old kid still in college at the time. His name's Michael, actually. And he just messaged me. I didn't know who he was. Then he had listened to the podcast and he's like, hey, I took this idea that I learned from your podcast.

Starting point is 00:45:27 I made a video on it and I got I remember it was like three million or ten million views or something. I forgot. It was some crazy stuff like that. I was like, he's like, can we talk? I'm like, you did what? That is a really good because he's like, hey, I could show you how to do this. You can like take the ideas, rehash them, gain attention, and then you get more listeners. He got attention by showing, hey, I can actually provide value to you as well. So I just like that idea. Most people never pick up the phone and call.

Starting point is 00:45:51 That's what separates the people who do things versus the people who just dream about them. You have to act. So then Barnett gets into the importance of the more experience you get, the more you should start to trust and actually follow your gut. This is something Steve Jobs talked about, like the later in life he got, the more he valued his own intuition. He said, intuition is a very powerful thing, more powerful than intellect, in my opinion, and it's had a big impact on my work. So that's Steve Jobs. This is what Barnett said about that. To some people, his ideas put the company, he's talking about his dad. I should have backed up and read something on the previous page. So it says, like many successful entrepreneurs I've since met,

Starting point is 00:46:26 dad relied on his intuition as much as he relied on his business plans and market forecast. To some people, his ideas put the company on a limb. But to him, the ideas felt right, and usually they were right on. Dad listened to other people. He loved mentors. But perhaps because he started out so young and had to rely on himself, remember, he started out in the business when he was 14, he learned the value of tuning out other people's voices when they became a distraction and listening to that pristine inner voice that is in all of us.

Starting point is 00:46:53 Your inner voice talks to you through your gut feelings. Your gut feelings, our intuition, emanate from your unconscious mind. He says your unconscious mind is a repository for all of your life experiences and then some. And he compares Warren Buffett using his intuition to buy as part of the way he bought Helzberg Diamonds. When Warren Buffett bought Helzberg Diamonds, he felt so positive about the deal that he cut out the usual due diligence to speed negotiations. Sure, Buffett did his homework, but he also had a strong intuitive response. I can smell these things, he said, and this one smells good. Trusting your gut isn't meant to replace using your conscious brain.

Starting point is 00:47:31 The two work together. And then he's got another great quote to end the chapter from Warren Buffett, who says, my idea of a group decision is to look in the mirror. And then this is Barnett on making sure that you're prepared to take advantage of luck. He calls this on how to have uncanny luck. This is going to remind, this reminded me actually, I think we talked about this, I'm pretty sure it was in the Peter Thiel's book Zero to One, it might have been in Paul Graham's essays. But it was a quote from this famous explorer called Roald Amundsen. And he says, victory awaits him who has everything in order, order or luck as some people call it. This is

Starting point is 00:48:06 what Barnett says. An example of luck would be my chance meeting with Warren Buffett on the streets of New York. I was prepared because I'd been attending his annual meetings for a few years and I felt I knew the kind of person he was. I was also in New York dealing with the very subject I spoke to him about, which is selling the company. And there was top of mind and it was a top of mind awareness of my mission. Add in the unmitigated goal to walk up to him, introduce myself and offer to sell the company to him. And you have an uncanny case of luck. And then like almost every entrepreneur, Barnett spent some time talking about the importance of making sure you're only working with and hiring the very best people you absolutely can.

Starting point is 00:48:47 He actually got something from another entrepreneur. He says, Larry Bossidy, former head of Allied Signal, said, good people hire good people. I fear the reverse is true also. When I got to that page, it made me think of something Max Levchin said in that book, The Founders, which is a story of PayPal and the entrepreneurs who shaped Silicon Valley, written by my friend, Jimmy Sony. That's actually episode 233, if you haven't listened to it. But Max said something that was very interesting. It's like at the very early days of PayPal, they kept the bar for talent exceedingly high. This is like the genesis of the PayPal mafia, which is well known in Silicon Valley and the technology industry.

Starting point is 00:49:27 And Max would repeat over and over again. And he was doing this, you know, 20, almost 25 years ago. And he says something very similar to what this guy just said. Good people hire good people. But I fear the reverse is also true. Max kept repeating A players hire A players, B players hire C players. So the first B player you hire takes the whole company down. And he ends this chapter with a quote from Bill Gates that I've never seen before, which illustrates this point effectively. The greatest thing you could do for your competition is hiring poorly.

Starting point is 00:49:56 This is another example of the importance of focus and not only focusing like your time and attention, which you're focused on, but also focusing your product line. You wouldn't think that a company called Helzberg Diamonds sold luggage or radios, but at one time they did. And so this is him correcting that mistake. We had decided that the future course of Helzberg Diamonds was indeed in diamonds

Starting point is 00:50:19 and that we should discontinue non-jewelry lines of merchandise. We phased out lines of merchandise, such as china, crystal, silver, luggage, and radios. that we should discontinue non-jewelry lines of merchandise. We phased out lines of merchandise such as china, crystal, silver, luggage, and radios. We believed that the dollar volume of business would decrease, but the profits would increase. So he's saying on a store, an individual store level, like, hey, we're going to cut all this crap out. The dollar volume of the business might go down, so our revenue might go down, but our profit would increase. Our profit margin would increase. Wrong. We were wrong. Both volume and profit went up. This was when we found out that less is indeed more. Focus is a

Starting point is 00:50:55 lever of your success. So then he brings up another lesson that he learned from his dad in a chapter called Digging Out the Answer. I'm always delighted when someone in a group can view a scenario in a wholly different way and suggest an unexpected solution to what seemed to be an intractable problem. I've seen it happen so often I'm convinced nearly any problem can be solved by bringing together a variety of smart people to brainstorm. My dad quoted a slogan for the tactic that was printed on the agenda for every executive And then he quotes his dad again at the end of this chapter. There is always an answer. And he goes back to this idea of the importance of having mentors, of learning from other people. But I like the way he thinks about this.

Starting point is 00:51:41 My personal vision of mentoring is that no individual advice will necessarily fit you. I see mentoring as a process of brain marination. When your brain is adequately marinated, you will look in the mirror and a light bulb on top of your cranium will flash the answer that best fits you and your situation. It may be a combination of your thoughts and some you received from your mentors. And he ends this chapter with one of my favorite Charlie and Margaret quotes where Charlie's really talking about the role that he played with Buffett in Berkshire. Just the discipline, this is so important, just the discipline of having to put your thoughts in order with somebody else is a very useful thing. And then he talks about, towards the end of the

Starting point is 00:52:25 book, he talks about the more successful you get, the more people around you that rely on you for the success. It's really hard to get honest feedback. The greatest, I don't know why things like certain things stick in my mind when they do, but I read the founder of UPS, Jim Casey, I read a biography of him back on episode 192. And he realized this too, where he's just like, man, I can't, I'm can't sure if like the information I'm getting from my executive team is not filtered. So he would just every time he was out and about when he anytime he saw a UPS, you know, the UPS brown trucks, he'd ask his driver to pull over. And he would just go and talk to him. It's like, these are the people that have the best information for me, because they're

Starting point is 00:53:04 on the front lines. They have direct contact. They're the lifeblood of my organization, but they have direct contact with the customer. And so Barnett has three questions where he's like, I asked these people three questions in a way to force to get honest feedback. Number one, what am I doing that you like? Number two, what am I doing that you do not like? And number three, what am I not doing that you would like? I highly suspect you may get like muddy answers for the first two questions, but that third question

Starting point is 00:53:30 will probably give you some useful ideas. What am I not doing that you would like? Another lesson from his dad, bad boys move in silence. You and I talk about this over and over again. Dad was the ultimate extrovert, yet he told me that the right strategy was to be, quote, a sleeper. That is not to be known for success when it did come. Interestingly, this thought was also confirmed by Leonard Lauder of Estee Lauder when I covered. So in that book, The Autobiography of Estee Lauder, Leonard is still like a young man. Part of the beginning of the book, he's in college, actually. Now, I think he's still alive to this day. I think he's in the late 80s. But this is a quote that Barnett learned from him. Leonard Lauder of Estee Lauder told an audience of entrepreneurs, don't communicate your success.

Starting point is 00:54:17 So that's another idea from his dad. Be a sleeper. Leonard Lauder says, don't communicate your success. And then he actually ends the book on something that's very important to me. It's why the title of episode 222 is my personal blueprint. It's this idea that entrepreneurs are prone, founders are prone to get wrong. Like how do you balance your life? How do you balance your work play, meaning having fun, children, health, and money. And this also ties into what you and I talked about at the very beginning of this podcast. The decisions that we're going to make are going

Starting point is 00:54:48 to resonate. They don't just affect our lives. They affect the lives of everybody around us right now that we're actually going through life together, but also future generations. And I think if you and I view our decisions like that, we're going to make better decisions. Not just today. What is this going to happen? What's the consequence of this 10, 20 years from now? What if my grandkids read about the decision I'm going to make today? Will that change that? Like, will that change what I'm about to do here? What do you want to look back on when your children are adults? And then he ends on this fantastic quote that puts this into perspective. I wish that I had known sooner that if you miss a child's play or performance or sporting event, you will have

Starting point is 00:55:31 forgotten a year later the work emergency that caused you to miss it. But the child won't have forgotten that you were not there. And that is where I'll leave it. Thank you to the person that actually sent me this book, the person on Twitter that actually sent me this book. I did not know it existed. If you want the full story, if you buy the book using the link that's in the show notes in your podcast player,

Starting point is 00:55:55 or by going to founderspodcast.com, you'll be supporting the podcast at the same time. If you want to use the same app that I use and that I love to store all the highlights for the books that I read and all the notes so I constantly remind and go back and reread them. You can test it for free for 60 days and see if you like it as much as I do. It's an app called Readwise. I'll leave the link down below, but you can go to readwise.io forward slash founders, and they'll give you 60 days for free. That is 279 books down, 1,000 to go. And I'll talk to you again soon.

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Founders - #279 What I Learned Before I Sold to Warren Buffett

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