Founders - #96 James J. Hill (Empire Builder of the Northwest)

Episode Date: November 4, 2019

What I learned from reading James J. Hill: Empire Builder of the Northwest by Michael P. Malone.----Come see a live show with me and Patrick O'Shaughnessy from Invest Like The Best on October 19th in New York City. Get your tickets here! ----Subscribe to listen to Founders Premium — Subscribers can listen to Ask Me Anything (AMA) episodes and every bonus episode. ---James J. Hill demonstrates the impact one willful individual can have on the course of history [1:00]If you want to know whether you are destined to be a success or a failure in life, you can easily find out. The test is simple and it is infallible: Are you able to save money? If not, drop out. You will lose. You may think not, but you will lose as sure as you live. The seed of success is not in you. –James J. Hill [3:30]Early life and education [7:58]What James Hill learned from history: The power of one dynamic individual [9:09]Hill strikes out for adventure [10:48]Hill makes it a priority to seek out mentors to learn from [14:44]Starting his first business [18:22]Hill’s strategies on building businesses & insights into his business philosophy [21:50]Hill’s edge: An obsession with knowing every detail of his business [29:22]Burn the boats/ going all in/ when you have an edge, bet heavily [34:31]Stay close to where the money is being spent [36:51]Hill had an edge because he took the time to educate himself more than others would [38:49]The power of maintaining your focus [40:00]The best defense against invading railroads was a better built system that could operate at lower rates [45:05]Great idea to think of your business as a living organism [55:40]A well run business is built slowly [56:32]—“I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — GarethBe like Gareth. Buy a book: All the books featured on Founders Podcast ----Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work.  Get access to Founders Notes here. ----“I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — GarethBe like Gareth. Buy a book: All the books featured on Founders Podcast

Like most dynamic individuals of any generation, James J. Hill displayed what Alan Nevins once called a sort of lunar dualism. His positive traits were quite remarkable. A quick intelligence, a power of analysis, an incredible power of will and personality, and an unparalleled work ethic and commitment. His negative attributes were mirror images of the positive, an extreme irascibility that sometimes exploded into rage, a willfulness that could turn into outright ruthlessness, and such a preoccupation with the purpose at hand that he sometimes lost sight of

the broader perspective. What does one conclude in the final analysis about this remarkable man? It is entirely appropriate that the passenger train from Chicago to Seattle is called the Empire Builder in his memory, for his hand reached into every aspect of building the regional economy and social order, from transportation to agriculture, mining, lumbering, maritime trade and town and city building. His larger-than-life stature is well attested by the persistence, nearly 80 years after his death, of his memory and legend. The various determinists no doubt are correct that events shape people more than people shape events.

But the life of James J. Hill certainly demonstrates the impact one willful individual can have on the course of history. We shall never see his like again, and that simple fact adds yet another dimension to the fascination his life will afford to each new generation. All right, so that's an excerpt from the book that I read this week and the one I'm going to talk to you about today, which is James J. Hill, Empire Builder of the Northwest, and it was written by Michael P. Malone. So I found out about – apparently James J. Hill is really famous, really well-known. I had never heard of him until I was reading – I think it was Poor Charlie's Almanac. And Charlie, in a speech, listed the kind of business operators that him

and Warren admired. And James J. Hill was on that list. I started doing some research into books and stuff. And then I also found that if you took all the great American fortunes that have ever been built and adjusted for inflation, Hill would be one of the 50 richest entrepreneurs to ever live in America. So before I jump into the rest of the book, I richest entrepreneurs to ever live in America. So before I jump into the rest of the book, I just want to pull up some quotes. And it's quotes from James J. Hill that I think give us an insight into his personality and kind of makes understanding who he was as a person easier to do. And then as a result of that, then becomes easier to see why he made certain decisions in how he built his company and his business.

So here's one. He says, give me snuff, whiskey, and Swedes, and I will build a railroad to hell. He was asked later in his life what is responsible for his success. This was his answer. Work, hard work, intelligent work, and then more work. I really like this idea about thinking about life as an adventure and then, you know, running a business as a tool to use in that adventure. So he says, most men who have really lived have had, in some share, their great adventure. This railway is mine. And then the last quote, which I found really

interesting because a lot of the, I would say, opinions of a lot of the people I've covered on the podcast kind of share what he's about to say here and the importance of being frugal and not wasteful in your resources. So it says, if you want to know whether you're destined to be a success or failure in life, you can easily find out. The test is simple and it is infallible. Are you able to save money? If not, drop out. You will lose.

You may think not, but you will lose as sure as you live. The seed of success is not in you. Okay, so before I jump into his early life and his personality, I want to start with the end in mind. And I want to read three things to you that I think if you know right up front, it makes it easier to understand James Hill as a person and of course, extrapolating it on to the decisions he's going to make when he builds his company. So where he starts in railroading, and I'll get to what he was doing before that. The earliest predecessor railroad to the GN, which is the shorthand for Great Northern Railway, that's the transcontinental railway that James Hill is most famous for

building. It was his life's work. It also, about 100 years, maybe like 110 years later, Warren Buffett buys what that road, the Great Northern Railroad was also merged into a bunch of other railroads. Anyways, Warren Buffett buys those in 2009 for like $44 billion. So it says the earliest predecessor railroad to the GN was the St. Paul and Pacific Railroad. It was a bank railroad with a small amount of track in the state of Minnesota. That is where James starts. Okay. This is where he ends up the great northern was the only successful built privately funded transcontinental railroad in u.s history no federal subsidies were used during the construction unlike all other transcontinental railroads that's really interesting

and then this is important to understand how he got there the great northern because he had a different strategy than other people, the Great Northern was built in stages, slowly, to create profitable lines before extending the road further into the undeveloped Western territories. And I'll talk about how that compares and contrasts with his competitors of the day. But when I read that part, it immediately made me think of Jeff Bezos' approach to building Blue Origin as a rocket company. Their motto is, slow is smooth, smooth is fast. And to a great degree, that's what James Hill did. All right, so I want to start with a bunch of random quotes about his personality that are scattered throughout the book that I put in all in one place.

And then we'll get into the time he was in and his early life. All right, personality. Hill alienated colleagues as often as he inspired them. He was arrogant, self-righteous, sometimes too ambitious, and frequently a blatant bully. Hill lashed out at managers and workers alike who failed to meet his taxing demands of production and loyalty. More about his personality. He was the embodiment of high energy.

He drank little, worked hard, and read incessantly. He simply could not delegate authority and live with the outcome. And then he has this personality dichotomy. It says, clearly he accomplished more than all but a few other leading figures in the history of American industry and regional development, and was, in fact, a man of remarkable abilities, determination, and drive. Just as clearly, however, he could be quite ruthless, overbearing, and politically domineering. Okay, so I think it's important to understand when this story takes place. It's a time that's really hard for us living in modern times to wrap our head around. So it says, perhaps no other generation in all of American history played so fascinating or central a role in national development as the one that, born in the 1830s

and 1840s, came to maturity in the Civil War crisis. For this was a generation that not only forged the modern American nation, but also work the industrial commercial transportation revolution that formed its modern economy and society. All of them, meaning the builders of this generation, seize the sudden and unprecedented opportunities the new age presented to them. Okay, so let's go back into the early life of James J. Hill. He started in rather humble beginnings. He was born in Canada.

It says, The growing family led a characteristic frontier existence. James later recalled that his father was not very prosperous, and he remembered lying awake at night staring at the moonlight beaming through holes in the roof. He also had a devastating early injury in life. When he was nine, hunting led to a tragic incident. A bow that he had made snapped, lashing the arrow sharply back into his right eye and pried it from its socket. This is a little bit about his early life and education. He became a

voracious reader even before school days, dwelling on the staples of the 19th century and the British tradition. The Bible, Shakespeare, Byron, Robert Burns, and the chivalrous novels of Sir Walter Scott were among his favorites. Something that happens early in his life that he takes with him and is, I would say, integral into the success he had in his career was he develops a habit and a love of learning. When James was 11, he attended classes at the Quaker Academy. career was he develops a habit and a love of learning. When James was 11, he attended classes at the Quaker Academy. Although Hill often told listeners about the inadequacies of his education, there's a quote

from him, he says, I never went to school a day after I was 14 years old, the fact is he had quite a good education by the minimal standards of the time. He could definitely read, write, and reckon. From an innate intelligence and the fostering of family and teachers, he loved to learn. So around this time, he starts studying history. This is what he learns from history, and he starts to empathize, or I guess idolize, would be one way to put it, is the power of one dynamic individual, which history is obviously full of, right? Stories from. He says, to many, he'll always seem the embodiment of cold and analytical practicality. But even as a boy, he revealed how realism and romanticism can coexist in the same mind.

Think about how he described the building of a railroad. He was very realistic and pragmatic how he goes about doing that. But he described it as a great adventure. There's like a romanticism element to that, a romantic element to that. So he says, history offers other such cases like that of robert goddard goddard who was not only a great rocket scientist but also an avid reader of science fiction like so many other 19th century youths young jim hill fell under the spell of bonapartism so he idolized napoleon the fetish of strength of will the power of one dynamic of individual to change

the world and the conquering hero. Around this time, he's about 14 years old. His dad dies, so he has to stop going. He can't go to school anymore. He has to go to work to support the family. So he gets a job at a general store. It says his childhood suddenly ended with the death of his father. The days of family togetherness now came abruptly and tragically to an end.

No longer able to stay in school, the 14-year-old James had to go out and work. So he gets a job at a general store, he keeps the books, he does clerical work, he milks cows, and he cuts wood, among some of his other tasks. But this is what he learned from his first job. Here began his first lessons in the knacks of dealing with customers, making ledgers, and handling merchandise. He proved himself highly industrious and adept to them all. Now, around this time, he works there for several years, and then he has a random lucky encounter. Remember, he's in Canada at this time. He's 18 years old when he starts to have thoughts about leaving the nest.

A trader from St. Paul, Minnesota, took a liking to the lad after he had voluntarily watered the man's horse. Handing him a tattered copy of a New York newspaper that had the caption, Splendid chances for young men in the West, the trader told him, Go out there, young man. That's the place for you. Jim carried the copy around, meaning the paper, reading it and rereading it until it fell to pieces. And now he finally focused his dreams of adventure on a real decision a rich imagination and a driving ambition were fundamental parts of his nature so then this is when he strikes out in his adventure he doesn't

know what he's going to do all he knows is going to he's going to head in the general direction of uh saint paul minnesota so. So he has this adventure across America, and he leaves Ontario with $600 in cash, his life savings, but seeming little else. And then the author corrects himself there. He goes, actually, he took with him all the tools he would need to succeed in America. A quick intelligence, self-sufficiency,

genuine courage, an engaging engaging personality a fierce ambition and a remarkable work ethic so you have those traits and you put you can whatever you direct those traits in whatever uh wherever you point that uh those are those are usually traits that they're going to lead to to good fortune and success so he goes uh after i think it's like six months journey he finally winds up in saint paul minnesota this is going to be the base of his operations and he just finds employment uh where many others did at the time and says he says he found employment on the levees along the mississippi river which is the focus of the city's economic livelihood before the 1860s

he says over 800 chugging steamers those are steamboats course to these levees during the He says, the docks and in the warehouses the youth who had known long hours of loneliness on the farm took naturally to the camaraderie of the levies and the variety of the work and people suited his high energy nature as did the fact that he could work with little supervision so he's on you see the early early um indications that he's meant for a life of entrepreneurship the fact that he didn't need anybody supervising him. So he co-signed and he would expedite freight, and he naturally learned quickly who was doing what and how things worked. So this is the education that this work is giving him at a very young age.

He worked incredibly hard, sometimes laboring late into the night, falling asleep at the desk, then getting up for a swim in the river and a cup of black coffee, then going back to work. So he's doing this at 18, 19. He does this all the way up until like his mid-60s. His schedule is insane. As he saw in retrospect, those years formed his apprenticeship, and he learned much more than bookkeeping. He learned how to extract favorable rates for shippers, how to beat back their attempts to inflate rates artificially. Remember, this is just steamboats but the uh he's gonna apply this to his work in railroading later how to purchase commodities cheaply and undercut competitors how to deliver efficiently and how to cultivate and maintain the loyalties of customers by voluntarily anticipating and looking after their every wish

these lessons would serve him well when he switched over to the world of transportation if there ever was a born entrepreneur it was jim hill highly intelligent highly motivated highly acquisitive and it was only a matter of time before he went into a business on his own so before he can he can switch from employee to entrepreneur he has to go through a series of experiences and one of the most beneficial experiences was the fact that he developed this habit of meeting older more successful people and then striking up relationships with them and learning from them and then a lot of the a lot of times those relationships formed into partnerships. This is an example of that. national fur trade says a generation older than hill kitson was now one of st paul's leading businessmen and wealthiest individuals he was a forwarding agent there for the hudson bay company and a one-time mayor of the city so kitson's got his hands on all kind of different businesses

some of them conflict with the work that he's doing for the hudson bay company that conflict needs to be resolved eventually that's going to lead to a partnership with Hill. It says, when the all-powerful HBC, that's the Hudson Bay Company, began frowning on Kitson's work for other independents, he made an arrangement to turn this business over to Hill as a partner. The young man had worked hard at befriending Kitson, as he uh as he would other older established people of power later in his career uh the old scott meaning kitson became much impressed by him jim found himself more and more heavily involved in the trade brokering furs of shipment uh and and consigning the movement of finished products northward on the frontier remember they're in like

largely the saint paul's a small city at the time, but you go west, you go north, and it's still frontier. It's largely uninhabited wilderness. That's where he's going to build his railroad, by the way. And that's what makes it so difficult. So it said, this trade would soon lead him naturally into the actual transportation business northward. Kitsie became his close friend, mentor, and longtime business associate. Jim would name his firstborn son James Norman in the old man's honor. So he starts out at this time, you know, he becomes, he doesn't start out saying, hey, I want to be one of the most fiftieth, wealthiest people of all time. He starts out with modest goals. And then interesting enough, he rapidly exceeds them.

I should say rapidly. He exceeds them. It does take take a actually it's the opposite of rap it takes a long time he had figured out uh that once he had amassed he had figured that once he had amassed a hundred thousand dollars he would retire and devote himself to a life of study philanthropy and fatherhood but like other ambitiously driven entrepreneurs of his time he soon abandoned his dream so he he's doing all this work. This reminded me, remember, we found out about Hill because of Buffett buying his railroad and Munger's talking about how they admire the way he operated the business. He also echoes a little bit about, somebody asked Warren, why don't more people emulate his strategy?

He says, because they don't want to get rich slowly. Hill, to a large degree, did follow that. He got rich slowly and then later in life, it accelerated. So it says 11 years later, at the time he entered the world of railroading, he would count assets of $150,000. And this would prove only to be a modest beginning.

So there's not many people that are going to put in that much time and effort into something like, again, it's going to make him a multi, multi, multimillionaire. If you account for inflation, it's like, you know, he's had over a billion dollars at this point. But it didn't start out quickly think about that what they just said 11 years it took him 11 years and that's the time he gets in the railroad business we're not even there yet take some 11 years before he can hit his goal or exceed his goal of having over $100,000 okay so I'm gonna skip ahead this is when he starts his own business we We're still not in railroading yet, but he has to go through these experiences to get that opportunity. It says, Jim Hill began a series of career thrusts that moved him decisively away from employment for others and towards independent entrepreneurship.

He meets another friend. Don't worry about the name. I'll skip ahead to that. He secures the St. Paul Agency for the powerful Northwest Packet Company. This company had near monopoly over the upper Mississippi River steamboat trade. Working as an independent agent, Hill applied his well-established contacts and knowledge of the local marketplace to serve not only the freight and passenger needs of the packet line, but also those of his close affiliate, the Milwaukee and Mississippi Railroad. So this is

where he starts getting the idea. He's introduced to the industry that he eventually conquers. A year later, he forms the firm James J. Hill Company. He negotiated an exclusive arrangement as forwarding agent for the St. Paul and Pacific Railroad, whereby his firm would transfer produce from riverboats to the firm's rails that pointed westward. Westward. So he's doing work that they don't want to do. Now, here's the crazy thing. I already told you what the St. Paul and Pacific Railroad was.

It's the road he's going to eventually go bankrupt, but he takes over. So this is the railroad which Hill would one day command. That's an insane sentence, right? Leased him a suburban riverfront location on which he built a large warehouse that served as a transfer facility so he also used them to set up to help finance the beginning of his business because he's taking apart a business process that they don't want to do uh during this time he starts a bunch of different businesses now this is a very different strategy than he employs later in his life one thing i've most learned from hill like i've

learned from a lot of these people since we start this series is his focus on one thing now he's not there yet eventually he's going to say the great northern railroad is my life's focus that's it but at this time he's still experimenting he's got to expose himself to different kinds of experiences that's how you learn right so he's got this other business where he's he's taking uh things off of steamers and putting them onto railroads and he also said hey i could start a fuel business uh he says jim vast expanded his fuel business concentrating first on the cordwood business he had been interested in for several years uh this comes from a lot of the the timber that's in the Northwest. So he starts having that cut down, transport it out,

and then people obviously purchasing it for fuel. Now he's also selling that fuel to the railroad, right? So he's learning a lot about the business. I'll get there in a minute, but one of his assets, like we started off talking about the fact that his railroad was one of the was the only one that wasn't built by subsidies right it's also one the only one that didn't go bankrupt during the the large depression and i think was 1893. um but one game one um advantage he had is he came from the bottom up of the industry a lot of the railroads at this time were basically put together they call them associations and you had like rich people in europe and new york and the northeast and they just buy them it's like imagine like a private equity firm coming in and trying and

running the business right as opposed to like the entrepreneur who starts very slowly and builds from the bottom so you have these two completely different approaches, and Jim's is the only one that winds up working out in this industry at this specific time in history. Okay, now this is a strategy for operating his fuel businesses. But again, we see a lot of his business philosophy that he applies early in life. He just takes that same tool, that same idea, and then applies it to a different industry or a different set of experiences later. So this is Cole was crowding fuel wood for the market. And as usual, Hill quickly got out in front of an emerging trend. Hill's rise to the top of the local coal business is interesting, not only because it formed a cornerstone of his career

and generated venture capital for later investments, but it also revealed for the first time his instincts towards what friends would call vertical and rational integration of an industry. Okay, that's what he would call it. rational integration of an industry. Okay. That's what he would call it. Foes call it monopolization. He would immerse himself in details of the business that never changed. He would do that through reading and correspondence. Then as the size of his, so he starts learning about it. Then he starts buying more tonnage, right? And he does this later on. He says he would work to purchase mass tonnage of high-quality anthracite coal.

Then as the size of his shipments and thus his bargaining power grew, he would remorselessly, meaning ruthlessly, leverage railroads to deliver the coal at preferred rates, learning in the process skills that would serve him well when he ended up at the other side of the transportation bargaining table. So right now he's negotiating preferred rates with railroads eventually he's going to sit on the other side he's going to own the railroads he's got to do the negotiation from the other side to the people that want lower rates uh we see more of his approach to how to build a formidable

company here uh in his coal dealings and in his other and other dealings to come, Jim Hill provided himself, excuse me, proved himself a tough, relentless, and driven taskmaster, and frequently a hard man to get along with. Definitely. He had a very difficult personality. He's going to show this here by, he's got a partnership with this guy Griggs. Griggs not working nearly as hard enough, doesn't think he measures up. So he says, convince Griggs that Griggs did not measure up. He forced Griggs out of the partnership. Now Griggs goes off. Now here's a good thing though. So he's ruthless, taskmaster, hard to deal with. That's difficult, right? But he also would change his mind and his course quickly when it made sense to. And that reminded me a lot of the podcast I did under Henry Singleton. So Griggs goes goes independent, right? Hill kicks him out of the partnership. Griggs goes

independent. When Griggs goes independent, Hill ruthlessly employed his influence with the railroads to keep Griggs from getting preferred rates on shipments. So now he went from former partner to adversary. But he changes his mind here. He says, ever the pragmatist as well as the tough competitor, he'll also eventually presage another future characteristic when he abruptly changed course and parlayed with his chief competitors to bring peace to the area coal industry by joining together in a market-sharing consortium. Trust, there's a lot of ways to put this, but monopolies,

there's a bunch of different words there. But now they're not going to compete. They're going to work hand in hand. The company was highly efficient, integrated organization that served its customers very well. Within little over a year, Hill would depart the independent coal business to devote his full energies and attention to railroading. So it's here that we get some more insights into his business philosophy by what he learned from the coal business. He said, it had taught him much and had demonstrated a salient fact of his entirely pragmatic business personality. When competition suited him in entering a market, he competed fiercely. When competition became wasteful to him, he did not hesitate to end it, even if it meant joining with

old enemies and creating an unblushing situation of monopoly. The breadth of the young entrepreneur's business activities seemed quite remarkable. This is some other side businesses he would engage at the time. He frequently bought machinery and buildings at foreclosure sales and resold them for tidy profits. These could be items as diverse as iron foundry equipment and saloon furniture. Sometimes he failed, but other times he profited handsomely, learning in the process more and more and more about the ever-widening ranges of endeavor. So around this time, before he gets into the railroad business, he starts a steamboat transportation business. And the problem

with that business is steamboats are seasonal, since the river froze every winter. So around this time, the railroad was expanding in this geographic area, and since trains could transport people and goods year-round, he started having the ideas of looking into railroads. It said, although the greater share of Hill's warehousing forwarding business still centered in the Twin City area, during this brief period, the Red River trade captured his imagination and began to take more and more of his time. So as a byproduct of what's going on here, he's constantly exposed to the opportunity in railroads. So it's only

a matter of time from where we are in the story until he's like, oh, I need to be working in that industry. It says, in this enterprise, just as in the fuel business, Jim Hill's behavior foretold future and larger happenings. Steamboating on the Red River had only a few years to go by the clothes this is so he's the industry he's in is gonna eventually cease to exist by the close of the 1870s advancing rails would seal its doom it's just so much more economical to to transport by rail than steamboats and eventually a few years after Hill dies the same thing happens to railroads with the invention of the interstate highway system. The railroad industry starts getting

a lot of its competition and starts losing a lot of business to trucks and cars. This might have meant that James Hill's move into the business would prove to be a dead end, but in fact it proved to be quite the opposite. His enterprises now bracketed the stalled out St. Paul and Pacific Railroad on both ends. In St. Paul, his warehousing business buttressed the railroad at the base of its operations. Unlike most Minnesotans who viewed the St. and pacific as a near worthless derelict it was a crappy run small regional uh railroad at the time hill viewed it as a miracle waiting to happen a potentially wondrous enterprise simply lacking competent leadership and how did he get like how is he coming up with such a drastic um difference of opinion than everybody else well he just

studied more than other people did. You know, we've talked about this a lot. Humans don't learn. They mimic. Everybody's just mimicking. They're not actually looking into it. So he looks into it. And he says, he studied the road constantly, reading every scrap of information he could

find out about it and boring anyone who would listen with endless detail as to what it could one day become. Thus would his move into river transportation lead naturally to an incredibly promising career in railroading. And that's just instructive for all of us that sometimes there's opportunities that you're not going to have, that are not going to afford themselves to you until you take some other preliminary step. In the case of Hill, the preliminary step is he had to get involved in warehousing and steamboat transportation to realize that there's a greater opportunity out there. But he would have never come to that conclusion had, one, he did not done the work and the

research into it, but two, had he not had those experiences beforehand. Okay, so this is the part of the book I was referencing earlier. So my note I left myself was his year of experience and his wayward path into the industry proved to be invaluable. Let me tell you what I mean by that. He possessed a priceless advantage compared with most other 19th century rail titans. Rather than coming from the outside world of finance, as most of them did, he arose from the inside world of freighting and transportation, and he knew this world in all its complexity. So this reminds me, there's several things that remind me of Samuel Zemuri. I did a podcast, I think it was back in like the 30s.

I can't remember the exact number right now, but he said something in that book, The Fish That Ate the Whale, that stuck with me and I never forgot. And that's that if you know your business from A to Z, there's no problem you can't solve. And it's amazing how many people will engage in whatever craft they're doing and not try to actually understand the intricacies from A to Z, and therefore their presented problems they may not be able to solve in the future.

What the author is describing here is him understanding the minute details that the people sitting in New York or in the Netherlands or in Britain just could never understand. And it also talks, I'll tell you more about how he applies that. He's actually in the field constantly with the workers too, similar to how Samuel Zemuri was. So it says he knew all the world and all its complexities. He was about to demonstrate how certain well-established regional capitalists

on the frontier could challenge and even best larger eastern interests. So he winds up beating people that were way more capitalized than he was and so he's right now he's in his life moderately successful six figure net worth doing okay but the amount of money that he's about to make in in railroading in a sense he was preparing his whole life for this opportunity he's got to round up he's like listen we need to buy this bankrupt railroad i don't have enough money so he has to round up. He's like, listen, we need to buy this bankrupt railroad. I don't have enough money. So he has to round up. He calls them the associates, business partners, essentially. And he's saying that, hey, we need $5 million. And his estimate was that the return of that $5 million is going to make us $19 million. They make a lot more than that. But

there's a number of things happening here it's like like okay let me just read my notes hill was obsessed with completing uh with completing the bankrupt slash crooked s spmp rail line so the railroad company could get the land grant uh land grant is very important to understanding the this railroad industry a land grant is basically a gift of real estate uh so you give them the land or the arts use privileges and it's made by a government in this case the united states as a means of enabling works or as a reward for services of an individual especially in return for military services sometimes we've seen it throughout history but in this case they're

giving anybody the anybody that operate around railroad because it's in the national interest to have a national railroad system. So all the different cities and states could constantly, you could ship not only people, but goods and crops or whatever the case was. So he's like, listen, we need to take over the S&P because first of all, they don't know what they're doing. They're bankrupt. They don't know how to run the business and because they have very valuable land

grants right now the reason i bring that up is because being obsessed is an edge going back all the way i would say this this applies to multiple founders episodes but if you go back starting at founders number 88 with warren buffett it's like that's one of the key things you're going to learn from warren buffett or any of the other people that we've been covering last few weeks is that you've got to figure out where the hell your edge is in life and then once you have that you've got to bet heavily on that that's what they're telling us to do that all these entrepreneurs are telling us to do with their actions uh so being obsessed here is an edge and so this is how hill talks about it he says here stood the kind of opportunity

that came only uh that came only with the opening of a new frontier once in a lifetime once in many lifetimes so that hill estimates okay we need 5 million for a 19 million dollar game hill and this is a good example of his his obsession why i believe that's one of his edges hill who knew the road better than anyone else constantly argued to his friends the potential prize defied description. No one understood the impact, the size of the opportunity that could happen if it was executed correctly, that Hill did. Indeed, he seemed completely fixated on the project, meaning he's obsessed. Many years later, his friend recalled that Jim had spoken of it

to him probably several hundred times during the mid-1870s. This takes up many years to do. Also, his his perseverance you have to applaud him for that but the idea that you're gonna talk about something like he's thinking about it over and over and going and won't shut up and won't stop talking about it that's the kind of person you got to compete with and if you were in the 18 where we 1870 somewhere yeah around 1870s maybe a little later if you were going to go up against hill and as we see he's the only one left standing it's crazy um his obsession with this opportunity led to voracious self-education that's my note he summarized well his feverish hunt for whatever knowledge he could gain i commenced to get all the

information that i could find copies of the mortgages of the complaints paper books published in connection with the lawsuits records in the courts What he's talking about is that the bondholders that financed the SPP were Dutch. And the investors and the ownership of the, or I guess the management of the railroad at the time were involved in heavy amount of lawsuits going back and forth. Records of courts. Such information I could gather from all parties who are likely to have information as to situation holland as to the situation with the bondholders okay so i just told you that uh i'm gonna get back to the result of that but like one of the most famous um pieces of advice that i've seen other people give and is relatively um i would say controversial to

not obsessives to non entrepreneurial types is Not having a plan B of burn they call burning the boats because when the conquistadors think was invaded like South America I'm sure they use in all different kind of this tactic and all over the world, but this is where I learned about it from They would land in this new this new area that never been before and immediately as soon as they landed the captain would Would order them to burn the boats meaning that we're not going to retreat if things go bad we either succeed or we die um that's you know you have to be an extreme person to do that but there's a lot of examples through history that people burn the boats so in this part of the story james is burning the boats it says it is a fair measure of james hill's grit and ambition that he now staked everything he had his entire career career, on the gamble for the SP&P.

He began cutting back any new commitments and moving out of the rail freight business in St. Paul to devote his full attention to acquiring the road. He was crossing the Rubicon, and if he failed, he might end up broken. And this is to the degree. He's going all in, which again, we've learned over the last several weeks when you have an edge you have to bet heavily maybe somebody wouldn't you know i don't know if ed thorpe or claude shannon or even buffett or munger would bet everything they had in fact i'm almost positive they wouldn't james does uh says both hill and kitson who's also going to be his partner in this new project proceeded to sell off most of their stock in the red river transportation

company that was his business beforehand which was garnering huge profits carrying immigrants and railroad construction and materials down river hill sold out his entire holding in the northwestern fuel company as well uh that was for 21 500 they then invested all its money this is the greater part of his net worth so he's in he's, he's burned the boats. This is going to either, either this is going to work out or, and I'm going to be spectacularly successful or I'm going to fail. So now he starts, they successfully take control of the railroad and he starts working the industry that, that he, it's his destiny essentially. Along the way in the book, there's descriptions of like how he operated the business. then in just random paragraphs i think that he gives great advice and that advice to us is staying

close to the money and i think that's a good advice in business i think it's a good advice in life so it says he'll now enter one of the most dynamic phases of his life for the first time engaging the work of railroad construction well equipped by his background and his remarkable astuteness and energy he would prove remarkably good at it, demonstrating a rare ability to muster and command men and materials and to control both a broad strategy and a myriad of details. Hill worked and worried by day and night, now at his office, often until after midnight, and then in the field, driving himself to the limit and seeing little of his family. He found it imperative, he said, to be where the money was being spent. This is an extremely different strategy than most of the people

owning railroads at the time. They're in offices nowhere near where the construction is happening. Hill essentially lives his life going back and forth on his line. And I'll talk more about his obsessive detail to the work. But the advantage you're going to have if you're understanding what's happening in the field as opposed to getting second, third, fourth-hand accounts, there's just no way you're going to be able to compete that way. And there's a reason that he's going to be rewarded financially for this work

because managing railroad construction is not easy. Here's a description of that. Keeping working crews in the field, not to mention keeping them working at capacity, proved especially difficult. Hill alternatively cajoled and coerced them he learned many of the men's names and would walk around along the lines calling out to them familiarly even working for them when they retired for a cup of hot coffee so they take a coffee break he'd pick up their axe and shovel

and start working and then he'd give it back to them when they're done with their coffee that's that's huge on the other, he routinely fired shift bosses. We're going to see this dualism that we talked about opening the podcast. On the other hand, he routinely fired shift bosses when they failed to perform to his satisfaction. When one whole crew rebelled, he fired the entire entourage. So he was ruthless. He'd put in the work and he'd do the work for himself, but he also had really high standards and could be unbelievably ruthless. That's not another way to put that.

Another example, I go back to this over and over again, this edge. He had an edge because he took the time to educate himself more than others would. Other people just weren't willing to do this additional research. The S&P First Division showed net profits by the end of the year well above $500,000. Half a million dollars in the 1800s. That's insane. Indicating what a vast earning potential it truly had as farmer immigrants poured onto the fertile lands it was opening.

So some of the first use of the land as the railroad's laying track, they're building these little frontier towns. And most of the people in there, they're harvesting their farmers. They're building these little frontier towns, and most of the people in there are harvesting their farmers. They're creating food. So anyways, I didn't get to how he's able to get such a big profit in his first year. In pouring over its books before he took over, he had perceived that nearly $200,000 in expenditures had been spent on construction and had been improperly charged to operations, thus understating the true profit capacity of the road. There's also some skimming done off the top and things of that nature. So he's like, well, I'm looking at the books and they don't actually know what they're doing. They're paying more than they have to. This money is being unaccounted for

so that just means that I think I can actually make even more than I thought up beforehand. Something essential to success, I'll talk about over and over again. This is something I've been talking about a lot because it's something I want to improve in my life. I feel like having a focus in the age of information, maintaining your focus, not allowing yourself to be distracted by things that are not important to what's important to you um is a superpower jim hill had that superpower uh he maintained his focus he says uh so they're talking about the financial success that spmp have says thus was born the great hill fortune and the fortunes of his friends as well talks about some of his other partners this guy named steven it's uh last name steven another guy

last name smith uh steven smith would use their newly acquired Richards riches to build a Canadian Pacific Railroad Hill would join them for a while. He made investments into that but the Manitoba that's the Manitoba His road has all different names depending on when you're at point SPMP Manitoba great great northern It's all the same thing. So I should just say the GN I would join them for a while But the Manitoba would always remain the focus of his career and his investments. So, but he learned, like, he didn't just come to the conclusion that focus was important because he thought that in advance. He understood that through trial and error. He made a mistake. He spent time, money, and energy trying to develop another railway while he's trying to do

what his first route, let's call it Railway A, is not complete it's not running as as best as he can right so what does he do he decides hey a is not done let me go invest time and money and energy into b then he realized like oh this is stupid i need to i need to take care of a or there is no b uh so it says for him this venture represented a regrettable division a diversion from what was becoming ever more clearly each life or each year that this was his life's mission, the building of the St. Paul, Minneapolis, and Manitoba Railway, the GN. All right, I'm going to take a sidetrack to the story to introduce you to another character that I came across in the book. He's a guy named Villard. He's going to be a future Founders episode.

But he's basically the opposite. There's a lot of books written on him. But he's the opposite when it comes to his approach with railway construction that Hill was. It says, For many observers would later compare Hill with Villard. The comparison was inevitable. While Hill was building carefully and checking his costs minutely,

Villard built in ignorance of costs. Like other transcontinental plungers, Willard did in fact build rapidly and poorly. Much of his main line would later have to be torn up and rebuilt. Amid mounting deficits and acrimony, Willard would then be forced to resign the presidency of his railroad in 1884. So he's in the book a lot. And think of him as like Bizarro Hill. I mean, he's successful. He's got some actually a crazy story and a collection of businesses is interesting. That's why I want to read a business on him. But they were just kind of just jumping on this opportunity. He didn't come into it organically like Hill did. So I want to get back to focus. This is a section, and the note I left myself is

this is what being focused can do for you. With each passing month, as the attention of his fellow associates wandered, Hill became ever more focused. Matching incredibly long hours at his desk with frequent forays into the field, he built up a remarkable command of the details of the railroad, its infrastructure, its operations, and its hinterland. His knowledge of the railroad in even the most minute detail quickly became a matter of legend. For example, while standing on a Dakota rail siding one day, he spotted an engine numbered 94, meaning a train. From that recognition, Hill astounded the engineer by walking up and addressing him by name, his name roberts and noting that

the engine had just been in for repairs at the same time hill hill learned the industry itself so he studied the history of the industry that he operates in he saw a lot of the things that would got people into trouble previously so he's doing the same thing we're doing here he's studying the past to look for mistakes to avoid and good ideas to steal, right? At the same time, Hill learned the industry itself, its parameters, problems, and potential. His genius lay precisely in his ability to master detail while fashioning broad vision and strategy. This is an example of Hill staying within his circle of competence. It says, Hill resembled his contemporary John D. Rockefeller in that he usually did well only by investing in his main area of focus. His many side forays into other projects quite often failed.

And this is just, I mean, the note out of himself is one word, smart. Let me read this section to you. The railroad associates managed the finances of the railroad in a highly conservative and prudent manner. They were neither plungers nor reckless speculators but were in the business for the long run unlike such vaunted manipulators as jay gold or henry villard jim hill took the opposite remember henry singleton loved taking the opposite approach of his peers took the opposite tact from speculative practices such as milking a railroad of its land grants and its resources and dumping oversold stocks on the gullible public.

Instead, this is where we're getting to the smart part. Instead, he advocated and practiced a policy of plowing large percentages of profits directly back into the property, this is what I mean, knowing that the best defense against invading railroads was a better built system that could operate at lower rates. And that was his key. And we'll keep talking about his optimize. How does he, okay, so he's telling us right there. This is what I mean by smart.

What is the best defense? There's gonna be a ton of other people who are trying to take business from me. This land is wide open. There could be other people creating essentially the same product that I have. How am I going to survive? Knowing that the best defense against invading railroads is a better built system that could operate at lower rates. So having lower rates, having low costs, thus being able to make a profit at lower rates is essential to success, right?

Well, how do you get lower rates? To get lower rates, he would constantly optimize his railroad. So another smart strategy here. Jim Hill worked incessantly at improving every aspect of the railroad structure and operation he traveled back and forth along the line looking for dips and bumps and spying out curves that could be straightened and grades that could be lessened because less curves less grades the faster train can go, the less energy expended. More than any other railroad leader of the day, he had an engineer's passion for minimizing curvature and grades, knowing that these were the keys to lower rates that would vanquish any competition.

He's building a business that's so well-run, it's going to be impossible to compete against. Oh, so he hasn't extended westward yet right and he's right now just and this is good it's a good thing he didn't uh because he's one of the everybody else is trying to build a massive railroad first without being able to build build a small railroad uh perfectly right so it's a completely different strategy now he realizes that that realizes that even if he has a successful regional railroad, I almost called it an airline, a successful regional railroad or railway, eventually it's going to either get bought out by a larger company

or he's got to turn that small railroad into a large company. So this is an example of how James J. Hill was thinking years into the future at a time when most people, and I would say probably still true to this day, into a large company. He now became one of the first people to see the looming shadows of coming events and to act accordingly. Assessing the status of his prosperous regional railroad, he came to see it as one component in the evolving national transportation system. The days of prosperous independent regional railroads must soon end, and the future lay in integrated continental systems that could move heavy tonnages rapidly and without interruption, at uniform and falling rates.

Either his railroad would find its own way from sea to sea, building its own tracks to the Pacific, or it would integrate into existing roads into its own, or it would be absorbed. Caught in the new wave of prosperity in rail building, the Manitoba must either lay tracks to the Pacific or become a link in someone else's. Rising to this challenge, he would take his place in the national and international firmament. So this is when he realizes, like, okay, I have to expand now. I figured out how to do this, and now I can't stop. So he already completed one extremely hard thing, right,

which was learning how to do railroad construction and do it profitably. It's extremely hard, and he did it on a tiny scale. Now he's got to take that same lesson and do the hardest thing of his life, and that's go all the way from Minnesota to the Pacific Ocean. All right. So before I get there, though, the note of myself, it's hard to compete with a well-run company. Many times they can make money at rates a poorly run company cannot. And so before he does this, there's another line called the Milwaukee Line that's trying to compete with a well-run company. Many times they can make money at rates a poorly run company cannot. And so before he does this, there's another line called the Milwaukee Line

that's trying to compete with him. It says, when the Milwaukee sought directly to invade the Valley with another subsidiary, Hill proved to be able to blunt their thrust by the simple expedient of forcing rates below what the opposition could bear, bolstered by his own well-built road, which could haul high tonnages more cheaply. So we've seen this strategy over and over again. I think of Henry Clay Frist. I think of John Rockefeller. It's just the ability, when you can make money at lower prices than your competitor can, time is on your side and eventually go bankrupt. Okay, so now we're going to get to the point.

This is what he's building now. The Great Northern Railway is a derivative of the company that Warren Buffett buys all the way into the future in 2009 right so the great adventure of james j ho's life came during his prime years with the epic westward construction of his midwestern railroad to the pacific the saint paul and etc etc became the great northern railway a transcontinental in fact one of the best constructed and most profitable of the world's major railroads so we know it's successful but these go through hell to get there the massive effort drove hill to the very limits of his very considerable endurance for all the signs of middle

of his middle age the fires of intensity determination and ambition burn within him within him hotter than ever the long long hours at the office continued, and once home, he often sat up late into the night writing long letters to his associates. Letters that today are collected in a library that bears his name. He complained frequently of fatigue, and he never was a good sleeper. He would lay awake through much of the night.

The aches of neuralgia, which is like this painful nerve, like pain in your nerves, affected him more and more and on almost a predictable basis. He was forced to stay in bed for days at a time with cold or flu congestion systems. His near manic preoccupation with his business gripped him like a demon. So some of the stuff like there's a reason no one has built all the way to the West yet because the lands they have to go over are extremely difficult

and there's a lot of difficult problems you have to solve. It said ahead lay the upward sloping and increasing arid lands of the Missouri Plateau and beyond these remote communities lay even more formidable obstacles. The 250 mile wide swath

of cross-cutting peaks and valleys of the northern rocky mountain range. These areas total 1,000 miles of easily crossed plains and hard-to-cross mountains, almost all wilderness. Did you get an idea of the scale of what he's trying to do here? We must build 733 miles of road next summer in eight months this all has to be done well uh has to be done from one end and is more tracked than has ever been laid in 10 months elsewhere so they got to do more and less time than anybody else has ever done ever it'll take a hundred million feet of timber and ties uh the grading crews uh that he that he managed 8 000 men and 6 600 horses headed out first they moved 9.7 cubic feet of earth and 32 000 cubic yards of rock

after the grading crews came the track layers they were heavily irish and loudly raucous which i thought was hilarious there 650 of them, and then they had the same number of horses. One day, they laid down eight miles of track, and then after them, the spikers, which is another group, would follow closely behind and fasten them into positions. Their workforce was expertly led and provisioned right down to the triple-deck dormitory cars in which they lived. There's a quick story here. I'm going to skip over most of it,

but I want to tell you the sentence I think I can describe everything to you. So this is a choice, meaning a choice that Hill has to decide, offered the alluring advantages of eliminating a dangerous rival whose shaky finances continued to cause it to behave erratically and thus to cause them trouble.

So there's a poorly run rival railroad that is hemorrhaging money and they can either build around it or buy it. And the reason I bring that up is because I think it was Sam Zamuri actually to quote him again, that he said like your, your most dangerous competition is not like your smart, well run competition. It's the crazy unsuccessful ones because they behave in ways that are completely unpredictable because they're, they're not running a business correctly And as that's like those decisions can actually harm you

so we see the same thing that hills having to deal with here is like This one I might have to buy this road just so doesn't cause me trouble because they can't make money and they keep cutting rates To the point where like they're gonna drown sooner than I will but it's still gonna cause Economic harm to me. So I thought that was really interesting it's just that the takeaway there is that you know it's the crazy unsuccessful competition you have that can sometimes be the most dangerous okay so uh this is again the decision to build all the way to Pacific is going to lead to the hardest work of his life and it was just struggle up to struggle up to and this is a little bit about what that struggle was like it says trying to manage an imperial railroad while building it west jim hill worked night and day ulcerating about expenditures and the agonizing

slow pace of construction so this is the problem uh well take away one thing i learned not to emulate with with hill is that he completely abused his body and his health for work. Workers in these remote mountain wilderness proved hard to get and to keep. They often had to labor on steep slope with hand tools and to move dirt in hand carts in terrain where even horses proved difficult to use and feed. In some cases, they're working like below 40 degree weather in the mountains. It's insane. The pace of building fell to merely a few miles per week and the boss fretted and ailed as he saw his hope of completion by 1892 fading away when his health fails he's he's wind up in bed he's bedridden for you know several days to several weeks at a time so the book goes on and on about how difficult it is

if you're interested in that go i recommend reading it. He goes into great detail about all kinds of like the politics of the, of in the Midwest and Northwest in the late 1800s, the businesses, it's, it's a full on history book. But I want to skip over that. And I want to talk about one, I think an idea that was essential to Hill's success. And I think that can be applied by everybody. And then I want to end on comparing and contrasting the outcome of what Jim Hill was able to accomplish and what his competitors were not. So Hill is eventually successful and completes the line. Part of what helped him do this, I think, is this idea. And I think it's a great idea to think of your business

as a living organism, one that's always adapting and improving. It says, to Hill, the railroad trunk lines and their spreading branches formed a living vital organism, which constantly needed to be replenished. Hill's life passion lay in straightening curves, lowering grades, laying new ballast and high-grade steel rails, replacing wooden trestles with steel ones and wooden culverts with masonry structures raising tonnages hauled by ever larger cars and engines and lowering rates and extending ladings over ever longer distances he cared most about freight and never frills it's a it's an idea of take one idea and take a simple idea and take it very seriously. Hill took it very seriously. And I'll just end here, which is what we see time and time again, that there's too much

of a rush in modern day entrepreneurship, that a well-run business is by definition built slowly. It doesn't mean you can't make a lot of money fast. There's all kinds of financial engineering and different ways to do that. But if you want a well-run business that can last a long time and be profitable a long time, you have to do it slowly. And I think that's an example and a takeaway that we'll take from Hill. And it says, part of the notable accomplishment of Hill and his associates lay in simple luck and being forced by the nature of their enterprise to focus their energies for so long

on building infrastructure in their Minnesota heartland before undertaking the long and costly thrust west. So the author's calling out Luck there. He didn't have the resources to expand. Also, he didn't finish the job. So you could also argue it's strategy. But they're saying one of the main benefits of Hill's railroad compared to the other ones that all failed was the fact that he had to do it slowly and he had to do it slowly and to do it right before he expanded but more important were hill's talents his remarkable mastery over every detail of what was now a far-flung operation his vision of the inevitable triumph transcontinental through transcontinental carriers his insufferable iron will and work ethic and his recruitment of an able workforce. It would always be a point of

special pride to James J. Hill, and deservedly so, that this well-built and tightly capitalized Great Northern Railway, unlike its federally subsidized competitors, did not fail during the 1893 panic. In case you didn't know, the 1893 Panic is the late 1800s version of the Great Depression. It was as deep as the Great Depression and in some cases even deeper than the Great Depression. That's more well known in the 1930s.

That is where I'll leave the story. If you want to, if you want the full story, I recommend reading the book. I will leave links everywhere on the show notes and of course everything I talk about is always available at founderspodcast everywhere on the show notes. And of course, everything I talk about is always available at founderspodcast.com. If you buy through those links, Amazon will send me a small percentage of the sale

at no additional cost to you. It's a great way to support the podcast. Thank you very much for listening. Please tell your friends about Founders. If you know anybody that you think would be interested in the stories and the lessons we're learning here, please do send them either the website or if you want to send them the individual episodes to your podcast player, whatever you want to do. But I'd greatly appreciate help spreading the word.

And I will be back next week and we'll go over another biography of an entrepreneur.