We Study Billionaires - The Investor’s Podcast Network - TIP601: Junk to Gold by Billionaire Willis Johnson

Starting point is 00:00:00 You're listening to TIP. Hey everyone, welcome to the investors podcast. I'm your host, Clay Fink. Today is a special episode because I'm going to be covering this book on Willis Johnson called Junk to Gold. As our listeners know, we've covered this concept of quality investing a lot over the past couple of years. And over that time, a company called Copart just continually came up in my various conversations

Starting point is 00:00:24 with investors and with just my research online. For example, Chris Mayer was asked by our T. The TIP Mastermind Community, what business he felt most comfortable with holding over the next 10 years. And Chris mentioned two businesses. One of them was Copart. For those not aware, the TIP Mastermind Community is a paid community that Kyle Greve and I run. And this is where we talk stocks and we network with like-minded investors and do a bunch of other things as well. Willis Johnson founded Copart all the way back in 1982.

Starting point is 00:00:55 And here at the end of 2023, the company does nearly $4 billion in revenues. and it has a market valuation of around $45 billion. I recently came across this table that showed the best performing companies over the last 30 years. I bet not too many people guessed that Copart would make that list. They ended up coming in at number 14. It outperformed companies like Microsoft and Adobe over that same time period. And over the past 30 years, their average annual return was 21.6%. And it had a total stock return of 33,802%.

Starting point is 00:01:30 just amazing performance by Copart over the past 30 years. And I just really enjoyed reading this book, Junk to Gold, and learning more just about what makes this company special. So during this episode, I'll share what I learned from reading this book on Willis Johnson, junk to gold. I'll discuss the early days of Willis's life and the experiences that impacted him. What he learned from chasing his dreams and building a successful business? Willis's experience fighting in the Vietnam War.

Starting point is 00:01:58 What sets Copart apart from the majority of other companies? companies that are out there? How Willis sold Wall Street on lending him money to grow and take his company public? How Copart strategically utilized technology to grow their business and much more. There's that saying that success leaves clues, and I think you'll find many insights during this episode on what it takes to succeed in business. Today, Willis owns over 55.6 million shares of Copart, which at the time of this recording is worth $2.6 billion. With that, I bring in today's episode on Junk to Gold, Willis Johnson, and Copart. You are listening to The Investors Podcast.

Starting point is 00:02:39 Since 2014, we studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Clay Fink. So this book was a relatively easy read. It was only around 170 pages. And originally, I thought this book was really. written by Willis Johnson, and it was published in 2014. He's the founder of Copart, but actually

Starting point is 00:03:13 someone else had written the book. It was a woman named Marla Pug. I had interviewed Chris Mayer to talk about his book 100 Baggers last year. And at the end of that interview, I asked him, what was one investor, what was one business person that he thought was worth covering on the show, or maybe just someone worth researching to just to research further? And the first person he mentioned was Willis Johnson from Copart in this book, Junk to Gold. So one of the special things about Copart is that it's a family-run company. Willis was the CEO from 1982 through 2010, and then Willis's son-in-law, Jay Adair. He took over as CEO and has held that role ever since, and you're going to hear a lot about

Starting point is 00:03:53 Jay during this episode. Funny enough, Jay Adair joined the company when he was only 19 years old. That was in 1989, and he's worked his way all the way through the company. He's worked in so many different roles within the business. So Jay has been with them for over 34 years now. It's also worth mentioning that Willis, as I mentioned in the intro, he owns over 55 million shares, or 5.8% of the company. Those shares today are worth $2.6 billion.

Starting point is 00:04:22 Jay Adair owns 35 million shares, which is 3.7% of the company. These shares today are worth $1.7 billion. So insider ownership looks really, really good at Copart. and the managers really became wealthy through the ownership of these shares. In looking at the company's reports before diving into the book here, I also couldn't help but notice that Jay Adair's salary was, well, it still is $1. He makes $1 per year through his role as CEO of the company, but he does also get some stock-based compensation if the stock hits certain price levels.

Starting point is 00:04:55 So he ended up making $379,000 in fiscal year 2023 after you take those into account. The company's proxy statement has some really good information. It talks about how Adair has been compensated based on the long-term results of the business, and he's been really successful in leading the company since he took over as CEO. Turning to the book, Jay Adair, Willis's son-in-law, he wrote the foreword. He mentioned that he never met anyone like Willis Johnson in his life. Willis served in the Vietnam War, and he built a multi-billion dollar business, starting with just one auto scrapyard. Willis thoroughly believed in the value of hard work and treating people right, and Jay listed some of the sayings that Willis was known for, and I'll mention a few of them here.

Starting point is 00:05:42 If you take care of the company, the company will take care of you. Watch your pennies and your dollars will take care of themselves. Don't forget, a lot of people are counting on us. These values instilled in Willis led him to want to have no debt on the balance sheet to take his company public on the NASDAQ exchange and build a great company from the ground up. But in some ways, Willis is really one of the most unlikely candidates to build a multi-billion dollar business. He had no formal education and he grew up on a dairy farm in Arkansas. Willis had to prove himself by working hard and continuously innovating. There was certainly no shortage of people who doubted Willis. Jay wrote here in the foreword, I quote,

Starting point is 00:06:22 Willis didn't drink, hunt, or follow sports. What he did do was business. That turned out to be the only thing I got right about Willis, because I thought he must be one heck of a businessman to figure out a way to make money with wrecked cars. Meeting Willis changed my life forever and set in motion my informal, but invaluable business education. Willis was very willing to share his wisdom and his experience with me, whether at work or relaxing on a weekend. I took it all in and still rely on his words. to this day. He was just full of life. He didn't come home at 7 at night with his shoulders down like he had just put in another day at the salt mine. His work didn't drain him. It drove him. I wanted to be like that, end quote. There's something to be said here about having the right mentors in life.

Starting point is 00:07:08 Of course, there are the Willis Johnson's of the world who do whatever it takes to make it in life or make it in business. But Jay saw the opportunity to learn from someone who had been through that pain and been through that struggle and business. And Jay opened his mind to learn from someone as brilliant as Willis, which just says a lot about who Jay is. He joined Copart when he was 19 years old and just really went under Willis's wing to learn as much as he could. One of Jay's most critical lessons from Willis was being open to making mistakes and taking on risks. But course correcting and learning from those past mistakes. Jay also mentioned that Willis's story is a fantastic source of inspiration to take on your own risks and discover what you're capable of doing, you know,

Starting point is 00:07:53 which may even be more than you think is possible. Now, there are 10 chapters in this book, which are all titled based on what he has learned throughout his life. For example, chapter one is on what he learned from his dad. Chapter two is lessons from war. Chapter four is what he learned from building a dream. And then chapter seven, another example, is what he learned from competition. So there are 10 chapters here. Willis starts out the book by explaining that there's no one way or no magic formula to building a successful company. He learned from his father that everyone should make his own way or make her own way in the world of business or in the world in general. His dad passed down the belief that nothing was impossible

Starting point is 00:08:34 without hard work and determination. And just reading this book, Willis certainly was a really hard worker. Growing up, Willis's dad, he worked 15-hour days, seven days a week, and his dad actually never worked for anyone else. So he was always doing his own businesses and working on his own projects. And it really never crossed Willis's mind that he should go and work for anyone else either. You never complain about your boss when you are your boss. Willis stated, when I look back, I think my success is partly due to the lessons my father taught me and partly due to God's hand guiding me along the way. I also think a good portion of it has to with the fact, it never occurred to me that what I was doing might not work. I never thought

Starting point is 00:09:16 I couldn't do it. Some may call it confidence. Some may even think that kind of blind optimism comes from ignorance, but I just never let the possibility of failure enter my mind. And I think when you can leap into something wholeheartedly like that, you can do amazing things because you don't have fear holding you back. End quote. I'm reminded of the Elon Musk biography here. I recently reviewed on the show that was episode 593. Musk just had this unwavering belief in everything he was doing. And we shouldn't underestimate the power of that. If you truly believe that you can do something, your likelihood of success increases dramatically.

Starting point is 00:09:55 Willis's dad was always focused on the next deal or the next way he could go out and make some money. It never occurred to Willis or his dad that the next deal might not come or he wouldn't be able to make any money with it, even if he had to learn something new along the way. So he was always open to these new opportunities, even if he didn't know exactly how he was going to make money or how he was going to make it work. He just knew with hard work, determination, persistence, consistent effort, it was going to work out in the end. So despite his dad owning a number of businesses, he actually never learned how to read. His dad had to drop out of a school after the fifth grade to help support his own family and put food on the table, and education for them at the time was really a luxury that they couldn't afford.

Starting point is 00:10:42 Although, you know, Willis's dad, he did really well in business and he was able to make ends meet. His upside was really severely limited because he wasn't able to read. Willis's family had a number of times throughout his childhood where his dad would take on these various business ventures and, you know, his companies would rise, they'd fall and, you know, just go through these waves of success and failure. And in his teens, they moved to, you know, a 150 acre cattle ranch that was based out of Arkansas. And this is where Willis and his siblings would be put to work hammering fences, milking cows. When you live on a farm, there always seems to be work that has to be done. When Willis turned 16 years old, his dad bought him a Chevy pickup.

Starting point is 00:11:26 And for Willis to pay for the pickup, he would haul milk to and from the creamery. So this is amazing. He'd have to get up at 3.30 a.m. Milk the cows, haul the milk, to the creamers and then have to milk the cows again in the evenings after school. There's a section here titled, Take Care of the Business and the Business will take care of you. The author writes here, both my dad and I also built reputations in the business world of always standing by our word and never doing a business deal if a deal felt wrong. We both walked away from opportunities that may have helped our businesses, but would have crossed a moral or ethical line.

Starting point is 00:12:01 It never ceases to surprise me, though, when others cross that line, even without a a blink of an eye. I was raised to believe that cheating is the same, whether you're taking 10 cents or taking $10,000. And if you could do it once, there's a good chance you would do it again. End quote. This also carries over into how he thought about money. If you let the small expenses or the small amounts of money slip, then he knows that this is going to add up over time and it adds up to big amounts. And I think he really understood the power of compounding in money that could be saved and invested, especially within a business. Willis's dad saw creating a business similar to raising a child. In the early years, a child really can't do much for himself. The child relies on

Starting point is 00:12:45 you to survive, but over time, a child becomes self-sufficient. And if you treat the child right and spend a lot of time with it, then eventually it will take good care of you. And this is really how he viewed business as well. Because of this underlying principle, his dad was almost always reinvesting profits back into the business rather than buying nice thanks for himself, you know, buying a cool vehicle, brand new furniture, new house, etc. Family always came first for the Johnsons, but next certainly came business because if the company succeeded, everything else would follow suit. But Willis still had a pretty tough upbringing. He mentions that generally they were just scraping by. His sisters actually shared a bedroom and then him and his brothers, they slept in a

Starting point is 00:13:31 screened porch, you know, which was exposed to the outside. The kids would get clothes, new clothes once a year, two pairs of pants, two shirts, and a pair of shoes, plus church clothes for Sundays. In order to make ends meet, Willis's family had moved around the country, and they ended up back in California around the Sacramento area. And his dad figured out he could make money off of broken down cars by buying these really cheap cars that were worth practically nothing and then selling the scrap iron and the car parts individually. So say he might buy a car for five bucks off the street and he even ran an ad in the newspaper to start getting more of these non-functioning abandoned cars. Willis's dad would haul in more cars every morning to the farm

Starting point is 00:14:16 that they used at the trucking yard. And Willis was just shy of 18 years old at the time. And his job was to take the motors out of the vehicles or maybe take the copper out of the vehicle. Or maybe take the copper out of the vehicles, you know, maybe they need to melt some parts down to just get down to the copper, and then they would sell those individual parts. So anything that was of value on the car, they take it off and they go and sell it. And Willis surprisingly loved doing this. So Willis graduated high school and then he ended up getting drafted into the Vietnam War. So very quickly, he went from having the freedom and the fun of an 18-year-old to being under the thumb of the U.S. Army. Working for his dad, suited Willis.

Starting point is 00:14:58 Willis well to do a really great job in basic training with the army. And he ended up getting assigned to the infantry. So he learned how to tear down weapons and throw grenades. There were 130 men in Willis's infantry and only about half of them ended up surviving the Vietnam War. And when a forward observer in the unit got killed during the war, it was Willis's job to walk ahead of the unit checking for ambushes and booby traps, making it one of the most dangerous duties within his group. The author writes that he learned to trust all of his senses,

Starting point is 00:15:35 including his gut, so he could warn the unit when there's trouble ahead. Willis also tells a story of having mortars just coming down around him, him and his troops getting down in a foxhole and dirt coming in and closing the foxhole so they really weren't able to move. He said when the troops dug him out of the foxhole, he was covered in blood and Willis thought he was actually dead. And thankfully, his wound wasn't severe enough and they were able to patch it up safely. One of the things that the Vietnam War did for those that were drafted or enlisted in the war and give them this appreciation for the life that they, you know, had ahead of them. You know, they were 18 years old when they went off to the war.

Starting point is 00:16:16 And then, you know, for those that survived, you know, they had their entire lives ahead of them. So Willis's best friend, David Flower, had enlisted in the war. and he ended up being killed is a story that Willis shares in the book. In the summer of 1967, Willis finished his time in the war. He ended up spending one year in the Vietnam War. He said that leaving the war and knowing now that he was saved was one of the greatest reliefs that anyone could ever feel. War taught Willis the power of his decisions,

Starting point is 00:16:46 and it instilled really this deep sense of responsibility. During the war, many soldiers counted on him and their lives to a large extent relied on the decisions that Willis was making. So this responsibility carried over into his business ventures as many people relied on his decision making to put food on the table and feed their families because he ended up hiring so many people to work for him. And it made him realize that life really wasn't about him and that he needed to make the best decisions for his company and for the people that surrounded him.

Starting point is 00:17:18 There's a bunch more here that he learned from being in the army, things like leadership, order, efficiency, teamwork, discipline. Willis didn't go to college, but he called this the best education he could get. The Vietnam War was really such a terrible thing for so many people, especially those who ended up losing their lives or losing a friend or a family member. One of the big things that Willis did was to move on from the war. He said this is one of the best things that he could ever do. Just use what he gained from the war and just try and block out so many of the terrible things that happened. You know, Willis, he wouldn't watch the news after he got home. He didn't talk about the war for many years. And he just really wanted to get on with his life.

Starting point is 00:18:02 He talked about how many others, understandably so, they just couldn't let it go. They relived the war just over and over in their head. And Willis, on the other hand, was determined to make the most of his life after the war and put that period behind him. Willis had told his sister that he was going to come home, get married, and become a millionaire. And that's just what he did. Willis had met Joyce Cox. He took her out a few times and he ended up proposing to her 10 days after their first day out together. They just instantly clicked and Willis had to leave town to finish his military duty. And he knew that the only way that she would go with them is if they were married. So that's sort of why he proposed only 10 days after.

Starting point is 00:18:46 When Willis had moved back home, he started working with his dad again in the wrecking yard business. And Willis and his dad, they had gotten involved in an auction of a wrecking yard and it was filled with a thousand old cars. And I thought this was just a really fun story. So they're at this yard. There's thousands of old cars. And really, they're just trying to figure out what they should pay for it. And if it was possible for them to get their money's worth, you know, clearing all. all these, they had 90 days to clear the lot of the cars and make the most of what they could.

Starting point is 00:19:19 So this auction, they essentially just needed to get rid of all the cars. And they found out about the auction in the newspaper on a Friday. So they drove to the yard on Saturday, walked the whole yard. And then on Sunday, they had to figure out what they thought it might be worth. And then Monday was the time to place the bids at the auction. Willis and his dad, they walked into the auction in work clothes. and in the room there were these businessmen and fancy clothes that were ready to bid against them. And Willis's dad, he ended up winning the auction.

Starting point is 00:19:50 It was a sealed auction, so everyone would just submit their bids having no idea what the other people would bid. So Willis's dad bid $15,000 and won. And Willis was quite excited and he knew he had a lot of work ahead of him as they had to get all these cars off within 90 days. And on their way out of the room, one of the businessmen had stopped Willis's dad. offered him $5,000 to just let go of the deal and they would take it for the $15,000. So essentially they would get $5,000 for doing nothing. And Willis's dad declined and Willis was just like amazed because this was just an amazing amount of money.

Starting point is 00:20:26 At that time, you could buy a three bedroom house for around $8,000. So after that first interaction, another man had approached Willis and his dad. And he said he wanted 15 cars from the yard for $5,000. and they ended up making a deal there. So Willis' dad already got back one-third of his investment, the $5,000 out of the 15. And then they still had 2,000 more cars and a lot to take off the yard or sell. And then the next day, that first businessman came back and he was still interested in what the Johnson's had on their hands.

Starting point is 00:20:58 They ended up coming to a deal. So Willis and his dad, they got $10,000. And then they also got 15 cars of their choice off the lot. So this means they got their $15,000. that they initially invested, they got that amount back, and then they got 15 cars of their choosing. So Willis explained that the reason they got such a good deal is because they were the ones willing to do the dirty work. You know, these guys in suits aren't out there trying to figure out what this whole lot's worth. Willis and his dad were really the only ones willing to put in the

Starting point is 00:21:29 work and figure out what the true value of the yard was. And this is why they were able to get the highest bid. These other guys were trying to be super conservative. They probably didn't really know what it was worth and these guys knew what they had on their hands. And at this point in Willis's journey, he was ready to try and start up his own business because his dad, he really wasn't willing to make all the changes that Willis was interested in pursuing. So Willis and his wife, they moved to a farm near Spokane, Washington to start fresh and have more independence. But things didn't go as well as they had hoped in Washington and they ended up moving back home shortly after. And Willis was offered 10% ownership and his father's business, and he worked for $1.10 an hour, and then he got commission on the sales he made

Starting point is 00:22:15 for the business. Willis's dad had slowed down his own work and getting ready to retire, and that opened the door for Willis to really start taking ownership of the business. He started hiring people to work for them, and he ended up tripling the yard's income pretty quickly. And then soon enough, Willis and his dad had gotten into enough arguments about how the business should be run, and, you know, Willis is pretty ambitious and they decided to separate ways. Willis was pretty upset that his dad didn't keep his word on a promise and Willis took away from that when you make a promise to someone, you better keep it. He states, I never promised something to someone that I didn't do and I never made promises

Starting point is 00:22:55 I couldn't keep. My word is gold, end quote. And it reminds me of the Buffett quote of putting so much weight on your reputation. Berkshire is able to do so well partly because of their reputation that that they've in that trust that they've built with everyone they work with. They do what they say and they say what they do. You know you can always count on their word because of that. So times were tight for Willis and his wife and they ended up purchasing five acres to start their own business. The purchase price was $75,000, which was definitely a lot of money at the time and given their

Starting point is 00:23:30 conditions. And the house they lived in was $11,000 and they ended up having to sell that to afford the purchase of this five acres. They not only sold their house, but they also borrowed money from the bank, borrowed money from his wife's parents, sister, and then brother-in-law as well. And then a couple other family members too. And that was just to afford the $15,000 down payment. So Willis at this point was 26 years old. And he had big dreams to chase while living in a tiny trailer on this acreage. The business to start was really simple. Him and his partner Curtis, who was actually his brother, they would take these cars that weren't drivable.

Starting point is 00:24:13 They'd buy them for 35 to 50 bucks a piece and then simply sell off whatever value they could get out of them. So it's very similar to what their dad did. Willis and Curtis, they named the business Mather Auto Dismantlers. Willis's life really revolved around three things. His business, his family, and his service. faith. So other than taking Sundays off for his family and his faith, the other six days were primarily spent on his business. He writes, while I was building the company, Sundays were our time

Starting point is 00:24:45 because building a successful business means nothing if you don't have your family or your faith, end quote. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive

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Starting point is 00:28:54 That's Shopify.com slash WSB. All right, back to the show. So this brings us to chapter four, which is by far the longest chapter in the book. It's titled Lessons I Learned from Building a Dream. So Willis was committed to this idea of reinvesting back into the business. So initially, the business really made ends meet by just selling off the scrap iron, but you aren't ever going to make big money by doing that. So they started building up a bankroll so they could start buying better cars.

Starting point is 00:29:24 and thus make more money off things like the motor, the transmission, the rear end, and all this would lead to more profits and much better margins. Willis made sure his business did things better than their competitors. So for example, Willis was willing to not only dismantle the cars, but dismantle the parts themselves to give customers exactly what they wanted. So none of his competitors did this. He also made sure to always have a clean shop and have the parts of the parts of the parts of the the parts he was selling, they were super clean as well. He knew that customers would pay more if the items appeared to be high quality. Willis really had set his sight on continued growth of his small business. So he built a new and much bigger shop and he started meeting with other shop owners who

Starting point is 00:30:12 were highly successful in other parts of the country. One theme he saw with the most successful shop owners was that they were specialized. One guy was really the go-to guy locally for Rambler parts. Another, guy from L.A. specialize in Chevrolet. He met with Don Fitz out of Seattle and he had several different types of specialty yards for General Motors, Ford, Chrysler, and others. So really the profits were to be made in specializing. And in Willis's area, other dismantlers didn't really want to deal with Chrysler, Dodge, and Plymouth. So this is what Willis decide to bet his company on. All the other dismantlers in the area just thought he was totally crazy. This is another common theme in the book is people just call him crazy and he just has this unwavering belief and just goes after it.

Starting point is 00:31:00 People that doubted Willis really drove him to want to succeed even more. And when you get to any local area, there wasn't huge demand for these products and that's probably why people thought he was crazy. But when your customer base spanned over many miles in your addressable market is actually quite large geographically, then it really made sense for him to specialize in what he did. So Willis wrote that before they specialized, they were doing $3,500 to $5,000 in parts per month. I'm assuming that's revenue. And after specializing, they were going through $3,500 worth of parts per day.

Starting point is 00:31:36 So that would be a 30x increase, assuming I'm understanding those numbers correctly. With all this additional demand now coming in, he signed over everything he owned as collateral and took on a $50,000 loan. and this was just a massive amount of money again at the time. But Willis knew that he was going to make money through the expansion efforts. He was just willing to do whatever it took. The idea of failure wasn't ever something that crossed Willis's mind. So the business significantly scaled up and as Willis puts it in the book,

Starting point is 00:32:09 they were sitting in high cotton. He says that a number of times that they were sitting in high cotton. It's a saying he has that seems like he really likes. Now that the business was proven to be, you know, have this potential to scale. They asked for and received an extension on the loan. And this was really the turning point for the business early on. So the next issue they ran into was being able to keep track of everything that they had going on. So Willis went ahead and spent $110,000 on a large computer that would really help them with the issue of tracking their orders and their

Starting point is 00:32:42 inventory. Again, everyone, this is another situation where everyone thought he was crazy. But once others saw how effective this was for them, then a bunch of other companies eventually followed suit. So he was really a big person on innovation. Willis saw technology really as his friend, and he really saw it as his friend because he saw it as a way to make him more money. It also points to Willis' sheer independent thinking. When he saw a competitor do something that really didn't make sense to him, he wasn't afraid to do something different.

Starting point is 00:33:15 One example is his competitors, they would take out tiny ads. in the yellow pages, and they would buy these small ads because they were cheap. And what Willis did is like, I'm going to take a half-page color ad, you know, spend all this money and everyone just thought he was crazy. And of course, this got him a lot of attention. So not only was he a big innovator, he also wasn't afraid to clone the ideas that he thought were great. So he'd drive up and down the coast of California to get ideas from other shops that were, you know, oftentimes more than happy to share ideas with them because he was wasn't a direct competitor. So while business was good, Curtis, Willis's brother was ready to step

Starting point is 00:33:54 away from it and not have to work near as much as Willis wanted to. So Willis ended up buying out Curtis's stake in the company. And there's this really funny story in the book that I wanted to share here where Willis got involved with Chrysler. Willis had gotten word that a production plant at Chrysler was closing down. And they were trying to sell off a bunch of leftover parts that they didn't need. And these were in huge quantities and they just really wanted to get rid of them. And you know, when Willis finds this out, he's thinking he's going to be getting some bargains and he got really interested. In these auctions, it was really all or nothing. So you're either buying a ton of parts, maybe hundreds or thousands of them or you're buying none at all because they

Starting point is 00:34:34 just want to get rid of them. And this made it really a bit difficult for a guy like Willis, but it didn't stop him from testing the waters and seeing if he can make some money out of it. He managed to buy hundreds of carburetors for $15.750 apiece. And then he managed to sell these for around $100 a piece. And he was able to get these sold. So he went back to Chrysler trying to get his hand on some other items, maybe higher priced items, whatever he really could. And then these sales were in Detroit.

Starting point is 00:35:03 And Willis lived in California. So I believe he was road tripping across the country. And on his way, he came across a motorhome plant that happened to need. many of those carburetors that he was trying to sell. So you can see that someone that works as hard as Willis, he puts himself in these positions where he manufactures his own luck at times. He's just curious. He's always talking to people. He's always working on different things, talking about different ideas with people, just letting his mind roam to new places. And I think that's so, so valuable. I know some people in my own life that sort of operate in a similar way where they're always

Starting point is 00:35:38 looking for new deals, buying cars, buying different things. Maybe it's stocks. And once you're always talking to people and learning about new ideas, sharing ideas, it seems to be a way to really manufacture your own luck. And that's something I think I found with Willis's life as well. Anyways, he considered buying some radiators from Chrysler. He knew at a minimum a radiator had $5 worth of copper in it. So he put in a bid for $7 a piece and that gave him a considerable margin of safety for anything he wasn't able to sell, you know, and mark up whatever he could sell. Willis then had become such a big buyer from Chrysler that they just started showing up to his place and delivering more parts to his business. They sort of just assumed that he wanted the parts. So they just kept sending him to him. The problem was that he didn't have the money to pay them. So they ended up giving him 90 days to pay Chrysler and they just kept sending parts.

Starting point is 00:36:34 And I just thought that was so funny that Willis found himself in a situation where he was buying these parts for pennies on the dollar and then selling them at full price. He had said, quote, I was becoming Chrysler's favorite way of getting rid of parts, and I didn't mind. Business was booming and I was sitting on higher and higher cotton, end quote. As Willis built more and more of these relationships, he was continually having to solve the puzzle, figuring out how in the world he was going to solve all this demand he had. So Willis ended up working out a deal with a company out of Taiwan that would send him parts for cheap, And in one case, he would get a fender from Taiwan for $15 and ended up selling it in a shop for $180. So there's this lesson in here titled, Don't Rest on Your Laurels.

Starting point is 00:37:22 So although his business was very successful, he knew that he heavily relied on Chrysler for parts. And these manufacturers in Detroit were shutting down, meaning that fewer and fewer people were going to need their Chrysler vehicles repaired. So he knew that this was a lot. no time to rest on his laurels. So in light of the 1973 oil crisis, Willis noticed that there was a rise in more fuel-efficient vehicles, and there were no yards that specialized in these unique cars. So he expanded to open another Mother location that specialized in many trucks. It was also around this time that Willis got interested in an acquisition. He had known the owner of a company called BTS, which was a company that ran auctions for vehicles. He paid $1 million.

Starting point is 00:38:09 to acquire this company that did $65,000 in pre-tax income, and then they had $100,000 in equipment as well. And this was actually a very high price to pay for Willis, but he understood what this could do for him over the long run in terms of growing his existing business and then exploiting the synergies between the two companies. So the deal was so large that he decided to partner on this deal with Peter Kay. Willis described this purchase as a big step that would change his life forever.

Starting point is 00:38:39 And then not long after, Willis had discovered another business in California that was full of customers where it was self-serve. They would browse all these cars in the store and just pull off whatever they needed and then check out. Willis immediately thought that he needed one of his own in Northern California. So he partnered with a couple of other guys to do this same business idea. And he called it, You Pull It. People would even pay 50 cents just to get into the building and have the privilege to see what was being. sold. And Willis just said it was unbelievable how fast this business took off. He described his businesses as appealing to two different customers. You pull it had a do-it-yourself customer base.

Starting point is 00:39:21 These were people that needed an operating car as cheaply as possible. And that meant they were buying use parts, working on their own vehicles themselves. Mother, on the other hand, they primarily sold to body shops and mechanics. And these were typically higher priced items and stuff you knew would work well. So Willis was always on the lookout for the next opportunity to grow his business empire. He ended up starting a dismantling magazine so he could market his own companies. And this also allowed specialized yards to market their businesses as well and run ads. At first, he called it specialized magazine, not the most creative name. So we thought about how the word co-op. He was thinking about that word and how they were the co-op of parts to dealers, you know, and then using it for the

Starting point is 00:40:11 mutual benefit of advertising. So he decided to call the magazine Copart. He also ended up changing the name of BTS, which was the auction business. He ended up changing that to Copart as well. So this 1970s wasn't a great time for advertising. So he somewhat sat on his hands with this business while you pull it was really his cash cow. It was turning over 100 car. a day and the DMV couldn't keep up with all the new title changes he had with, you know, he's buying these cars selling them. And his team would fill out the paperwork for DMV and submitted themselves, which is so funny how the government and the DMV can be just a bottleneck and private companies just figure out a way to make it work. Since the DMV, they had to mail these

Starting point is 00:40:56 physical books to you pull it and to Willis. So Willis ended up spending $40,000 in building a computerized system so they could just print these themselves. And this ended up saving the DMV the hassle of constantly printing and shipping these, getting new forms. So it just reminds me that great entrepreneurs time and time again just seem to find a way. Willis ended up buying out his partner in Copart and started making some changes to his businesses. He quit doing sealed auctions and he switched to live auctions. And this created more excitement, which meant more commissions for his business. And Willis was inspired by Disneyland in how they were expanding their business. So at Disneyland, you pay a fee just to enter the park and start having fun. And then when you

Starting point is 00:41:42 were in the park, you also had to pay for food and drinks. You had to pay for the gifts in the gift shop. And sometimes you would even have to buy tickets to ride the rides. So Willis recognized the need to have multiple revenue streams within his business that really all work in harmony together. So as alluded to, Willis really didn't have things easy growing up. He had to work and earn everything he had. And now, Willis had a family of his own. And he was sitting in high cotton, as he says, and he could afford to buy nice things for his family and his children. But he wanted to make sure his kids didn't have it too easy. He would have each of them when they turned 16 years old, pick out a wrecked vehicle from the junkyard, put up half the money themselves, and then just learn how to fix it. So teaching that value of

Starting point is 00:42:29 hard work and having to earn what it is you get in life. He writes here, Joyce and I were sitting in high cotton from all my business ventures in hard work. We were driving nice cars, had a house with a pool, and could have afforded to buy all the kids' new cars, but we had both known hard times. We wanted our kids to learn how to make money and save money so they would understand the value of a dollar and respect what went into having a car. But I also wanted them to learn a little bit about the business I was in. The business that supported the family, all these years and that was doing so well." So at the end of the day, everything Willis did was for his family.

Starting point is 00:43:07 And family always came first to him. So this brings us to chapter five. It's titled Lessons I Learned as a Teacher. And this is where we first learn about Jay Adair. In 1989, Jay Adair just graduated high school and he was dating Willis Johnson's daughter. Initially, Willis said that Jay annoyed him because of all the questions he asked. Jay was not initially impressed by Willis's businesses, as he's never been to a wrecking yard in his life and how in the world could you make money off used, wrecked cars. But Willis admired that Jay had a love for business. So instead of getting into sports in high school, he focused on making money with his dad and he loved it.

Starting point is 00:43:52 So Willis writes here, while my world was strange to Jay, he was fascinated by it. And I think he also fed into my passion for business. I have to admit, the wrecking business is infectious. And when you catch it, there is no cure. Jay caught it, end quote. So like Willis, Jay was an early riser. He started getting up at 4.30 in the morning to spend the day with Willis. And this is just amazing to me how a 19 year old or whatever age he was at this time,

Starting point is 00:44:20 he's getting up early at 4.30 in the morning and working all day. So through all this time that Willis and Jay spent together, Jay served as a really good sounding board for Willis. Willis was always thinking about new ideas for his businesses and Jay would come back with questions. And sometimes this would change Willis's views or change the way he thought about things when he had this new angle or new perspective coming from Jay. And as we've learned in studying various entrepreneurs and investors, Willis also recognized

Starting point is 00:44:49 getting the incentives right. A key part of Copart's business today is, working with insurance companies and they have to deal with cars getting in accidents and needing to get rid of them. So initially, Copart ran into the issue with insurance companies. They weren't able to sell a car for more than it took Copart to pick it up, store it, auction it off. And this is what led Willis to start the PIP program, percentage incentive program. So rather than Copart getting a set fee for each car they sold for insurance companies, they would take a 10% cut on newer, highly priced cars and then a 20% cut for older highly damaged cars. So insurance companies didn't have to pay

Starting point is 00:45:30 Copart to take care of a car that might not sell for that much. And now with this new program, the incentives were aligned. Insurers made money off these totaled vehicles and now Copart had an incentive to clean up the cars, make it look nice and do whatever was necessary to sell them for the highest price possible. So insurers now loved working with Copart. And this is because Copart, simply put, increase their bottom line. So Willis's lesson from this was to be your customer's most valuable partner. As with any great company, culture is very important in business. And I think Copart has an amazing culture that you'll see during this episode.

Starting point is 00:46:11 Willis had what I'll call the copart way of doing things. When he purchased other businesses and he trained them to do things the copart way, he recognized the importance of culture in bringing on the right. people. So at the end of the day, doing business is all about people. And he knew that treating people right would really help contribute to the long-term success of his business. So Jay Adair ended up following Willis long enough. And he quickly found out that he was learning way more about business through Willis than he was by sitting in a classroom. He was in college at the time. And Jay knew that the best way to learn was by taking action. So he told Willis that he wanted to drop out of college.

Starting point is 00:46:52 and he wanted to keep learning in the school of Hard Knocks is what I'll call it. Jay was just so passionate about business and he had found the perfect mentor to teach him business. And I love this part because Willis understood where he was coming from. So Willis handed him a broom and told him to start getting to work. Willis shifted him around all different parts of the business so he could really get exposure to everything. This meant driving forklifts, organizing the mechanic shop, improving the DMV side of the business. Wherever he felt Jay needed to learn about the business

Starting point is 00:47:27 or maybe Willis selfishly wanted to improve a certain part, he just throw Jay in there and see what he could do. And it seems that anything that Jay did, he almost always figured out a better or more efficient way of doing things. So Jay was really the perfect guy for Willis because he did whatever it took to leave things better than he found him. And this was just wonderful for Copart because Willis knew that in order to keep growing, they needed to keep innovating. Most managers, in my opinion, really have a tough time putting their egos aside. And they just accept that their way or the way things have always been done is the way it should be essentially forever or for a long time. It's really difficult, I think, for a lot of managers to change things. And Willis was totally

Starting point is 00:48:15 open to change and Jay was perfect for, you know, helping implement and spark those new ideas. Jay eventually got to the point with Copart where he considered if he should stay or not. You know, it was sort of a small business. And Jay knew that he had a ton of potential. And he thought his personal growth might be limited at Copart because Willis was running the show. And he was unsure about Copart's future growth and how much growth opportunity that would give him. You know, maybe Jay could go start his own company. And keep in mind that Jay is only 21 years old at the time. So the level of ambition this guy had at that age is just like very impressive to me.

Starting point is 00:48:55 And it's a testament to him. And it's just like nice that with this sort of background, he's the CEO today. And, you know, he's just had a level of ambition you don't come across a lot. So Jay's doubt with his growth within CoPark quickly withered away when they heard news that insurance auto auction had gone public and they raised money to expand their operations very rapidly. So insurance auto auctions, I might refer to them as IAA here, and they are

Starting point is 00:49:24 actually Copart's primary competitor here in 2024, but we'll be getting to that later. So IAA, they wanted to acquire as many auctions as they could with the money they raised from going public. And Willis and Jay, they knew next to nothing about the stock

Starting point is 00:49:40 market. But one thing they did know was that Copart was certainly a better run company than IAA. So this intrigued Willis. And he wondered whether Copart should look into going public and raising money themselves. Initially, Willis and Jay, I guess, they both assumed that going public and working with Wall Street was only for the big dogs and the billion-dollar companies. And Willis and Jay, they were really just regular people with big dreams. So they set their next goal as going public and

Starting point is 00:50:10 make Copart a significantly bigger operation. So Jay certainly knew he wanted to stay with Copart for the long term now. Willis had met up with the connection that he had from Wall Street and he told him that nothing could get rid of this business. He had to sell himself. So he said that two of the biggest businesses in the world are car manufacturers and insurance companies. So the world is always going to make cars and those cars are always going to need to be insured. And he said that copart was essentially the middleman between the two. Willis had said to the guy at Wall Street, as long as we've got the land in the right place to put cars on, we can't fail. What a statement. The Wall Street guy's name was Barry. He went home to his wife apparently and told her after that he had just met the smartest

Starting point is 00:50:56 businessman he'd ever meet. So Barry recognized the enormous potential in Willis. So he told him that he could try and raise $10 million for him to essentially give Willis the opportunity to prove himself and show that if he raised this money, he could grow his business. So he essentially had to create some sort of track record for Wall Street. And Barry told him that this going public was not going to be easy and that 97% of people who try to go public don't make it. So Willis, however, wasn't very easy for Barry to work with. Willis only worked with people he really trusted and really liked. And Barry gave him the opportunity to receive more money. But Willis would turn it down if he ever came across somebody that just didn't feel right. He didn't feel like he could trust them. And I think

Starting point is 00:51:44 that's quite an admirable trait. I think life's too short to spend your time with people you don't enjoy spending your time with or enjoy working with in this case. And Willis had said, I've been in business for a long time. If I don't trust people from a conversation across a dinner table, I'm pretty sure I'm not going to trust them with my reputation or with my money, end quote. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a

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Starting point is 00:55:31 for Barry. While Willis was in the works of going public, IAA was really trying to take down copart. Bob Spence, this was a guy that had tried to partner with Willis in going public and merging their businesses together. But Willis, for some reason, he kind of got a bad feeling about it. He was open to merging the companies with Bob. And then as they approached the signing of the deal, Willis is just like, I can't do this. He backed out. He didn't know what was wrong. but it just didn't feel right to him. And when there's something to that about trusting your gut and trusting your instincts when something doesn't feel right.

Starting point is 00:56:06 And it turned out that Bob Spence had been working with insurance auto auctions behind the scenes. So essentially, he was kind of this guy that was going to help take down Copart. And this really added fuel to Willis's fire of wanting to come out on top. And this is funny, given that we know today that Copart is essentially eating insurance auto auctions lunch in 2024 as we record this episode. So Willis got a $10 million loan from Wall Street to prove that he could grow the business when given additional capital. So he ended up selling off the U-Pollet locations that were really successful for him. And he turned his focus to expanding the traditional business at Copart. And Jay, who was 23 years old at the time, had interviewed a guy

Starting point is 00:56:51 named Russ Lowy, who would become Copart's very first official sales guy. And during the interview, he showed Russ a map with seven Copart locations that were all in the U.S. And once they went public, he told him that eventually they'd have 100 locations. So Copart's team was scrambling to acquire these salvage yards all over before insurance auto auctions could get a monopoly everywhere. And it seemed that these small family businesses knew that they were going to be in trouble competing against these bigger companies. And Willis was able to work out a number of deals because he promised these businesses that they'd get copart stock once they'd went publics. And I think another reason Willis was able to expand and work with these great small family companies was that

Starting point is 00:57:38 people generally liked him. When you work with Willis, you knew that you were working with someone you could trust. And I'm sure many of these people knew Willis for years. He was a guy that did so much networking and talking with various people. And it wasn't long before Copart ended up using the $10 million they got and doubled the size of their company. On Friday, March 17th, 1994, Copart went public at $12 a share and they had $6.5 million shares outstanding on the IPO. And that put the total market value of the company at $75 million today. And just for reference, they are worth $45 billion today. At the IPO, Willis owned 3 million shares, and this made his stake alone worth $36 million, so around half of the market value of the company at the time. Willishead wrote, it's a little unbelievable if you think about it.

Starting point is 00:58:29 Two years earlier, we had been driving forklifts every day, and now Wall Street was telling us we were worth $80 million. So being public gave Koppur really a tremendous advantage to be able to grow their business. Public companies, if you're not aware, they can essentially use their shares like a currency. So if he's, you know, they can essentially use their shares like a currency. So if he's, you really needed cash to deploy, he could simply issue more shares of his company, sell it off, raise that money instead of having to go out, work with bankers or work with whoever to take on debt or find a partner who was willing to buy into the business and fund it. So to Willis, going public was one of the hardest parts of his journey. Working with Wall Street wasn't something

Starting point is 00:59:09 he was really used to, working with people in suits, having to sell himself to all these people he's not used to really being around, constantly having to look out for people trying to take advantage of him. It just wasn't Willis's environment. He's so used to working, you know, with people he likes these really humble, typically rural people is what I imagine them as. So he was really excited to get back to doing what he did best, which was growing and taking care of his business. One of the early states they focused on expanding in was Texas, and it wasn't too long after that they looked at the East Coast as well in places like Atlanta. So there was continued pressure from insurance auto auctions on gobbling up all these locations across the country as fast as they could. And Willis knew that

Starting point is 00:59:57 their plan was to grow as fast as possible and just let these businesses continue to have operations as they were. So while Copart was very strategic, they wanted standardized systems across all their yards, standardized business models, whereas insurance auto auctions was just the opposite. It was just grow at all costs, don't standardize, don't have a consistent culture. And they just wanted to focus solely on growth and just figure out the rest later. So insurance auto auctions, I was surprised to read about this. They even had a way of seeing what copart was up to. So they operated in what seems like a pretty sleazy manner.

Starting point is 01:00:35 Willis found out that insurance auto auctions had followed his tracks a number of times. So he was super careful sharing his plans with it. anybody. Willis had a different philosophy than insurance auto auctions. He wanted slow and steady growth, and he wanted to focus more on finding those strategic locations and converting each one to doing business the copart way. And as I read this, I just recognize the type of capital allocator that Willis is. You know, he wants really strong business performance over the long run. And he knew that chasing growth at any cost is a really dangerous strategy. And just buying anything can lead you into some really bad businesses, really bad managers, and just working with people you probably

Starting point is 01:01:18 would rather not work with. So it was a very, very different style of growth and strategy. Willis knew the value of a dollar. And he really didn't want to squander his money just because he had a lot of it. So while insurance auto auctions had their sites set on, you know, places like big cities, Coppard initially focused their attention more on rural areas. So rural, it was cheaper to acquire, cheaper to operate, and it also had less competition. So in the city, he might have to pay $7 to $9 million for a yard, but in rural areas, he might pay $1.5 to $2 million. Willis really wanted to build the Copart brand. So anything that had a Copart logo on it would really run the same way. So it would have the same computer system, same pricing, same way of treating employees. In that way,

Starting point is 01:02:05 the experience with customers was just consistent across the board. And in many ways, insurance auto auctions and copart, they were pretty similar to serial acquirers. We've long talked about serial acquirers here at TIP on the podcast and in our TIP Mastermind community where we talk stocks with members. Small businessmen have many reasons they want to sell their company. It might be because they're wanting to retire. They're getting of age. They might want to switch to a different business, do something else. They realize it's time to hand over the reins to someone else or whatever the reason may be. Some small businesses simply just want to sell for the highest price. And others, I think, see their business as a reflection of their life's work and they care who they're

Starting point is 01:02:48 selling to. So for those that care who they're selling to, they see their business as their life's work. You know, that's someone who doesn't care as much as about the price tag. They just want their employees in good hands once they hand the business owner. So Copart was the type of business that insured it was in good hands. Whereas insurance auto auctions, on the other hand, they probably won a lot of sellers with fancy suits and a high price tag. So for those business owners who were thinking pretty short term, insurance auto auctions was probably a pretty good company to sell to.

Starting point is 01:03:21 But for those who wanted their business in good hands, who sought long term and wanted to give their business the tools to not only survive, but thrive, then Copart was an excellent option for them. It was just a much different value proposition for sellers, and it reminds me a lot of serial acquirers. And when Willis was able to identify the areas of value within a business, he definitely wasn't afraid to pay up for it. So sometimes it might look like he's paying an expensive price, but he's able to look under the hood, look beneath the surface, and discover value when he saw it. So it's really interesting. From Wall Street's perspective, insurance auto auctions was the better business. They were probably growing faster. They probably had higher revenues because their

Starting point is 01:04:04 business model was slightly different. And they were really aggressive. They probably set these high targets on their growth. Whereas Willis, on the other hand, he knew that higher revenues aren't what matter over the long term. It's all about capital allocation, earning high returns on capital, and over the long run, maximizing the bottom line, not the top line. And I've mentioned the term capital allocation here a few times during this episode. But I don't think, Willis wrote that word one time in this book. But you can see when you see the stock chart, you see the company's performance, and you see their numbers today that they certainly understand capital allocation.

Starting point is 01:04:41 So in Willis' expansion to the east, he met with the founder of NER. And in his discussions, he discovered that their business was practically a mirror image to copart, but it was just on the East Coast instead of the West Coast. And the founder was ready to spend more of his time fishing and enjoying himself. So NER ended up selling their business for $20 million in cash and $20 million in stock. And this actually doubled the size of Copart overall. And so it was definitely a sizable purchase that's worth mentioning here. This purchase was in May of 1995, only about a year after they went public.

Starting point is 01:05:17 So in the late 90s, Copart was operating on three different computer systems internally, and this is another turning point for them in the 90s. So one of the computer systems they inherited from NER. and then they had two others, but then Copart. And it was really a big undertaking for them to create their own uniform system. It took a lot of resources to get that done. It slowed their growth in the near term. And Willis talked about how this was really a short-term sacrifice

Starting point is 01:05:44 in order to have a better business in the long term. And he also mentioned how Wall Street over-emphasized growth and consistency. So because there was a slowdown in growth, they learned that that's what Wall Street values and the stock ended up taking a beating. So it's a good reminder as investors. We want to ensure we're partnering with managers that have that long-term approach and then be understandable when you have those inevitable slowdowns and growth. These slowdowns can oftentimes end up being great buying opportunities if you're willing to be patient, trust the management, and that they're trust that they're making the best decision for the long term. It's somewhat funny, he says here, I quote, I learned an important lesson and that was not to grow too fast. You have to grow slow and steady, or Wall Street will make you pay for. it. They always compare you to what you did last time, end quote. And the reason I say this is funny is because copart has been one of the best performing stocks over the past 30 years. So, you know, when you see a hypergrowth company, they usually don't make the best investments,

Starting point is 01:06:43 even though it's easy to get attracted to high growth. So I think it's those businesses, oftentimes, like the co-parts of the world, that just chip away year after year. They just get a little bit better every day, every month, every quarter, every year. It's just a slow and steady grind. And, you know, from month to month, quarter to quarter, year to year, it's hard to see the impact of that. But when you take the compounding that they do and you extend it out over really long periods of time, you know, after they've been public now for nearly 30 years, you see they're really starting to separate from their competition. No one can compete with them. No one wants to compete with them. And it's just crazy to see. I think it's just a really good case to

Starting point is 01:07:24 for some of the types of things to look for in a great business that compounds capital over time. So jumping to chapter 8, the first lesson that Willis shares here is to embrace new ideas. So the internet ended up being a revolutionary tool for Copart and their growth. It was in 1996, Jay first learned about what a website is. So he told his team to purchase copart.com. and even though they had no idea what a domain was, they went out and purchased it. And before the internet, Copart put together a master sales list of vehicles every single day. And it's typically comprised of 8,000 sheets of paper.

Starting point is 01:08:04 So putting this list on the web not only would end up saving them time, but also a lot of paper. Jay discovered another need that the internet could deliver on as well. He saw the reps for customers at auctions were placing bids for them on cars they wanted. they'd get paid over $100 for each car they bought for their clients and they were making $2,000 to $3,000 a day. And when Jay saw these reps making a killing, he definitely wanted it on that action. So he used the internet to let buyers submit their bids online ahead of time. And that way, they didn't have to pay these reps high fees and they could still place their

Starting point is 01:08:40 bids on cars. And Jay went out, he built this online bidding system. He explained it to so many of his potential customers. and it's amazing. He builds this online system, and in the first quarter of it being live, online sales through that were north of $1 million. And if this was 1996 or 97, whatever year it was, it's just like the very early days of the internet. And just to be able to convince people, hey, if you go online, I'm sure it was such a pain for many of these people. They probably didn't own computers. They had to go and use somebody else's. So I'm sure this wasn't an easy sell.

Starting point is 01:09:16 But I think a lot of these auctions were outdoors and people probably froze to death during the winters and such. They talk a lot about that when they expand into Minnesota and some of these other states. So originally Jay had thought that buyers would look at cars in person on the site the day before the auction. And that way they knew what cars they were bidding on and then they had the option to place their bids online. And sometimes it's just a reminder here that sometimes you just don't know how. customers are going to behave when you introduce new things. And this is Jay saw one customer. He purchased a car that was in San Diego, but the guy was based in Connecticut. Jay was like, what the heck is going on here? And he gave the customer a call to learn about why he'd buy a car that he hadn't

Starting point is 01:10:04 seen in person, obviously. And the buyer didn't seem too concerned. He said he knew what he was doing. But he mentioned to Jay that it'd be nice if Copart posted pictures of all of their cars online. And this was sort of a light bulb moment for Jay where when customers ask for something, you should probably deliver it to them, especially when it's such a great idea like that. So it was super, it costed a lot of time and a lot of money to take pictures of each vehicle, but it's what buyers wanted. And after, you know, rolling out all the photos, next thing you know, online sales started to cross $10 million per quarter. So not only was Copart getting cross state bids, but they were also getting bids. outside the country from places like Mexico and Canada. Willis writes, Copart was no longer just a salvage company. It was a technology company. So they were also

Starting point is 01:10:54 continuing to expand their number of yards, of course. In 1995, they had 42 yards. 1998, they had 60. In 2000, they would grow to 76, so very solid growth. And then here it mentions where they were expanding to Chicago and Minnesota. Willis and Jay just couldn't stand how cold the weather was. to California weather and when temperatures got really cold, less people wanted to stand outside at auctions. So instead of fighting the cold and trying to get people to come out, they decided to start building these giant indoor auctions. So anyone can identify a problem, but how many people are like Willis and Jay where they put in the work, they put in the thought, and they start experimenting, trying new things and they, you know, provide solutions. There's just so much to admire about these two.

Starting point is 01:11:41 Their ability to innovate is definitely one of them. And then I think their love for business is another very admirable quality. And when you read a book like this, it's hard to ever want to partner with a manager in a public company who's just doing things for the money. You need to find people, in my opinion, who are really passionate about what they do. Those managers who are passionate about their business, they're not just thinking about their business from 9 to 5 when they clock in and clock out. They're thinking about their business 24-7.

Starting point is 01:12:11 So jumping ahead, after 9-11, people generally weren't flying as much. So that meant more people were driving cars and more business would essentially be heading Copart's way. So they needed to raise more money and the last thing they wanted to do was hold on to debt. This meant that they were going to issue equity. Initially, they wanted to raise $75 million, but there was just so much demand for the capital raise that they ended up raising $116 million. In 2003, Jay ended up taking the lead on ushering in an exclusively online and revamped auction system. This was referred to as VB2. This was really, really important in their growth.

Starting point is 01:12:53 And this really helps show more of their customers the power of the internet and how there was really no need to show up in person to the live auctions. It ended up having these amazing results for Copart. Customers received more value. Auctions became more competitive with all these buyers from everywhere. and this would of course lead to more revenue for Copart. And also, it ended up coming with additional benefits as well. Copart didn't need to have these large parking loss for customers,

Starting point is 01:13:19 and they also didn't need as much staff. So for the investors in our audience, this probably sounds like higher margins, higher return on invested capital. And of course, at the time, people thought Copart was just crazy for trying to sell wrecked cars on the internet. And of course, with the benefit of hindsight, it was definitely a no-brainer.

Starting point is 01:13:38 At the end of the day, it was really all about delivering more value to their partners, you know, the insurance companies being the sellers, and then various other parties being the buyers. By 2003, Copart crossed 100 locations and they expanded their footprint into Canada. Then Willis has this chapter on what he learned from employees, and this really dives into culture here. In 2002, Jay had called one of his yards, and the employee on the line heard the name Jay Adair, and he asked Jay if he worked at Copart. And this really surprised him and made him realize that Copart was no longer a small mom and pop company. And he really put a lot of things in place to make sure that employees received good

Starting point is 01:14:19 pay, good benefits, and they really felt valued working at Copart. And he really wanted employees to be happy that they got to work with Copart. Jay figured that if he had a company full of happy employees, this would in turn lead to happy customers. Then they also put together a very clear mission, vision, and values, and this was really to help align everyone for why they do what they do at Copart. Their mission was to streamline and simplify the auction process. Their vision was to continually offer compelling, innovative, and unique products and services to propel the marketplace forward. And their values spelled out Copart, C-O-P-A-R-T, committed, ownership, profitability, adaptable, relationships, and trust. Now, culture, of course, is a really key part of any business when you look

Starting point is 01:15:06 out over decades. And certainly Copart's culture, I'm sure, has had a really big impact on their success. And since we mentioned trust here, Copart had a prime opportunity to show their customers that they could be trusted even in the worst scenarios. It was on August 29, 2005, Hurricane Katrina, which was the costliest and deadliest natural disaster in U.S. history at the time of writing, it hit New Orleans. Copart's strength was really tested during this disaster. And according to Willis, passed the test. Within the span of a year, Copart processed tens of thousands of vehicles on top of the more than one million that they do during their normal operations. And they didn't even pass on any of those additional costs to customers, and they proved to their customers

Starting point is 01:15:51 that they were the trusted provider during these types of situations. So Copart really played a key role in cleaning up New Orleans after Katrina hit. And then the last chapter in the book here covers Copart's expansion overseas, a really key part of their business today, I think. Canada was the first country they expanded to. It was definitely a natural selection, but it definitely came with a steep learning curve as well as Canada has their own currency, and they have their own roles for salvage vehicles and regulations. And it wasn't long until Willis and Jay, they traveled to the UK to make an opportunistic acquisition there as well. So once Copart wrapped their arms around, the cultural differences between the U.S. and you, you know, the futureal differences between

Starting point is 01:16:32 the U.S. and the U.K. He started making more acquisitions there and expanding their footprint. Obviously saw a lot of opportunity overseas. The UK was really a place that was ripe for disruption as every salvage company bought and sold the cars themselves. And this was a model they knew didn't work for Copart in the U.S. And they were essentially the broker that would get the highest price possible for insurance carriers. And this was thanks to that VB2 system I mentioned. Once insurers saw how successful this business model was relative to the old way of doing things, they were more than happy to work with Copart. And then in addition to this, expanding internationally really increased the volume of cars on

Starting point is 01:17:13 Copart's website. You know, it creates this network effect that buyers really enjoyed. So once you have a ton of supply, it attracts buyers, and more buyers attracts more of that supply. So the bigger Copart grew, the more buyers they attracted. The more buyers they had, the higher the prices that insurer. got from working with Copart. So in this situation, it's similar to the Costco situation that everyone wins. Fast forward to 2010, Jay Adair became the CEO of Copart since Willis wanted to be sure

Starting point is 01:17:43 to spend more time with his family. He also knew that just Copart was in really good hands with Jay. You know, Copart was Willis's life's work, and he certainly knew that Jay was the guy to take it over. Willis's wife had actually gotten breast cancer, and he told Jay in 2000. that he had to take over the company and he ended up doing so just so Willis could spend more time with his wife. And around this time as well, many of Copart's vehicles, they came from the insurance side as they do today and they wanted to expand their supply. So work with these parties outside

Starting point is 01:18:18 of insurance. So they created two new divisions in the company called Copart Direct and Copart Dealer Services. Copart Direct helped the public sell cars through VB2 and it gave them access to Copart's network of buyers. So in my mind, this is very similar to Amazon's FBI program, where anyone I know in the U.S. can hop on Amazon, sell a product, and Amazon takes a fee for giving them access to this network of buyers. And then through Copart, sellers now had the ability to sell to anyone in the world. And then Copart dealer services, this reached out to dealerships and auctioned. So Copart dealer services, this reached out to dealerships and it auctioned. their unwanted trade-ins, and that was also through VB2.

Starting point is 01:19:03 So despite all of the exciting growth that lied ahead for Copart, Willis knew that in order to give Jay full control of the company, he had to move away. So the lure of business was really just too strong for Willis. He couldn't be too close proximity-wise to the headquarters. So Willis and his wife, Joyce, they bought a ranch in Tennessee, and they made their move in 2009. And that really is the end of the book. Again, this was released in 2014, so their recent history isn't included here, but man, this stock has been just a heck of a winner. I think I mentioned at the start over a 30 year time period.

Starting point is 01:19:39 It's increased by over 21% on average per year, which is just amazing performance. And when I just look at their revenue since 1995, it's just consistent growth year in and year out. I'll list a few of the years here. In 1995, they had $58 million in revenue. That was the year they went public, I believe. 2003, $347 million. 2013. They did $1.05 billion in revenue. In 2023, $3.87 billion. And they increased their revenue every year they've been public, with the exception of three years, 1998, 2009, 2015. Every other year, they've increased their revenue. And it's interesting to see, too, that over the past decade or so, they tend to increase their revenues generally around the 10% range, but some years you'll see that 20 or 30% increase.

Starting point is 01:20:32 And it sort of points to this idea of compounding and how most of the benefits go to the investors who stick with it for a really long time. It's a little bit of choppy growth, but over the long run, it ends up being quite good returns for investors. And in 2022 alone, I wanted to mention that their revenue increased by $808 million in that one year, increased by $808 million in 2022 alone. And that increase in revenues in just one year, that's 13 times their total revenue of what was in 1995 when they went public. And when they went public, they did $58 million in total revenue. And I think this is a really good example that helps illustrate the true power of long-term compounding. I did an episode on Copart back on episode 549 of the podcast.

Starting point is 01:21:21 That was recorded just under a year ago. And just to give a brief overview of their business today, they have two main revenue streams. They have their service revenue and then their purchase vehicle revenue. Service revenue is essentially when someone lists a car on their site and then Copart collects a fee on the sale for being the intermediary. And in this case, they're not taking ownership of the vehicle. And purchase vehicles refers to vehicle sales where Copart has taken ownership of the vehicle and then sells it at a higher price, pocketing the difference. So to a large extent, Copart operates in an industry that's dominated by two players.

Starting point is 01:21:56 Copart and then a name you've heard about in this show, Insurance Auto Auctions. Now, from the research I've done, it sure seems like Copart is a much, much stronger business. They have a stronger network effect. They have a better management team that's reinvesting back into the business. they think long term. And I think it's also important that Copart owns the land they operate on, while insurance auto auctions leases their land. And I wanted to mention four competitive advantages here on why I think it's such a great business. First is the economies of scale. I had mentioned that Copart owns their land, much of which was acquired in the 1990s. And since they own all of these

Starting point is 01:22:33 junkyards, from what I can tell, it's next to impossible for a new competitor to enter this space and get the land they need. You know, there's regulatory issues and most people don't want another junkyard in their town. And their scale allows them to really offer great value to customers and insurance companies that want to work with someone like Copart who can offer these nationwide contracts. So it really takes time to build out that network. And so that first competitive advantage is economies of scale. The second one is network effects. As their platform of buyers and sellers grows, it makes the platform more valuable and more difficult to disrupt. And someone else to release their own platform. Third is the barriers to entry. This relates to the first two points.

Starting point is 01:23:13 It's just really difficult for competitors to do what Copart does. And it definitely can't be done overnight. It takes many years and a lot of investment. And then I think the land is another barrier that's difficult. I think about many software companies and how, you know, it's all just code. And obviously that can be difficult to disrupt. But when there's that physical aspect, it sort of gives me the peace of mind. I don't own shares. But if I were to own shares, it would give me some peace in mind. And then fourth, and the final competitive advantage I wanted to mention here is their management team and their culture. I think it's hard to put together a team that really thinks long-term and thinks in decades instead of quarters. And I think management and culture is an advantage that

Starting point is 01:23:52 can't be overlooked. I also wanted to mention that if you're looking for a company with an exceptional balance sheet in a great financial health, then Copart's about as good as you'll find. It's a recurring theme in the book that they don't want to hold debt. And they, you know, they want to be prepared for really bad situations so they can best serve their customers. And Copart has certainly seen disaster strike and they want to take great care of their customers. Jay Adair, for example, he's seen 9-11. He's seen Hurricane Katrina. He's seen the great financial crisis. And part of that financial health is just the way Willis Johnson was raised in the culture he's instilled within the company. And I think it's also noteworthy. I mentioned this at the start that Jay Adair has a salary of $1.

Starting point is 01:24:35 So he has share ownership in the business. He gets stock options. And I think he's just so well aligned with shareholders in terms of incentives. And he's certainly looking to maximize long-term shareholder value, not only for his benefit, but to the benefit of all shareholders. And I also wanted to mention that I discovered some amazing research on Copart from my friend Leandro. He has a blog called Best Anchor Stocks.

Starting point is 01:24:59 He does some amazing work there with his research service. I'll be sure to get that blog linked in the share. show notes if you're interested in learning more about Copart. Leandro and I have actually become friends on Twitter or X. And he also just recently joined our TIP Mastermind community to do a presentation on a company called ASML. It's in the chip business. And I just really appreciated that presentation he did. And members got so much value from that. So Leandro, he ended up running Copart through his checklist. And he gave Copart, I'm looking at his blog here, he gave Copart a perfect score on financial health, competitive advantages and insider ownership. And then they really just have a long runway to grow,

Starting point is 01:25:40 I think. Currently, they're reinvesting all of their cash flows. They have return on invested capital of 20%. And then one of the bigger risks for Copart over the long run, I think, is autonomous driving that I wanted to mention. So say if autonomous driving proves to be really successful, then not as many cars will be getting into accidents. And currently it seems that a lot of the tech that goes into cars has really benefited co-part. because it can get really expensive to fix these cars once they've gotten an accident, say you have a camera on the rear bumper or motion sensors, whatever else. So oftentimes they decide to just sell these cars off to Copart, but of course you can't ignore that risk of autonomous driving.

Starting point is 01:26:21 And then people always mention the valuation for Copart. I think at a PE of around 33, 34, many are going to say the stock's way too expensive. But I think if you have a long holding period, then this is going to prove to be potentially around fair value. You know, they're constantly improving their business. They're constantly improving their competitive position. And they just keep stealing market share from insurance auto auctions. And they have a lot of cash to capitalize on future opportunities. So you never know where that's going to lead them. So again, it's definitely not a bargain, but it's similar to a company in my mind like a Costco. It's trading at a high multiple. It's a mature business, not as

Starting point is 01:26:57 not near as big as Costco, but corporate's a pretty big business. And I think it's almost certainly going to get stronger over time. And they have a management team that's just exceptional capital allocators. They think very long term, as I've said, 10 times this episode. So the qualitative aspects really personally lead me to believe the business is going to do quite well over the coming years. But with all that said, I do not own shares in this business. And yeah, that's all I've really had for today's episode. I really enjoyed reading this book. Diving in the copart, it's called Junk to Gold and covers the life of Willis Johnson. I've found it personally to be such an inspiration to read and I've really enjoyed it and I hope you enjoyed

Starting point is 01:27:39 this episode and learning more about them. So I also wanted to mention if you enjoy doing a deep dive on stocks and individual companies, I think you would also be interested in our TIP mastermind community. I've mentioned it a few times during the show. In the TIP mastermind community. We talk stocks. We network with like-minded investors. We bring in guest speakers like Chris Mayer and Godem Bade. And we also host live events in Omaha in New York City. We'll be meeting in Omaha in May this year and have a couple of social events planned. And I bet we'll have at least 25 or 30 community members there. So if you're looking to network with people in Omaha, I think this is a really great opportunity. To learn more about the TIP Mastermind community, you can go to

Starting point is 01:28:23 the investors podcast.com slash mastermind. There you can sign up for our waitlist or if you want to get expedited in the process, you can also shoot me an email, Clay at theinvestorspodcast.com, especially if you're looking to meet with us in Omaha. That's all I had for today. Thanks so much for tuning in. And I hope to see you again next time. Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network.

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We Study Billionaires - The Investor’s Podcast Network - TIP601: Junk to Gold by Billionaire Willis Johnson

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