Les Schwab Charlie Munger Recommended This Book

I wrote this in November and December of 1985 I did write this 100% with my old 40-year-old typewriter I didn’t have a ghost writer I wanted it in my own words I hope to pass on some of my theories of business to our people and I hope these theories are used in our business for as long as the Less Schwab company continues should we fail to follow these policies towards customers and employees I would prefer that my name be taken off of the business there could be some interest in this book with people who are interested in business if so so you’re invited to read it I hope in some way this book might help you in the business world if you are not interested in business this book will bore you and if I were you I wouldn’t waste my time reading it that was an excert from the book that I’m going to talk to you about today which is Lush Schwab pride in performance keep it going it is the autobiography of Les Schwab I want to tell you why I decided to reread this book the first time I read this book was four years ago I was going through all of Charlie monger’s book recommendations back then and he said something that was fast ating and he said it at the birkshire annual meeting and he said if you want to read one book that will demonstrate really shrewd compensation systems in a whole chain of small businesses read the autobiography of Les Schwab who has a bunch of these tire shops all over the Northwest and he made a huge fortune in one of the world’s really difficult businesses by having shrewd systems and he can tell you a lot better than we can and so last week as I was going through the new strip press edition of the updated and Abridged version of poor Charlie Zac in one of the talks Charlie Munger actually analyzed anes what caused the success of lashwab based on his reading of the autobiography so at the very end I’m going to give you Charlie’s interpretation of the book that you and I are going to go over right now so let’s go ahead and jump into the book as you can probably tell from that excerpt that came from the forward of the book unless his personality jumps off the page the whole book is like that he just speaks very clearly and directly so he says father was not there he was drunk again I was born on October 3rd 1917 school was just a railroad box car with somewhat crooked Windows cut out in one side of the Box Car there were three of us in the e8th grade we had to take State exams to graduate from the eth grade we all failed the Family Farm wouldn’t sell as it was the start of the big depression the bank took the farm my mother thought it might help my father’s drinking problem if we moved back to Oregon that didn’t help it caused the swab family many heartaches we were taught to work at a very young age it seemed the noral thing to do so all these sentences that I’m reading you they’re spread over a few different pages but I I feel these sentences tell entire stories uh he’s going to get his first job he’s 12 years old this is a job he’s gonna he’s going to work in the newspaper industry up until he try up until he buys a tire shop in his 30s but I want to tell you this background because you’ll get an idea of who we’re dealing with and the kind of work ethic he had look at this sentence right here I soon got one of the newspaper routes before long I got all three routes my family lived in a small two room home there was no running water they’re living in a logging camp water was hauled by train from town and you took your bucket to the tap filled it and carried it to your home there was one Community shower so he’s living in poverty on the outskirts of town his mom decides hey both your brother and you I have she had a strong desire for both of her sons to attend high school they by this time they made the decision he hadn’t been in school in 2 years and so this is what happens when he goes from the outskirts of town into town we would come into town early Monday morning and return to the logging camp on Friday after school we missed much of the school activities and pretty much felt like Outsiders one of my biggest fears was that my father would come to school on Friday drunk it would haunt me all week as I was proud poor but I had a lot of Pride many a Friday evening we would have to sit in front of some old moonshine joint until 9 or 10 p.m. until we to get our drunken ride home to the log Camp so think about what’s happening there the rest of the family’s back in the logging Camp during the week they’re staying uh in other people’s homes so they could go to school they have to get a ride back to the logging Camp from their dad and the dad thinks this is a good idea to get Smash at a moonshine joint moonshine joint then drive drunk with his two sons in the car back to the logging camp and here’s another example of two sentences that tell an entire story this was killing my mother it was sad times for the Schwab family eventually Les stays in town on the weekends and he goes back to the one profession that he knows he goes back to delivering newspapers and this again this gives you the idea I was texting a friend about this book yesterday what I was saying is like the book is 40 years old this guy I don’t think he ever finished high school he had a a a middle school and eighth grade education yet he’s a business genius he winds up building a multi-billion dollar company selling tires and there’s no way you could look at his childhood and predict that outcome but you could look at his childhood and the way he approached everything is like this guy’s going to succeed at whatever he does maybe not to the degree of making you know a multi-billion dollar company but he was not going to end up a loser like his dad uh so he says I immediately started to deliver newspapers I remember my so well my first route I didn’t know how to write a bike we never had one so all the other young kids delivering newspapers on a bike right he’s got no money doesn’t know how to ride one I ran my routes for two months in order to get enough money to buy my first used bike I’d run nine or 10 miles a day I was too proud to complain that is the second time that something he says over and over again the fact that he had a lot he was poor he he knew he knew he was raised in poverty but he was very proud person a very cocky person and I think he used his pride and his Cockiness as fuel and I actually think it served him so now in the story he’s 15 years old January 1933 our mother became ill and she was in the hospital she died 10 days later from pneumonia but as much as anything from complete exhaustion with dad’s drinking problem the rough log Camp life teaching school and raising babies it all amounted to just much more than she could handle a year later my father died almost to the day of my 16th birthday he was found dead in front of a moonshine joint he had gone so far downhill and he was working for 50 cents a day for a Rancher it sounds like my father was all bad this isn’t true why how a man can let this happen the Lord only knows but he was a hardworking extremely strong man a gentle man but a raving Maniac when drunk it certainly brought sad days to our family back to this idea that this can’t be my life is a very powerful motivator you see him being embarrassed by his current state of affairs and willing to work incredibly incredibly hard to change things I rode my bike during the week even though I was getting to the age where a boy didn’t like being seen delivering newspapers but money was much more important than pride and this is another example why I said I believed Les wab was inevitable there were eight or nine routes in the town and I took over the whole town during the summer I was now making about $175 to $200 per month and I wasn’t even 17 yet this was the middle of the depression my high school principal only made $1 150 per month I thought I was already a man and so the note I left myself when I read this the second time was he’s a money maker his whole life just like Sam zel uh it reminded me if you read Sam zel’s autobiography which I covered all the way back on episode 269 Sam had this natural instinct to make money when he was a kid one of the things that blew my mind obviously when he was you know close to the end of his life at 81 years old he was one of the best entrepreneurs and investors uh alive but even when he was in law school he was making the equivalent it’s like you and I going to law school right now we’d be in our early 20s and making millions of dollars a year while going to law school Sam zel did the equivalent when he was in law school and a much younger man so he you see when you read his autobiography it’s like oh this guy just has a he’s a money maker from day one and he has that skill so now we see that Les is technically an adult he’s 18 years old he winds up getting married and he says we will soon celebrate our 50th Anniversary I was lucky we have been very much in love and we’ve had a happy marriage they wind up having two kids and having to deal with and endure the worst thing that every anybody ever has to go through I’ll get there uh later on so he goes back back to again he’s going to stay in the newspaper industry for the next 15 years he works from one newspaper to another winds up getting recruited and so there’s there’s this uh newspaper in Ben Oregon that once that recruited him away from another newspaper to become their circulation manager and this is where he realizes oh actually it’s possible that you can know more about something than anyone else and it gives you a massive Edge I it makes me think of that one of the main themes in this excellent talk that the investor Bill Gurley gave which is called Running Down a Dream how to survive and thrive in a career that you love was the fact that you don’t have to be smarter but you can just you can know more about something than anyone else just by accumulating more information and you see that less uh did this not only uh this is very Rockefeller was the same thing where he actually knew more about the business than his bosses when he was like 18 years old so there’s like a kind of an echo between Rockefeller and L Schwab at the same age the one thing I did know was newspaper circulation work and I knew more about it than the two other minority owners who were technically his bosses there three bosses the circulation end of the newspaper work is usually regarded as the lower end of The Prestige ladder it’s essentially a sales job so that’s another I think key which we’ll get to in Charlie monger’s analysis of this book later on is the fact that Les had a fundament as you’ll see right he had a fundamental understanding of human nature he had magician likee Powers with sales persuasion and incentives so back to this I attempted to put some pride there’s that word again I tend to put some pride into the circulation work didn’t matter to him that was low status he’s going to make a ton of money doing this ton of money for his day I attempted to put some pride into the circulation work for myself and for others I was young I was cocky but the same Cockiness helped me a lot in going through life fast forward 10 years is a very common situation I was now 28 years old I had ambition I wanted to go into business as I’d always wanted to be a businessman but I didn’t have any money I was going through a period at this point of not not knowing just what I wanted to do 5 years later still working in the newspaper business I was 33 years old now and I still wanted to go into business for my own money was the main thing holding me up my brother-in-law told me to find a business and he’d help me Finance it that was all I needed and I started to look seriously as I knew time was running out I believed if you didn’t get started in business at a fairly young age you would get into a rut and never make the big decision to jump and this is so wild he picks an industry wait till get to this he picks an industry he has no experience he’s like all right well there’s this like little tire shop they’re all um franchises at this point so it’s called okay rubber welders it’s a franchisee of okay rubber welders and he’s like all right I thought the tire business had a future I remember telling my wife I thought I was a Salesman and a pretty good one and maybe that ability could be used in the tire business this small shop retreaded tires sold new tires and fixed flat Flats it was hard knuckle busted Dirty Work the price of the business was $111,000 plus inventory and we’re going to see Les had a burn the boats mentality it is now or never I’m going all in I borrowed $111,000 from my brother-in-law I sold my house and I borrowed on my life insurance with all the expenses he’s going to spend about $177,000 acquiring this small tire shop this is the tire shop this is going to be in 1952 I was just reading about this yesterday the fifth generation his fifth generation just sold the company to a private Equity Firm for a rumored $3 billion it is going to start in 1952 with $117,000 all of it borrowed and so the very first sentence describing his very first day in business is mindblowing I had never fixed a flat tire in my life and then this next paragraph This is one of the reasons that Charlie Monger recommended this book Charlie says over and over again never ever think about something else when you should be thinking about the power of incentives multiple times in Port Charlie Zac you see ideas just like that incentives rule everything around you never ever think about something else when you should be thinking about the power of incentives the most important rule in management is get the incentives right this is something that Monger repeated over and over again and it’s something that less understood and did a masterful job I remember telling my wife many times that if I ever got a chance to go into the business I had some ideas about sharing with people and about sponsoring people there are a lot of people who could run a business but never get a chance to do most to a lack of startup money speaking about himself right I was going to furnish the money and in some way share with them in the promotion of our business you and I are going to get to why this is so important but I want to give you an overview because it’s going to happen a little bit later on he says multiple times even at the very end he writes I think this is the third edition of the book so he’s constantly writing like every five or six years he writes like an updated like epilog and he he constantly talks about the fact throughout the book and in the updated versions that if I failed with the first story store there was never going to be a second store and if I failed with the third store there was never going to be a fifth store and if they didn’t fail with the fifth store there’s never going to be a seventh store and now I think at the end of the book they have you know hundreds of stores and so one problem he’s going to run into right away is one he buys this shop you know how many people work in that shop him one person and he does such a f fantastic job with it which we’ll get to in a minute it’s it’s crazy how how good this guy was at growing businesses but then he’s like okay well I’ll do a second shop now here’s the problem I can only be in one shop at it’s time and eventually obviously he’s going through like just visiting shops he’s no longer running them and so he’s like I need an incentive structure so these people do their best damn job possible because I can’t be there every day and that’s where he realizes hey what if I make them essentially a partnership because incentives Drive behavior and if you’re the other they start out as one person shops but eventually you know they might have seven or eight people in there whatever the case is but you’ll see how powerful that one Insight was well I was like listen I’ll just bring you in I’ll share 50% that way when I’m not there you are heavily incentivized to grow and manage the business to the best of your capabilities and so when Charlie saying hey this guy made a huge fortune in a really difficult business selling tires for God’s sake and he did it because by having shrewd systems this is one of the most important systems that he puts in place and he does it from the very beginning so let’s go back to this the first month we did $2,800 in sales I made a small profit the first month February was even less in sales but in March I started going and by June and July I was doing $10,000 or more per month in sales at years end I had $150,000 in sales the man I bought the business from did 32,000 per year in sales the year before Les is the only person in the shop and he 5x the sales the note I left myself on this page is being good at sales is like being a magician and so right away he realizes that the tire business is a bad business because there is complete collusion at this time that he’s getting started all the rubber companies are American and they dominate the entire Market and they also collude on pricing and he’s competing against the big tire companies also have their own stores and of course uh they are going to give a better price on the tires to their own stores than they give to less and so when he brings up this point to them this is what they say they called it meeting a competitive situation I called it milking the dealer of his profit and the great thing about Les is he realizes oh this is a problem and it actually produces the greatest opportunity this is one of the waves that he rides his success which we’ll go into uh a little bit later on and Charlie talks about a lot and so Les says I had to contend with this essentially this this completely dominated and colluded market right I had to contend with this until I made connections with the Toyo Tire Company from Japan I say thank God for the foreign tire supply it helped the independent Tire Dealer which is exactly what he is he’s an independent Tire Dealer and this wave he surfed to use the terminology of Charlie Monger was a massive one because the Japanese go from like 0% market share and I think within like a decade maybe even less than two decades they essentially own the entire market and so he’s got to find a way to survive and he’s like okay well if I sell new tires I’m not going to make any money there’s no profit all of his profit is coming from retreading tires and so retreading is very common especially on large truck tires and so essentially it’s taking a tire that is worn out and then removing the remaining layer of old tread and then just applying a new tread so that the tire is has fresh tread again this saves you from having to buy new tires this is where all of is profit this is going to actually Bridge the Gap this is how he’s going to be able to survive until he gets a reliable and uh better tire supply Tire supplier and toyot tire company from Japan is uh the first he’s going to diversify into other suppliers but he R definitely rides the Japanese uh Tire Trend he says it was impossible to make a reasonable profit on new tires I usually got the retreading and I could make a decent profit on that by handling the business as a oneman on a oneman basis he did the sales to service the credit the whole works I could operate very cheaply I had a theory that when like this never take advantage of a Custer customer never take advantage of an employee but take all the advantage you possibly could over a rubber company because they were not being fair and honest today in 1985 I don’t feel the same way towards rubber companies as I did 25 to 30 years ago this is a very important point right because they try to screw them they tried to put him on a business he decided to fight back so this is what he’s talking about there are much better people today today I don’t want my company to take advantage of anyone even the rubber companies but I certainly won’t apologize for anything I did in order to survive 25 to 30 years ago I proud that I had the guts to fight this goes back to this Cockiness this pride thing that’s very apparent from the from the very first page of this book I’m proud that I had the guts to fight hard enough to survive this period I feel strongly that the rubber companies were very unfair to their dealers during the early days of my tire business but really in many ways this proved to work out in our favor what is he talking about problems are just opportunities and work closeth you’re going to screw me over so bad you’re going to mistreat me so what am I’m I going to do I’m not going to sit there and take it I’m going to look for better options and he found the better option with the Japanese and then he rides that wave and he destroys the people that were trying to screw him over and he says so here the five major American rubber companies have received their just Awards as two of them have dropped dropped truck tires entirely and the other three aren’t doing very well with truck tire sales it serves them right they earned their failure so he immediately starts to expand he winds up opening a second uh store a year later it that second store also has one in employee and that employee shares in the profit and looking back 30 years later this is what he says this was a big day in my business career this was the start of the profit sharing program that we still use today but this is what I meant that he repeats something over and over again that hey if I mess up on the first store there is no second store if I wind up messing on the second store and I’m not there there’s no you know fifth store there’s no 200th store and so I have to get the incentives right from day one uh I told Frank that’s his the the first hire I told Frank that if this store was successful I plan to build build more if this store failed I would go back and just run one store there wouldn’t be the chain of Less Schwab Tire Centers that we have today if we hadn’t been successful in that second store so he’s going to open a third store in this third store he wants to be independent because the first two are actually franchises of the okay rubber welders and he’s got a contract with them and I’m telling you it’s very it’s it’s impossible uh to read this book and not love less as a person and he’s like no I’m going to be independent and I’m G to fight because I don’t think what you guys are doing are right he also has he was really um Charlie’s going to talk about this later but he thought he was an artist like he was really gifted with marketing and advertising as well so he goes to the franchise uh company and he’s like hey uh I’m going to open an independent tire store and the guy goes you you can’t do that and Les goes let’s not argue I I just want to be open about it and so he’s like you can’t do that he’s like yeah we’re not going to argue I’m just going to do this anyway like I’m not here for a discussion I’m just letting you know cuz I thought it would be the right thing to do and so he’s like all right now I got to figure out a new name and he’s like maybe I’ll just call this a tire center and then he goes but that seems too plain and then he goes well what if I just call it Les Schwab tire tire center I’ll just name it after myself and that’s exactly what he does and so then he’s like I know I have a fight so we’re just going to have to like we’re just going to have to fight about this yeah I really did have a fight now with okay they were threatening to take all my equipment away from me and cancel me as a franchise remember and this was his response when they told him that I lost my temper and I told them Hereafter I didn’t want any more harassment from them if they had anything more to say say it in court I walked the floor night so okay this is a very important uh term that he uses over and over again he he talks later on how stressful founding and then expanding the company over three decades to hundreds of stores and thousands of employees were and so many times in the book He’s sharing with us not just the winds but times where he’s almost like depressed and extremely stressed in fact he talks about everybody blew their top I think their three top Executives all had a heart attack including him and so he when he’s when he’s under stress and he’s trying to figure out what he does he says I walk the floor nights he’s walking around trying to figure out what to do and he says why he is so stressed because if they took my equipment it would have bankrupted me I was bluffing but I was determined as I think back I think the reason that they didn’t take me to court was due to the fact that if they lost it would have messed up the fr anchise Nationwide so you know you pay x amount per year to be to use uh to be a franchisee and they had 1100 franchises and so if Les could prove that they were abusing him that might apply not just to his two stores but it could jeopardize the contracts and the treatment of the other 1100 franchises that’s actually very shrewd on Les’s part and then this is just funny they keep sending him letters so it says every time they try to cancel me I would send them a registered letter back telling them that I will not accept the cancel and it winded up working like he winds up getting out of this later on but he is in a hell of a trouble at the very beginning of his career the early days were full of struggle and he describes it to you and I here the pressure on me was tremendous my largest account was way behind on payments and it worried me to no end my net worth was about the same as what they owed me if they had gone broke at that time they would have taken me out with them and the Les Schwab story would have ended there there’s a lot of Sam Walton s kind of behavior in this book I feel that Sam Walton and Les Schwab are very similar people in fact one of my favorite things that Charlie said last week in poort Charlie nomac was that fanaticism and scale combined can be very powerful fanaticism and scale combined can be very powerful think Sam Walton think Les Schwab when he says that I would call Dorothy that’s his wife and say let’s get the hell out of town for at least uh one night maybe two nights and we do just that but guess what I would usually visit other tire dealers this is exactly is exactly it’s incredible how how similar these great Founders are to each other right where Sam Walton’s kids would talk about his autobiography the fact that anytime they went on vacation they just had to accept the fact that no matter where they went dad was going to go into visit the retail stores of wherever he was and we see the same thing here and it’s during one of these trips where Les actually lays out to his wife that his initial modest goals he says like I had no idea how big this could get get I told Dorothy I was gelling on an idea for the future maybe in the future I could build six or seven or eight stores someday I knew I could buy tires better if I had the time meaning finding better suppliers which he does I knew how to advertise and promote which he does and I wanted to share with the store managers and make them successful he’s really describing what Charlie describes later as like this laa paloa effect like all these different things that Les Schwab did smart and did right over many many decades that got this nonlinear return and so the first one was hey find a better supplier ride the wave that’s your Japanese uh Tire wave knew how to advertise and promote uh Charlie says he’s an artist at that I wanted to share with the store managers that’s the incentive superpower and then the fourth part is that he was by Nature expansive if he gets to six he’s going to want to get to seven if he gets to seven he’s want to get to eight when he gets to 199 he wants to get to 200 that’s just how he is uh this is how more on how he set up the corporation in the very beginning each store operates as a separate entity and each store operates as a separate business the store employees share only in the profits of the store they work in I’m sure you already know this but just in case you don’t if you read Warren Buffett’s shareholder letters he talks about executive compensation a lot that the fact is the individual businesses that birkshire owns the person running that business is only incentivized and paid and rewarded or punished based on the performance of that individual business and not birkshire as a whole and Les takes that exact same idea or I guess he did even before burshire existed because we’re still in the early 1950s here another comparison you could make between Sam Walton and Le Schwab if you know if you studied the early days of Sam Walton’s career he winds up building uh a great franchise but he made the mistake of not owning the ground upon which he was building he was renting he was leasing his store when Sam goes to reup the guy’s like okay yeah I’m not going to release it to you winds up kicking Sam out of his store uh opening up his own essentially just copying what Sam did and then running both owning the building and running the retail shop and there’s this great um there’s a great scene in uh this is actually not in Sam Walton’s autobiography there’s another biography of Sam Walton I read uh I think it’s called Sam Walton richest man in America by this guy Nam Vance Trimble I think it’s episode 150 if I’m not mistaken but I it’s one of my favorite scenes and when I say scenes it’s like when I’m reading the book in my mind I can actually see this happening and his he Sam goes to his lawyer he’s like surely like you know this guy can’t do this this is unfair how do we get out of this and you know Sam still he’s just inexperienced he just didn’t know what he didn’t know and his lawyer is like no like that you’re screwed here this guy is going to take he’s not he doesn’t have to lease to you and he can run he can essentially just duplicate what you did here and Sam is the lawyer talks about this Sam is clenching and unclenching his fist and clenching and unclenching his fist and clenching and unclenching his fists and he says something like I’m not whipped I built up this store I can do it again and so he goes and finds another town if I’m not mistaken pretty sure that next town that he goes to is Bentonville Arkansas um so again he took problems are just opportunities and work close Okay I made that mistake that’s a big [ __ ] up on my part I won’t let it happen again and the reason I bring that up is because in his contracts when he goes and takes either takes over a store or winds up leasing uh sometimes he takes over other people’s failed tire stores sometimes he’s just leasing the location to build his own he always has he will not sign Les will not sign a contract unless he he does a five-year lease with a five-year option to buy if I’m not mistaken an he repeats that over and over again he’s like I already seen I had already seen the wisdom of owning property and I wanted a contract so that I would own it someday if I made it and then he’d also cap his downside this guy again I love I just love everything about less like the way he acts he’s very you know clear Communicator we’ll tell you exactly what’s important to him exactly how he thinks but he also is just really a business genius and so in in every contract he also would cap his downside uh he called an escape clause and he says I had an escape clause in the contract that I could turn the property back to him and not have to pay it off if the store failed and there’s just this great line that Charlie uses to describe him later on he says he was a talented fanatic and he had to get a hell of a lot of things right and keep them right with clever systems and in this next story you kind of see that oh this guy is actually understands marketing and advertising again I I know I’ve already said this but Munger said that he was an advertising and marketing artist and so you see this all of the stores are in places where it snows okay and he winds up going in to this company in California it’s called The Mohawk Rubber Company actually goes to where the manufacturing plan and he wants to watch what they’re doing and see if there’s any opportunity to like for improvement and he has a product idea that he’s going to use for a very long time so he says I was I was watching them make uh retreaded Rubber and I noticed that they use a measuring shovel to add the Walnut shells and sawdust so you could buy either uh rubber mixed with Walnut or rubber mixed with sawdust they use this in like sleep and snow and in icy conditions right they add two shovel fulls to each batch of rubber while mixing since we had such a hard time deciding which one was best Walmart or Sawdust I asked them could you put one shovel of Walnut and one shovel of sawdust they said yes I told them to make all of my tires that way unless I told them differently then I went home and I started a big advertising campaign the new rubber especially designed for the Les Schwab Company Walnut for ice sawdust for snow many people brought in their old tires and asked us to redo their tires because the new rubber sounded so good and they wanted that we use this campaign and this rubber for years and years and years the power of one idea is the fact that it’s can be valuable and long lasting for years and years and years and it took him just going to visit and paying attention and then one idea Pops to his mind and he winds up using that throughout his company multiple stores for years ideas great ideas are like magic and he’s got a lot of time to think about his business because just like Sam Walton when he’s driving through those mountain towns this is before he gets the plane uh the Cessna you know Sam’s going from store to store to store Les is doing the exact same thing on an average day in the early days Les would drive 600 miles a day going around and visiting all of his stores let’s go into more of his ideas about advertising and marketing so he writes all of the radio ads uh for his company himself and he winds up getting INSP inspired by other ads So Lucky Strike cigarettes was one of the largest tobacco producers at this time and they spent a ton of money on advertising and their tagline was lsmft that was their slogan they used it on their ads they printed it on the cigarette packs and they would hammer it over and over again and they said Lucky Strike means fine tobacco and so he heard that and he winds up telling his wife who’s next to him and I go look LS mft that means Les Schwab means means fine tires I started to use this slogan immediately and it was very effective and so he comes up with a campaign for lady drivers and he says Hey Les Schwab will change your flat and fix it for free if you’re a lady driver in our area call us we will drive to your house a friendly serviceman will come to your rescue that’s the the tagline on the ad right they’ll come to your house they’ll change and repair the flat tire for free and so this idea over time grew his business it was very very shrewd because think about it if somebody comes to your house and fixes your tire for free when it’s time to get replace those tires and to get new tires who are you going to go to this is the reciprocity tendency that Charlie talks about in his speech at the end of Port Charlie amak on the psychology of human misjudgment humans have this embedded innate and very strong desire that if you do me a favor I feel the need to repay you that person is going to the Les Schwab Tire Center and they’re going to buy their tires from them and he says I always knew that if we fixed all the flat tires in town we’d have all the tire business in town another one of his ideas that Charlie Munger loves invert always invert you and I have talked about this over and over again it pops up in a lot of these biographies very surprising that you can innovate by doing the exact opposite of your competitors and so he this is he creates the very first Tire showroom and if you go into a tire shop now this is exactly what they do they weren’t doing at this time most Tire businesses had a small showroom so what the customer see and all the tires were hidden in the warehouse my thinking was to reverse to invert to make the showroom the warehouse it would impress people and that’s exactly what he does this is the end result I had a lot more tires displayed in the showroom than any other tire dealer in the area and customers were impressed on the very next page there’s this illustration of another idea that Charlie Monger repeats over and over again understand the circle circle of your conf idence and so he says I’ve often said that I think I’m one of the very best tire dealers in America but without a doubt I probably am the worst rancher in America so he wanted to own a cattle ranch he did this multiple times he winds up doing it successfully many decades into the future but this is still early in his career and he sucks at it he’s very bad attempting to be a cattle rancher has cost me millions of dollars I would undoubtedly be three or four or $5 million richer if I never attempted to be a Rancher but really I don’t regret it this is excellent as you only go through life once and I would have hated to go through life without my cattle ranch experience another thing that’s interesting is that he was obsessed with keeping everything clean so he has this idea it’s like well if we instead of putting all the tires in the back where the customers can’t see them put them in the front it will be impressive it’ll be this this like Tire Supermarket showcase and you need he made sure that you have to clean the tires in the store where all the customers are every single day the tires on display think think about how crazy that is nobody else was doing this in his business the tires on display were clean daily and so one of the great things about this book is he does all these like memos these internal comp company memos and they’re dated and you could see what he was thinking about and there a lot of them are reprinted in the book and so I just want to read two sentences from this memo that talks about his obsession with keeping everything clean because he just was fanatical about doing the best job possible for his customers a supermarket tire store has tires displayed a clean showroom tires waxed and an appealing appearance appearance I sincerely hope I have made myself very clear about the fact that you have to this you you better clean this every day I better not walk into your store and it better if I walk into your store it better be clean and he’s driving 600 miles a day so you never know when he’s going to pop up I sincerely hope I made myself very clear I love you but I love a supermarket tire store even more in another memo he explains if you read between the lines how to get the incentives right and so he’s writing this memo to all the managers if a bright young ambitious Man Joins our company and wants to make our company his career does he do it because he likes his manager do you think that this man is going to work 10 hours per day just to help you build your store do you think that this man is going to work for low pay year after year just so that you could build your profit share contract into a nice fat Nest Egg no I don’t think so he wants to see results just like you did when you started up the ladder this man didn’t join the company because of the future of the store manager he understands that you need to appeal to interest not to R to to reason right they were all inherently self-interested he just gets it this man didn’t join the company because of the future of the store manager or for that matter the future of Les Schwab personally this man joined the company because of his future and so what he’s talking about he’s trying to get more of his store managers to he he wanted to promote from within all the time in fact one of his main directives to his companies and one of I think the main ideas he used to build such successful company was promoting from within it reminds me of the my one of my favorite quotes from Sam zuray the panana king that said there’s no problem you can’t solve if you know your business from A to Z so actually want to I’m going to pause where I’m at in this incentives and read something that Les says later on in our 34 years of business we have never hired a manager from the outside nor have we ever hired an assistant manager directly to do that job every single one of our more than 200 50 managers and assistant managers started at the bottom changing tires they have all earned their management jobs while working up and they also understand every single part of the business because they did every single part of the business another way he reminds me of Sam Walton Sam Walton had this great line in his autography when people ask like how he built Walmart he says we just got after it and then we stayed after it Les Swab would say that once you get on the ball he uses that word all all the time like you got to be on the ball that you stay on the ball and so a directive that he gives to all of his employees that’s reprinted in the book is the fact that you have to focus and you have to avoid complacency if we think there’s a free lunch if we rely on last year results then this company will turn a corner and then we too will start to go downhill and once you start down it is mighty hard to turn around if we become complacent then brother it’s all over with and one thing that he repeats throughout the book that I really love is the fact that if you do stay on the ball you’d be shocked at how bad and how especially like most businesses are poorly run and then if you’re on the ball you can beat them and so he’s realizing this because he’s dealing with all these monopolistic rubber companies and so he says as a young person I always thought that the heads of large corporations must be human calculators as I got deeper into the tire business and met many of these people I was surprised so often all they knew was the policy of the company asked them a question and the policy would flow from their mouth in a stream but they couldn’t think on their own the good people who could think and had guts had dropped out of the company long ago and went out on their own I’ve often said that we should send Goodyear Firestone and the other large rubber companies a Christmas card each year and thank them for their policies as their policies made it possible for us to be successful he’s saying your mediocrity is my opportunity and so he was looking for remember he starts out from day one it’s like I have to fix my supplier problem this is a big problem that leads to one of his greatest ideas and it’s had this idea where it’s like well at this time tire dealers were were like constrained in who they were buying their tires from right and he’s like well how does a supermarket buy groceries there’s no such thing as a Kellogg Supermarket they may carry Kellogg products if it’s the best for their customers if they get good prices if they have a good relationship with their supplier but once they don’t they just move it out and they TR and they actually substitute it for something else he’s like I’m going to do the same thing for tires I was so disgusted with the Tire suppliers I was willing to do almost anything to help my company survive in 196 6 I made a big decision I decided to go straight independent to buy tires like cway buys groceries to buy the best possible Tire good quality and at the lowest possible price this was a major move at that time and no one had tried it before the idea was to be a supermarket tire store in no way where we identified or affiliated with any individual Rubber Company let’s go back to the fact that incentives Drive Behavior one benefit one unexpected benefit of sharing profits with employees less theft from within again never ever think about something else when you should be thinking about the power of incentives uh he’s talking about the fact that they were able to expand I think at this point they have 163 stores and people would analyze this company like where all your controls and he’s like well we don’t have many controls why because the incentives are controlling Behavior Uh we didn’t have many controls the thing that held it together was that we ran each store as a separate entity as long as we made sure that every tire was build to them as long as they made sure that every Tire they sold was buil to the customer we would come out all right as long as the people were honest our contracts with the manager said another shrewd system here okay our contracts with the manager said that in case of dishonesty you forfeit all your money in the contract and so this would accumulate throughout the year after they had about 20,000 or so in the their contract it helped everyone be honest now we share with all the people in the store now this is so important he’s really describing again he he just fundamentally understands human nature if anyone employee sees another employees steal anything then they are a weak kitten if they don’t report it why because this man is stealing from them from his children if he won’t fight for his children he can’t be very much for a company as large as ours is today we have very little dishonesty every few pages he goes back and tells more stories about he feels the profit sharing he did was the most important thing he did in his entire career and he can’t multiple times in the book he’s like I don’t understand why other companies aren’t copying this and so he calls of being unselfish for good reasons I think is a good way to think about that my thinking has always been if I give away half the profits I still have half if I share $10 million with people I still have $10 million I don’t understand why businessmen don’t do this as it’s being unselfish for good reasons it helps other people and he talks about the fact that you’re helping other people succeed actually will provide you a deeper satisfaction if you just had another $10 million success in life is being a good husband it’s being a good father and then you end up being a second father to hundreds of other men and women last night I attended a wedding of a young man from our office this young man told me that two men had influenced his life his father and me that is worth more than money and he’s writing these words after he already dealt with the worst thing a human could go through which is the death of his son Les is going to be he’s going to have heart attacks he’s going to be drinks he’s he says you know by his own he’s like the doctor says I’m in bad Health what he means is I’m fat like Les talks that way the whole time but somehow he lives till he’s almost 90 if I’m not mistaken but his his his daughter is going to wind up dying of cancer at 52 and his son is going to die at 31 years old and so his son works in the business and he winds up having this accident he’s trying to fix this this truck tire and the the lock ring uh was under too much pressure and the lock ring flies up and hits him in the head and you know he’s going to be alive for a few more years after this but he was never really the same and I’m just going to read part of this to you his name his son’s name is harlon harlon stopped by the house one night really broken down maybe I was too rough on him but the only thing I could tell him was damn it I Told You So I wonder now if maybe I was too harsh on him he was defeated bankrupt broke and really down the job was too much for Harland it was too much much for harlon he was about to break down emotionally so I had no choice but to take him off the job it certainly was hard on me it made him feel he was a failure and he was drinking entirely too much Harland Schwab would have been a tremendous help had he lived a normal life he had problems though and in some ways he would have had to conquer these problems sooner or later at 2 a.m. on October 26th 1971 my doorbell rang a policeman was at the door he came in and told me that Harland was dead he had run into the back of a log truck I sometimes have thoughts that he might have done this on purpose as he was very depressed he was 31 years old Haron left his wife Jean his daughter Diana 10 years old and his son Allan 8 years old absolutely devastating and then around this time he winds up having a falling out with his partners he had given two of his Partners I think they each owned 20% of the company and they go crazy they fall out they have a falling out over money which is crazy because how small the amounts wind up they are today not realizing that you’re on this rocket ship it’s working just hold on don’t mess this up figure like talk it out there’s just something with they’re not technically co-founders of the company but you see this a lot with co-founders I think Paul Graham said the the number one breakup of in why combinator is not like external factors it’s actually uh co-founder conflict and you just see it a lot in these books I’m going to read this whole thing to you and explain to you what’s going to happen but it there when I’m reading it this time I couldn’t help but think about the the falling out that Ray Croc had with the McDonald’s brothers and they’re falling out over money and and a disagreement about like the direction of the company it’s just like you’re shooting yourself in the foot there’s this giant opportunity so few businesses actually work and get to this scale and you ruined it it’s like hard enough to start a company a successful company and then one that’s succeeding more than 99.99% of all other companies and it there’s something where we just can’t help but shoot ourselves in the foot reminds me of this there’s this lyric uh that 50 Cent talks about and he says enemies stay enemies but friends they change people go crazy over money my man and so this is exactly what happens here Norm Nelson and Don Miller these are his partners were both making tons of money but a lot of that money was not being taken out of the company they leave it in there their salary was their salary was enough to live on but the rest data in the company to be used for expansion they each owned 20% of this money but here’s what happens now they’re they’re seeing how much the company’s making now they’re the money that’s in the company that technically they have they could have access to it’s growing and growing so their their wives the people in the family is like hey you need to push Less on this we need to get the money they and their family saw all the money they were making and their wives wanted to get their hands on some of it and so they wind up having a disagreement about this and so now norm and Don wind up teaming against less so now it’s two on one but even though uh less owns way more the company owns 60% to their 20% each I soon found out that I had run into a buzz saw as both norm and Dom teamed up against me this is something I never could figure out this was one terrible mistake on their part as you can use hindsight today money has funny effects on different people especially the kind of money that these men were now making I went home and I was talking to my wife uh about nothing else that night at breakfast the next day she suggested why don’t you buy them both out you’ll get by someway something hit me I hit the table I pounded the table dishes fell off and I said that’s the best damn idea we’ve had in six months because this has been going on for six months uh in the six months that we’ve been talking about it the agreements that I had with norm and Don said that I could buy them out at Book value at any time by giving them 30 days notice and so he goes and meets his partner Don you want to swimming pool cuz they wanted like swimming pool on boats and and you know the stuff people want when they start making more money Don you wanted a swimming pool now you can have it you’re going to get $225,000 Norm you wanted your money now you’re going to get your money you get around $300,000 so he winds up buying all his Partners what’s the value of this decision to his descent his the the fifth generation that winds up selling the company that’s another thing we have to talk about I don’t want to be confuse you too much but over and over again talks about you know I want my company run this way or take my my goddamn name off it I don’t want the company to go public I don’t want to sell the company and you could do that all you want but the guy’s been dead for a long time and then I mean not even for a long time I think it was like 10 years later and they wind up selling the company there’s just this weird thing that we want like this Legacy to continue on I’ve been thinking about this my own self it’s like well is it even possible to have like this multi-generational succession plan because now they’re five generations out and they’re like oh yeah you know great great grandpa or whatever didn’t want to sell the company but this company’s offering us $3 billion uh yeah we’re going to take it so I don’t know it’s just a thought that’s in the the the back of my mind if you’re a successful entrepreneur you’re used to having control and influence and and bending the will the world to your will and yet all that is not going to exist when you’re not here anymore it’s just something to think about so anyways WS up getting it buys out 20% of the company for $300,000 and then the other 20% for $ 225 okay which just one part of their contract not including a salary or anything else they were eligible for a 5% cash bonus each year today which and when he says today that’s 1986 that they’d be making over a million dollars per year just from that 5% bonus so if they just held for another 15 years or so instead of taking the 300 Grand that day or 225 that day they’d be making a million dollars per year now why did I say that that’s very reminiscent of this disagreement that Ray Croc had with the McDonald Brothers they have this huge fight it’s in the book grinding it out which I’ve made two podcasts on the last time I made an episode on that was like 293 it was earlier this year Ray Croc winds up buying out uh the McDonald’s brothers and it cost him 14 million and a bunch of Interest or whatever right and at the time it was a lot of money but now he’s looking back many maybe like two decades after and he’s like oh this is peanuts because their contract said that they would have if they would have stuck around they would get half of a percent of all sales in every single McDonald’s anywhere now in the future and so even though he’s I think he’s I think Ray Crock is writing that book what that book is probably written in the 70s who knows what it be worth today but if they had just held on instead of taking so I think it was 12 million to the McDonald’s Brothers I think they had to pay like two million in transaction costs or interest something like that but let let’s say they the McDonald’s brothers made 12 million one time if they just held on they would be making at that time that Ray Croc produced uh published a book $15 million in royalties every year and that’s not you’re you’re not going to work for that money you’re not going to the office you’re not working in a McDonald’s store it’s just $15 million this year and as it grows 16 million the next year 25 million five years from now and just goes on and on and on so again people just go crazy they go nuts money has funny effects on different people and it can cause you to make a terrible terrible financial decision and now that I’m thinking about it let me look for it uh something just popped in my mind I’m going to search my readwise uh there is I’m doing this while I’m talking to you there is a line yep found it okay uh this is nuts okay so I just thought about another like investor founder partner conflict Henry Ford one of his investors invested $10,000 they wind up having uh this huge falling out now think about think about owning a part of the Ford Motor Company right pre Model T okay so this guy I’m just going to read this I’m like excited and I think I’ve had too much caffeine today let me just read this to you he got $175,000 hardly a bad this is Henry Ford speaking now okay he got $175,000 hardly a bad return on an investment of $10,000 three years earlier so that’s great you invested $10,000 three years later you get you you you push this issue to get your money out and you got 175,000 you did great right but if he’d stuck it out for a decade longer he would have gotten a100 million that is bananas 10,000 into 100 million in 13 years and instead you took the $175,000 let’s go back to his Partners another thing that he repeats over and over again life is hard there’s no digital version of this book to search through but if it if it if there was life is hard is probably the thing that repeats the most life is hard but again it turned out to be the the best thing that could have ever happened to the company greed was entering into the company and greed destroys their interest today day would be worth around $112 million each so again their eony interest would be worth 12 million in 1985 when the book came out their annual bonus would be another million on top of that now this is bananas right because at the time when they did this when they pushed the issue the company was only doing 10 million in sales uh the I think this is 1967 if I’m not mistaken okay 1969 sorry okay so 1967 they’re doing 10 million that’s great 1985 they’re doing 180 million in 2018 they did $1.8 billion they could have still been alive and had 20% of that company and instead they sold it for two their interest for $225,000 so they could buy a swimming pool incredible this is why I love biographies there’s just so many lessons and you can like hopefully it hit you in the head or excuse me hit you in the heart but you know that takes place over like you know three four pages it’s just absolutely incredible and then it just makes you think of all the other biographies and maybe other episodes of Founders that you’ve listened to you can kind of tie it all together and really I think makes it uh resonate much more than just a list of facts now another example I hate to keep doing this but I’m telling you man Sam Walton and Les Schwab are very similar people so Sam Walton is autobiography says if you are not serving the customer or supporting the folks who do we do not need you this dude Les is constantly railing against office people even though he’s an office person he’s like the store people are the only ones that are important we have had over the years some people in the office that sometimes think that they are more important than the stores the office serves only one purpose and that is to serve the stores the office and accounting people can only tell the stores what they have done if the store manager runs his store right he doesn’t have to spend hours and hours looking at the office reports if he’s doing okay the records will show it in fact if he spends too much time in his office reading the mail or looking at reports it is a sure thing that his store will suffer sell tires give service keep expenses low watch for leaks do these things and you’ll come out all right our store managers make more than our office people some of our office people especially some with these MBA degrees sometimes wonder about this but I’ve warned them do not [ __ ] to me because that is the way I want it if you want to go out start at the bottom changing tires and work into a manager job then hop to it if it weren’t for those men in these stores working their butts off in all kinds of weather missing meals and and working God awful hours you wouldn’t even have a job and so that’s something that Les repeats get out of your goddamn office says it over and over again like stop getting in your office Reading reports go out and help the customers serve the stores and then once you’re out of your office you need to stay out of your office and he continues this line of thinking again I could help another store manager more in one hour than a professional type management person could in a week why because I had the same problems he had done the job right uh the professional type management loses out and it doesn’t take long if you stay out of a store for 30 days you’ve forgotten 50% of what you should know and when I read that I thought of this pianist quote that uh let me go find the book I got to pick up Port Charlie’s omac now and Charlie uses this idea or this story this quick story to illustrate an idea he talks about like once you have the skill set you have to constantly use them or or you’re going to lose them and he says skills of a very high order can be maintained only with daily practice this famous pianist once said that if he failed to practice for a single day he could notice his performance deterioration and then after a week’s Gap in practice the audience could notice it as well Les Schwab’s version of that is if you stay out of a store for 30 days you forgotten 50% of what you know and so then Les tells a story about how he wind up winning this competition with what he thought might be a formidable formidable adversary this this Nelson tire warehouses and they made a mistake so he constantly talk about hey you need to have a lowc cost structure you need to watch your costs of course he did but he didn’t feel that way about wages he thought you should pay the highest wages possible because the higher wages you pay the better quality employee you get the better quality employee you get the more the happier customers will be and so there’s all these like second and third order effects that the people that just cut salaries and think about Cal salaries and wages as a part of their cost NE like never realize and it wind up dooming them and so it says if Neil made a major mistake and he must have because he went bankrupt it was in moving too fast but he had me concerned for quite a period of time uh they were springing up all over Oregon and he got up to 24 stores and so he talks about they did really good in advertising they did good at holding down costs but the one mistake they did was that they paid low wages and the flaw here this is Les talking the flaw here was that they didn’t get with that low pay near the quality of employees that we had and this is the most important part as he’s going through and like having this competition head- onhe head he’s like oh like did I make a mistake here like should I be doing what he’s doing and so he says after thinking about this for a year or so and wondering if I shouldn’t cut wages and benefits I finally made a decision and that decision was if I couldn’t be proud of my company if I couldn’t pay good wages if I couldn’t have good benefits and if I couldn’t have the best employees then why would I want to stay in business so we did nothing and we won the customer liked us best life is hard this is his summary this is his summary on the Neil Ty Neil Neil TI warehouse and what doomed them life is hard for the man who thinks he can take a shortcut and so this is a interesting historical fact buried in this very hard to find book that a lot of people have not read so you know KKR uh I think it’s like Colberg kvis Robertson company I think they have like a trillion dollars under asset Center management it’s like one of the biggest investment compan companies in the world if I’m not mistaken well back this is now what 40 years ago he’s actually interacting with a bunch of like the partners and the reason is I need to bring this up because I mentioned this earlier how like he could say hey it’s going to stay in the family business it’s never going to be for sale but once you die you really you know don’t have uh a lot of say in this and so he talks about over and over again the company is in for sale all the stock will remain in the family he wind up turning down Buffett earlier in his career he winds up turning down Michel and tire uh they wanted to buy the company and turns out KKR tried to buy the company as well and this would have been shortly after KKR was founded uh because KKR was founded in 1976 I’m so glad I resisted the urge to have our stock on the market I don’t want a few investors around the country club asking about our business and questioning some of our decisions they might even ask how come some of those store managers make so much money why they why do they make as much as I do and I have a college degree I’d probably lose a customer as my answer would be he is worth twice as much as you and he has a degree too he learned how to be a businessman I’d probably add he also learned how to work something you never did learn there’s another company that wanted to buy him and uh he want a meeting with the guy he takes the calls just for fun this company was headed by a man in his 70s who had made a fortune by buying up privately held companies and letting the present management run them how many people have used that idea successfully buying up privately held company and letting the present management run them I told them that I didn’t want to sell the KKR people also contacted me and I spent a day with them I was more Curious than anything everyone knows about KKR they have bought companies out in the billions they are nice people and if I truly wanted to get out I would consider them as they have a good reputation with how to handle the companies and employees after they buy it and so this is causing him to think about like succession plans and what’s going to happen and he’s very concerned because he says I’ve seen companies fail and go downhill and they dis and sometimes they disappear entirely after the founder retires or dies I hope this doesn’t happen with our company where we are in this point Les already had way more money he ever needed he could have retired 15 years ago I could come out with an as he’s talking about selling the company I could come out with an AST astronomical bundle of money if I sold the company but what would I do with it what good is money Beyond a certain point I think the biggest M misconception about public has about a successful businessman is that he’s working for more money you won’t find many truly successful ones that are only working for money success in my mind they obviously like the money he’s not saying that right success in my mind comes from having a successful business one that is a good place to work one that offers opportunity for people and one that you can be proud of to own and he goes right back into the fact that incentives Drive behavior and he’s very proud of what he’s done it is very rewarding to create a program and watch it work there’s something in our program that makes a man that’s several hundred miles from the main office be at his store at 7 :30 and then sometimes have to stay till 9:00 p.m. if needed it’s not a big thick policy book it’s not a lot of Supervisors which he doesn’t have it’s something that our programs created in him right in his heart he continues on this and he feels that most companies put the emphasis on the wrong part we are different from most American corporations as we think the most important people in the company are the people on the firing line the ones who sell the ones who do service work and take care of the customer most American corporations have the fat salaries and outrageous bonuses for the top people and treat the people at the end of the line as peons I guess that is why if you’re on the ball you can beat them on any type of fair competitive basis and he practices what he preaches the warehouse executive people should be very happy that the store managers make good money they make more money anybody else in the company as it helps them if jealousy ever Creeps in goodbye Less Schwab company we have great people and this won’t happen as long as I’m alive I’ll kill them if it does again fanaticism and scale combined can be very powerful they’ll find out that life is hard and you put life is hard in caps it’s almost like his model life is hard and then he continues on this theme over many many pages about the importance of taking care of the store if you take care of the customer take care of the store then the office is automatically taken care of there’s this great line I need to do her uh biography Mary Kay the one uh she’s the founder of Mary Kay cosmetics she has one of the best in terms of like um How to Win Friends and Influence People if you want to think about in those terms she’s one of the best best lines I’ve ever heard she says that Mary Kay said that everyone goes through life with an invisible sign hanging around their neck that says make me feel special this can be applied to customers but it can also be applied to your employees this is what Les says most men are starved for personal recognition any boss who unknowingly or otherwise destroys an employees self-esteem also destroys the employe truly work to make this man a successful man and then you have done something great great for the man and great for you Les believed in building up and empowering something he repeats over and over again keep your decision making as low as possible keep decision- making lower a company starts it grows and as it grows more and more of the decision- making tends to move up to the main office and this is one hell of a big mistake the decision- making should be always be made at the lowest possible level give your manager the authority to make his own daily decisions and let him run his show keep your decision- making at the lowest possible level and then I want to close on this book before we get to Charlie’s analysis of this book I love what he talks about here keep the main thing the main thing focus on doing the job to your best for Ability today that gets you to tomorrow and then continue that process over a long career and you’ll be surprised where you end up so he’s looking back and talking about if he didn’t do the day-to-day things correctly they would have never got this far most companies that have grown large must have had as many of the same problems that we’ve had I think I think many times of the many things that have happened that could have stopped us from growing if Frank had failed with that store in redond this is when they expanded the second store if the large commercial account I had that owed me so much money had gone broke at the wrong time if I hadn’t won my fight with the okay franchise if the foreign tires hadn’t been available to us if I had not been able to get through the period of the blowup between my partners and me if any of my first five or six stores had failed if I hadn’t gotten out of ran Ing and got my mind on my business and the many many many more ways that could have stopped the growth of the Les Schwab company The Parting advice that he has reminds me of one of my favorite Edwin L quotes Edwin L said there’s a rule that they don’t teach you at Harvard Business School it is if anything is worth doing it’s worth doing to excess the Less Schwab version of that looking back on his career he says whatever you do you must do it with gusto you must do it in volume it is a case of repeat repeat repeat and so with that I pick up poor Charlie omac I go to talk number nine and that is where Charlie analyzes the book that you and I just went over and so he says now I’ll give you a hard problem there’s a tire store chain in the Northwest that has slowly succeeded over 50 years it’s the Less Schwab Tire Store chain it just ground ahead it started competing with the stores that were owned by the big tire companies that made all the tires like the good years and so forth and of course the manufacturer favored their own stores and those stores had a big cost Advantage later Le Schwab Rose in competition with the huge price Discounters like Costco and Sam’s Club and before that he competed against Sears and yet here is Schwab now with hundreds of millions of dollars in sales and Schwab is in his 80s with no education having done the whole thing how did he do it and so this is where Charlie’s going to analyze how he did it and so he says let’s think about this with some microeconomic fluency is there some wave that Schwab could have caught so if you listen to last week this is something that Charlie talks about over and over again his his surfing model if you get at the beginning of something and it’s working and you’re riding the wave stay on the surfboard he’s like you would be shocked at how you just stay on the surfboard it’s going to take you a long way a lot of people jump off right and they get mired in the shallows that’s what Charlie says and so he says was there some wave that shaab could have caught the minute you ask the question and the answer pops in the Japanese had a zero position in tires in America right zero and they got huge so this guy must have ridden that wave in the early times but his slow following success has to have other causes and so this is where he goes into this laala paloa result that Les gets this is something that Charlie was intensely interested in he would collect a bunch of instances he would constantly read about this and so he says and that’s probably what happened here this guy did a hell of a lot of things right and among among the things that he did right is he must have harnessed the superpower of incentives he had a very clever incentive structure driving his people which again is why Munger said at the annual meeting you should buy the book you’re managing people just read it just for his incentive structure there’s a bunch in the book and he must be pretty good at advertising which he is he’s an artist so he had to get a wave in the Japanese Tire Invasion and then a talented fanatic had to get a hell of a lot things right and keep them right with clever systems again it is not that hard of an answer we hire business school graduates and they’re no better at these problems than you were maybe that’s the reason we hire so few of them well how did I solve this problem obviously I was using a simple search engine in my mind to go through checklist style and I was using some rough algorithms that work pretty well in a great many complex systems and those algorithms run something like this and so he’s saying this applied to leua but it also applies to a lot of these other super successful companies and he gives uh four factors here he says extreme success is likely to be caused by some combination of the following factors number one extreme maximization or minimization of one or two variables number two adding success factors so that a bigger combination drives success often in a nonlinear fashion as one is reminded by the concept of breakpoint and the concept of critical mass in physics often these results are not linear you get a little bit more mass and you get a laa paloa result and of course I’ve been searching for La La paloa results all my life so I’m very interested in models that explain their occurrence and so Charlie’s also explaining not just lashwab he uses Costco as a uh as an illustration of this point Toyota is an illustration of this point and Oracle some just some of them but he mentions many more in Port I’m number an extreme of good performance over many factors that is right jumps right out of the book If you read the lwwa book and finally four catching and writing some sort of wave so that is where I’ll leave it highly recommend that you if you can get a copy they’re very hard to get again limited there’s only 20,000 I think in the entire world if you can get a copy of the book highly recommend you do so it’s fascinating and it doesn’t really matter what order you do this in you could read the lesw book first and then read Charlie’s analysis because I I read this book for the for for the first time four years ago but then I read poort charlies’s last week I’m like oh [ __ ] like I should go back and revisit Le Schwab and then reading his analysis and then reading the book was really cool and then going back to his analysis after I think really adds to it so anyways in any case I will leave the links down below for both those books and if you buy them using that link you’ll be supporting the podcast at the same time that is 300 and 30 books down 1,000 to go and I’ll talk to you again soon okay so what you’re about to hear is this question I was asked a few months ago I actually recorded this a few months ago they asked how did History’s Greatest entrepreneurs think about hiring all the answers people think I have a better memory than I than I actually do you know if people say oh David you have a great memory my wife would laugh at that because I forget things all the time it’s not to have a good memory it’s I reread things over and over and over again every single answer every single reference you’re about to hear in this 20 minute mini episode came from me searching all of my notes and highlights that option is now available to you if you like what you hear if you think it’s valuable if you’re already running a successful company and you want an easy way to reference the ideas of History’s Greatest entrepreneurs in a searchable database that you can go through at your convenience anytime you want then you go to Founders notes.com and sign up I want to start out first with why this is so important there’s actually this book that came out in like 1997 it’s a called in the company of giants I think it’s episode 208 of founders it’s two Stanford MBA students if I remember correctly and they’re interviewing a bunch of technology company Founders and in there Steve Jobs is one of them this is you know right I think even before he came back to Apple and they were talking about well yeah we know it’s important to hire but in a typical startup a manager or a Founder may not always have time to spend recruiting other people and I I first read this this Steve’s answer to this you know I don’t know two years ago and I never forgot it I think it’s excellent I think it sets up why why uh this question is so important and you should really be spending especially in the early days like basically all your time doing this uh in a typical startup manager may not always have the time to spend recruiting other people then Steve jumps in I disagree totally I think it’s the most important job assume you’re by yourself in a startup and you want a partner you take a lot of time finding a partner right he would be half of your company I’m going to pause there this idea of looking at each new hire as a percentage of the company is genius why should you take any less time finding a third or fourth of your company or a fifth of your company when you’re in a startup the first 10 people will determine whether the company succeeds or not each is 10% of the company so why wouldn’t you take as much time as necessary to find all a players if three three out of the 10 uh were not so great why would you start a company where 30% of your people are not so great a small company depends on great people much more than a big company does okay so to answer this question the advantage that um that I have making Founders and that you have as as a byproduct of listenting to Founders is not only that I’ve read you know 300 something biographies of entrepreneurs now but I have all of my notes and highlights stored in my readwise app and that means I can search for any topic I can look at the past highlights of books or I can search for keywords so what I did is first of all like what I’ve started to do with these AMA um questions is I read them decide which ones I’m going to do next and then think about it for a few days I don’t put any just literally that that I know that’s the next question just let my brain work on it in the background for a few days and then I’ll go through and start searching all my notes and so that’s what I did here and so there’s a bunch of you know I don’t have I may have like 10 or 15 different Founders talking about hiring the first idea is the most obvious but I think probably works best when you’re already established so Steve Jobs is talking about hey you know great way to to is just find great work and find the people that did that and then try to hire them when you’re Steve Jobs that’s a lot easier right than if you’re just somebody doesn’t have reputation maybe you don’t have resources maybe your company’s rather new or not as well known David ogy I just did confessions of an advertising man a couple episodes ago I think 306 or something like that 307 and he did the same thing but he’s David olvy at that point so he would find he’d go through magazines find great advertising great copyrighting and he’d write the person a letter and then set up a phone call and he says he wouldn’t he was so wellknown and you know he’s one of the best in his field that he wouldn’t even have to offer a job just the conversation then the person would the he would want to hire the person never mention it and the person would apply to him um and so again I think if you can do that then of course that’s straightforward who find for somebody does great work usually you can do this I actually have a friend I can’t say who it is he’s doing this right now actually um I have a friend that’s really good at doing this he’s finding people that do great stuff on the internet and then just cold cold dming them and then getting convincing them to work on things and that usually works especially with people like younger people earlier in their career there’s a bunch of different ways to think about this in a bunch of different ways to prioritize so the first thing that that that came to mind that I found surprising is you read any biography on Rockefeller and he had a couple ideas where he felt the optimization you know table Stakes that you’re intelligent and you’re driven and you’re hardworking right we don’t even have like if you’re listening to this you already know that but he prioritized hiring people with social skills and so this is what he said the ability to deal with people is as purchasable a commodity as sugar or coffee and I pay for I pay more for that ability than any other Under the Sun there’s the two the second part to this though and this is also works well if you have access to more resources you Rockefeller would hire people as he found as he found talented people not as he needed them it’s not like okay standard oil has six open spots let’s go find six candidates right he’d come across what he considered a talented person he didn’t even matter if he didn’t know what they were going to do he’s like I’m just going to stack his team and if you really think about the his Partners at standard oril he essentially built a company an executive team of founders of because he was buying up all their companies so it’s very rare but um there’s a line from Titan I want to read to taking for granted the the growth of his Empire he hired talented people as found not as needed and then I found another idea in the hiring like the actual interview process so there’s this guy named Van ever Bush I did two episodes on him I think it’s 270 and 271 he is the most important American ever uh in history uh in terms of connecting the scientific field private Enterprise and the government the most important person to keep alive for the American war effort was FDR the second one was vaniver bush vaniver bush is like the Forest Gump of this historical period he is involved in everything from the Manhattan Project to discovering like a young Claude Shannon to building a mechanical computer like this guy literally has done he’s just he pops up in these books over and over again if you were reading about American Business history during World War II and post World War II you are going to come across the name vanever Bush over and over again uh I read his fantastic autobiography called pieces of the action and I came across this weird highlight and so this is his brilliant and unusual job interview process and so he’s talking about this organization he’s running called amrad at amrad I hired a young physicist from Texas named CG Smith the way I hired him is interesting an interview of that sort is always likely to be on on an artificial basis and somewhat embarrassing so I discussed with him a technical point on which I was then genuinely puzzled the next day he came in with a with a neat solution and I hired him at once here’s another idea this is from Nolan Bushnell Nolan Bushnell is the founder of Atari founder of Chuck e- shees and Steve Jobs Mentor he hired Steve Jobs when Steve Jobs was like 19 at Atari he would ask people their reading habits in interviews this is why uh one of the best ways his whole thing was he wanted to build a all of his companies laid on a foundation of creative people so that’s what he’s looking for he’s like I need creative people one of the best ways to find creative people is to ask a simple question what books do you like I’ve never met a creative person in my life that didn’t respond with enthusiasm to a question about reading habits actually with which books people read is not as important as the simple fact that they read it all I’ve known many talented Engineers who hated science fiction but loved say books on bird watching a blatant but often accurate generalization people who are curious and passionate read people who are apathetic and a different don’t I remember that’s such a great line and I obviously agree with it I remember one I’m going to read it again a blatant but often accurate generalization people who are curious and passionate read people who are apathetic and indifferent don’t I remember one particular woman who during an interview told me that she had read every book that I had read so I started mentioning books I hadn’t read and she had read those too I didn’t know how someone in her late 20s found that time this much time to read so much but I was impressed I was so impressed that I hired her right there and assigned her to International marketing which was having problems this is why this is why I’m reading this whole section to you a job with a lot of moving Parts benefits from a brain that has a lot of moving Parts it wouldn’t be possible to have read that many books books without such a brain so do you see what I mean like we start with Steve Job saying this is the most important thing that you your role as the leader the company the founder do right and you are and it’s so important to study and this is why I’m glad this this question exists and why I’m glad that I’ve I took the time and I had like the foresight to like hey I should really organize my thoughts and notes because there’s no way I would have remembered all this without being being able to search my readwise right but you have Rockefeller saying this is what’s important to me you have Bush saying this is I hire now you have Nolan Bush now saying well here’s another weird thing that I learned um let me go through what Warren Buffett says about this so this is about the quality one thing that is consistent whether it’s jobs Buffett Bezos uh Peter teal this just pops up over and over again they talk about the importance of trying to find people that that are better than you the the hiring bar constantly has to increase now obviously the larger the company gets that’s impossible uh Steve Jobs has this great quote where he’s like you know Pixar was the first time I see saw an entire team entire company of eight players but they had 400 player they had 400 team members he’s like at the time Apple had 3,000 it’s like it’s impossible to have 3,000 a players so there is some number that your company May grow to where it’s just you’re just not you’re not going to have thousands of a players in my argument I don’t even know if you get a 400 I guess you I mean I’ll take Steve’s word for it on there and Pixar definitely produce great products but it’s probably a lot lower than that as well so Warren Buffett would tell you to use David ol’s hiring philosophy and so Warren said Charlie and I know that the right players will make almost any team manager look good again that is why it’s the most important function of the founder maybe directly next to the product or right above the product actually because those are people building your product we subscribe to the philosophy of ogy and Ma’s founding genius David ogy this is what ogy said if each of us hires people who are small smaller than we are we should become a company of dwarfs but if each of us hires people who are bigger than we are we shall become a company of giants David or Jeff Bezos rather used A variation of AG’s idea too Jeff used to say in Amazon every time we hire someone he or she should raise the bar for the next higher so that the overall talent pool is always improving and they talk about this idea on Amazon where the the the future hires that we do should be so good that if you had applied for the job you already have an Amazon you wouldn’t get in that’s a very interesting idea take your time with recruiting take your time with hiring there’s a great book on the history of PayPal it’s written by actually I’ve recently become friends with the author his name is Jimmy Sony um and this is in his book The the most fascinating thing that I found was that PayPal prioritized speed so from the time they they’re founded to the time they sell to eBay it’s like four years Jimmy spent more time researching the book than than four he spent six years researching book I always tease them because like you took longer on a book than they took to start and sell their company it just speaks to like the quality he’s trying to do but that as a byproduct of that like obviously they move fast but they prioritize speed over everything else except in one area recruiting Max lechin kept a bar for talent exceedingly High even if that came at the expense of Speedy SAA Staffing Max kept repeating A’s hire A’s B’s hire C’s so the first B you hire takes the whole company down let’s read that again a players hire a players b players hire C players so the first B player you hire takes the whole company down uh addition the team the company leaders mandated that all prospects here’s another idea for you all prospects must meet every single member of the team now the next one is the most bizarre it makes sense if you study I did this three-part on Larry Ellison three-part series on Larry Ellison I should read those books again because the podcast is like 50 times bigger than than when I uh publish those episodes and he’s just he’s just crazy so he would hire based on the confidence the self-confidence level of of the candidate listen to this I have tears in my eyes I don’t know why I’m laughing okay this just so because this is you read about Larry Ellison and he’s one of these people it’s like really easy to interface with because you just you just know exactly who he is and what’s important to him that’s why I think it’s so funny Ellison insisted that his recruiters hire only the finest and cockiest new college graduates when they were recruiting from universities they’d ask people are you the smartest person you know and if they said yes they would hire them if they said no they would say who is and they would go hire that guy instead I don’t know if you got the smartest people that way but you definitely got the most arrogant Elison and this is why the personality of the founder is largely the culture of the company Apple is Steve Jobs Apple’s just Steve Jobs with 10,000 lives right I was just texting a a Founder friend of mine uh he listens to the podcast I actually met him through the podcast and he’s going through this like uh process of self-discovery like he’s already started a bunch of companies are really successful but he’s like I think I’m more of this type of founder than the other type of founder and that’s good that he’s doing that because he’s he’s hopefully his next mission is like his life’s Mission you know and you can’t get to your life’s mission unless you you figured out who you are Ellison knew who he was Ellison’s swaggering combative style became a part of the company’s identity this arrogant culture had a lot to do with oracle’s success here’s another odd idea for you Izzy sharp the founder of Four Seasons actually could figure it out that in his business which was hotels right that hiring could hir the right person could actually be a form of distribution for his hotel he gave me the idea because of what what do we know what do you and I know in our bones that History’s Greatest Founders All read biographies they all read biographies of people that came before them and took ideas from them Izzy sharp is trying to build Four Seasons what do you think he did he picked up a biography of Cesar Ritz the guy that Ritz Carlton is named after the great arguably the greatest Hotel of all time and when he realized oh [ __ ] Ritz he he says uh remembering that that Caesar Ritz made his hotels World Famous by hiring some of the foremost chefs we decided to do something similar so what is he talking about Caesar Ritz went out and partnered with August escoffier what Caesar Ritz was to hotel to building hotels August escoffier was to French cooking and so what happened is you partner with world famous chefs people come into your restaurant that’s in the hotel because the world famous chef and now they know about your hotel that leads to more G that me leads to more activity in your restaurant that you own but also leads to more brand recognition of your hotel and then by as a byproduct that more people staying at the hotel so hiring as a form of distribution this is fascinating that is a fascinating idea okay here’s a problem you can identify great people right maybe they even want to come work like you’ve identified them you’ve sold them hey this is what this is our mission this is what we’re we’re doing and yet humans have complicated lives they have spouses they have kids they have a reason maybe they can’t move across the country to work for you even though they want to so there’s a problem solving element that you see in these books on you have to solve like you’ve already identified the person you’ve recruited them they can’t go for some other reason okay well the great Founders are not going to take no for an answer I read in um in this book called liftoff which is about the first six years of SpaceX this is what Elon mus did they had an anticipated his friend’s issue having convinced mus they needed to bring This brilliant young engineer from Turkey on board it became a matter of solving the problem his wife had a job in San Francisco she would need one in Los Angeles right because that’s where SpaceX is at the time there these were solvable problems and elon’s better at solving problems than almost anyone else mus therefore came into his job interview prepared about halfway through mus told the guy that he wants to hire so I heard you don’t want to move to LA and one of the reasons is that your wife works for Google well I just talked to Larry and they’re going to transfer your wife down to La so what are you going to do now to solve this problem musk had called his friend Larry Page the co-founder of Google the engineer sat and stunned silence for a moment but then he replied given all that he would come to work at SpaceX that’s really smart there is another idea when you’re promoting are you going to promote from within or from without you know that’s dependent on you depending on what’s going on I do think this is interesting though there’s this guy named Les Schwab who built this this really uh valuable chain of uh like tire companies in the Pacific Northwest I actually found out about him because Charlie Monger is like hey you should read this biography he said it in um he didn’t say to me personally he said it to uh in like one of the Burkshire meetings that to study leab had one of the most uh one of the smartest uh Financial incentive structures of any company that that Charlie merer had come across so this is what Les Schwab did he did not want to hire from he didn’t want to hire other people from other companies because they might come with bad habits he liked to train his own Executives and so he says in our 34 years of business we have never hired a manager from the outside every single one of our more than 250 managers ERS and assistant managers started at the bottom changing tires they have all earned their management job by working up and then another thing if you’re going to hire the best of the best in a players they a players don’t like to be micromanaged um and so this came in Larry Miller’s autobiography called driven he owns like he owned like 93 companies all throughout Utah car dealerships movie theaters all kinds of crazy stuff but he also owned the the the NBA team Utah Jazz and what was fascinating is he’s trying to recruit Jerry Sloan as the coach at the at the point and Jerry Sloan would only take the job on one condition and I really like it I really like this idea if you hire me let me run the team in business right that’s what you’re hiring me for one of the best things we had ever done was hire Jerry Sloan’s coach at the time he said I’m only going to ask you for one thing if I get fired let me get fired for my own decisions if you hire me let me run the team SL business here’s another idea from Thomas ell Edison that I think is fascinating really I the way I think about a Founder is like developing skills that you can’t hire for you you’re going to hire for everything else but you shouldn’t be hirable and Edison wasn’t Edison expressing his views on the preeminent role of Applied scientists which that’s what he considered himself coined the expression I can hire mathematicians but they can’t hire me and so when I read that paragraph for the first time the note I left myself was develop skills that you can’t hire for capitalism rewards things that are both rare and valuable uh Estee Lauder would give you advice that you need to hire people align with your thinking and values hire the best people this is vital hire people who think as you do and treat them well in our business they are top a top priority so this idea is like that seems kind of weird like hire people who think like you there’s obviously not one right way to build a business I think that your business should be an expression of your personality and who you are who are as a person at the core and so I think there is an art to the building of your business and the reason I use the word art I don’t mean in like a hoyy toyy you know pretentious manner that’s not me at all I don’t even care about I don’t art at all really I mean that you’re making decisions not just based on economics like there are non-economic important decisions based on how you’re building your business like you could probably make more money doing a decision a but decision a is goes against who you are as a person or you just don’t like it or it’s just not as elegant or beautiful and so therefore you don’t do it so that’s what I mean about you know higher people who think as you you do and what for whatever reason when I read essay L her say that I was like okay that there’s like this art to what she’s doing one thing that’s going to be helpful in recruiting uh this comes from Peter teal I think this is the book 0 to one understand that most companies don’t even differentiate their pitches to potential recruits and hiring so therefore like they’re just going to by as a byproduct of that you’re going to wind up with a lower overall Talent base and so he says what’s wrong with valuable stock smart people are pressing problems nothing but every company makes this these claims so they won’t help you stand out General and undiff at pitches to join your company don’t say anything about why a recruit should join your company instead of money instead of many others so that ideas like your pitch your actual he would tell you you’re you shouldn’t be building undifferentiated commodity business but even above and beyond that like you’re the the the mission that you’re trying to engage everybody to join you in that pitch that sale sale you’re trying to make to potential recruit should be differentiated should not if that person’s applying to five other jobs there should not be like it’s like they may not like your mission and they may not like your pitch but they shouldn’t be able to compare it to anything else uh another quote from Nolan Bushnell hire for passion and intensity that’s what he would do or that’s what he did when he found Steve Jobs if there was a single characteristic that separates Steve Jobs from the mass of employees it was his passionate enthusiasm Steve had one full one speed full blast this was the primary reason we hired him and one thing all these Founders have in common is that they know how important hiring is and when something’s important you do it yourself this is again Elon Musk on hiring he interviewed the first 3,000 employees at SpaceX that’s how important it was one of musk’s most valuable skills was his ability to determine whether someone would fit his mold his people had to be brilliant they had to be hardworking and there could be No Nonsense there are a ton of phonies out there and not many who are the real deal must said of his approach to interviewing Engineers I can usually tell within 15 minutes and I can sure I can for sure tell within a few days of working with them musk made hiring a priority he personally met with every single person the company hired through the first 3,000 employees it required late nights and weekends but he felt it was important to get the right people for his company and then the close on this we started with Steve Jobs telling us why it was so important and why it should be a large part of how you spend your time and now we’ll close with what you do after what do you do after you hire the person this what he says it’s not just recruiting after recruiting it’s building an environment that makes people feel they are surrounded by equally talented people and their work is bigger than they are the feeling that their work will have a tremendous influ fluence and is part of a strong Clear Vision so that is the end to that 20-minute mini episode I just Rel listen to the whole thing and it it really does I think it’s a perfect explanation and illustration of why I think Founders notes is so valuable because that some of those books I haven’t read in five six years and just the ability to have a searchable database of all this these ideas like this collected knowledge of some of past’s greatest entrepreneurs to reference and then contextually apply to our own business is it’s nothing short of like it’s magic that’s really the way I think about it I think it’s a massive superpower gives me a massive superpower I couldn’t have make the podcast without it I also think if you have access to it it will make your business better and so if you’re already running a successful business I highly recommend that you invest in a subscription and you can do that by going to Founders notes.com