David SenraBack in 2019, one of the co-founders of my favorite app,the best app I pay for,I literally could not make the podcast without it,is called ReadWise.I've been talking about it for years,I've been tweeting about it for years,every single other interviewon other people's podcasts I go on, I talk about this,and I did this way before I knew I was gonna partnerwith them on my own product.So I built this product with ReadWise.It's called Founders Notes.You can see it at foundersnotes.com,and it's founders with an S, just like the podcast,so foundersnotes.com.I got a DM from Tristan in 2019,and he was the one that made me aware of ReadWise.It was perfect.And the reason it was perfect is becauseI have way more highlights and noteson my books than most people do.So I have over 20,000, over the years,I've added over 20,000 highlights and notesfor all the books that I read for the podcastto the ReadWise app.And so, and the reason I do that is becauseI'm able to search everything that I've ever done.I use this every day, I search it every day.It really is the world's most valuable notebookfor founders.So I contacted the founders of ReadWise and said,hey, can we do this?Can we actually do this project together?I wanna make my own version.I want people to have access to everything that I see.Literally, if you sign up at foundersnotes.com,you are able to search and see every single oneof my highlights and notes.It's exactly what I see.And so as an illustration of just one of the waysthat I use this is at the end of this episode,I'm gonna include this 20-minute episode I madewhere somebody asked me, like,how did history's greatest entrepreneursthink about hiring?And anytime I'm asked a question like that,anytime I'm making a podcast,what I do is I'm constantly searching my ReadWise app,which is now available at foundersnotes.com,and just, it gives me a complete listof all the different waysthat history's greatest founders have thought aboutwhatever subject I happen to be thinking aboutor working on or investigating.So at the very end of this episode,you're gonna hear me speak for 20 minutes,and it's answering the question,how did history's greatest entrepreneursthink about hiring?And all that information came from mesearching my notes and highlights,which is exactly what you can do with Founders Notes.Keep in mind, this is made for foundersalready running successful companies.
[2:13]
OtherThose already running successful companieswill get the most value out of thisbecause it's a way for you to reference the thoughtsand ideas of history's greatest founders,and then you know how to apply themto whatever's going on in your companyat this very moment.The other thing I wanna tell you,it is currently priced at 50% what it will be,so it's actually gonna double in price,and the reason I did thisis because I'm adding a bunch of featuresthat I think are incredible,and I have to build up the landing page and everything else.You sign up now, obviously, as I add features,you don't have to pay any additional.I truly do believeit is the world's most valuable notebook for founders,and the value you get out of it will be incredible.You can get immediate accessto over 20,000 of my highlights and notes right nowby going to foundersnotes.com.
OtherI 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 ghostwriter.I wanted it in my own words.I hope to pass on some of my theories of businessto our people,and I hope these theories are used in our businessfor as long as the Les Schwab Company continues.Should we fail to follow these policiestowards customers and employees,I would prefer that my name be taken off of the business.There could be some interest in this bookwith people who are interested in business.If 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.
OtherThat was an excerpt from the bookthat I'm gonna talk to you about today,which is Les Schwab, Pride and Performance Keep It Going.It is the autobiography of Les Schwab.I wanna tell you why I decided to reread this book.The first time I read this book was four years ago.I was going throughall of Charlie Munger's book recommendations back then,and he said something that was fascinating,and he said it at the Berkshire Annual Meeting.And he said,if you wanna read one bookthat will demonstrate really shrewd compensation systemsin 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 fortunein one of the world's really difficult businessesby having shrewd systems.And he can tell you a lot better than we can.
[4:16]
OtherAnd so last week,as I was going through the new Stripe Press editionof the updated and abridged versionof Poor Charlie's Almanac,in one of the talks,Charlie Munger actually analyzeswhat caused the success of Les Schwabbased on his reading of the autobiography.So at the very end,I'm gonna give you Charlie's interpretation of the bookthat you and I are gonna 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 foreword 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 boxcarwith somewhat crooked windows cut outin one side of the boxcar.There were three of us in the eighth grade.We had to take state exams to graduate from the eighth grade.We all failed.The family farm wouldn't sellas it was the start of the big depression.The bank took the farm.My mother thought it might help my father's drinking problemif we moved back to Oregon.That didn't help.It caused the Schwab family many heartaches.We were taught to work at a very young age.It seemed the normal thing to do.So all these sentences that I'm reading you,they're spread over a few different pages,but I feel these sentences tell entire stories.He's gonna get his first job.He's 12 years old.This is the job he's gonna work in the newspaper industryup until he buys a tire shop in his thirties.But I wanna tell you this backgroundbecause you'll get an idea of who we're dealing withand 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 townand 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,she had a strong desire for both of her sonsto attend high school.By this time, they made the decision.He hadn't been in school in two years.And so this is what happenswhen he goes from the outskirts of town into town.We would come into town early Monday morningand return to the logging camp on Friday after school.We missed much of the school activities
[6:34]
Otherand pretty much felt like outsiders.One of my biggest fears was that my fatherwould 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 jointuntil nine or 10 p.m.until we could 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 in other people's homesso they could go to school.They have to get a ride back to the logging campfrom their dad.And the dad thinks it's a good ideato get smashed at a moonshine joint,then drive drunk with his two sons in the carback to the logging camp.And here's another example of two sentencesthat tell an entire story.This was killing my mother.It was sad times for the Schwab family.Eventually, Les stays in town on the weekendsand he goes back to the one profession that he knows.He goes back to delivering newspapers.And again, this gives you the idea.I was texting a friend about this book yesterday.What I was saying is the book is 40 years old.This guy, I don't think he ever finished high school.He had a middle school, an eighth grade education,yet he's a business genius.He winds up building a multi-billion dollar companyselling tires.And there's no way you could look at his childhoodand predict that outcome,but you could look at his childhoodand the way he approached everything is like,this guy's going to succeed at whatever he does.Maybe not to the degree of makinga multi-billion dollar company,but he was not going to end up a loser like his dad.So he says, I immediately started to deliver newspapers.I remember so well my first route.I didn't know how to ride a bike.We never had one.So all the other young kids delivering newspaperson a bike, right?He's got no money, doesn't know how to ride one.I ran my route for two monthsin 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 saysover and over again, the fact that he had a lot,he was poor, 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 illand she was in the hospital.
[8:50]
OtherShe 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 dayof my 16th birthday.He was found dead in front of a moonshine joint.He had gone so far downhilland he was working for 50 cents a day for a rancher.It sounds like my father was all bad.This isn't true.Why and how a man can let this happen, the Lord only knows.But he was a hardworking, extremely strong man,a gentleman, but a raving maniac when drunk.It certainly brought sad days to our family.Back to this idea that this can't be my lifeis a very powerful motivator.You see him being embarrassedby his current state of affairsand willing to work incredibly, incredibly hardto change things.I rode my bike during the week,even though I was getting to the agewhere a boy didn't like being seen delivering newspapers,but money was much more important than pride.And this is another example of why I saidI believed Les Schwab was inevitable.There were eight or nine routes in the townand I took over the whole town during the summer.I was now making about $175 to $200 per monthand I wasn't even 17 yet.This was the middle of the depression.My high school principal only made 150 per month.I thought I was already a man.
QuestionerAnd so the note I left myselfwhen I read this the second time is,he's a moneymaker his whole life, just like Sam Zell.It reminded me, if you read Sam Zell's autobiography,which I covered all the way back on episode 269,Sam had this natural instinct to make moneywhen he was a kid.One of the things that blew my mind,obviously when he was close to the end of his lifeat 81 years old,he was one of the best entrepreneurs and investors 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 20sand making millions of dollars a yearwhile going to law school.Sam Zell did the equivalent when he was in law schooland a much younger man.So you see when you read his autobiography,it's like, oh, this guy just has a,he's a moneymaker 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.
[11:13]
OtherWe have been very much in loveand we've had a happy marriage.They wind up having two kidsand having to deal with and endure the worst thingthat anybody ever has to go through.I'll get there later on.So he goes back to, again,he's going to stay in the newspaper industryfor the next 15 years.He works from one newspaper to another,winds up getting recruited.And so there's this newspaper in Bend, Oregonthat recruited him away from another newspaperto become their circulation manager.And this is where he realizes,oh, actually it's possible that you can know moreabout something than anyone else.And it gives you a massive edge.It makes me think of that one of the main themesin 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 somethingthan anyone else just by accumulating more information.And you see that Les did this.Not only, this is very, Rockefeller does the same thing,where he actually knew more about the businessthan his bosses when he was like 18 years old.So there's like a kind of an echobetween Rockefeller and Les 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 ownerswho were technically his bosses, his three bosses.The circulation end of the newspaper workis usually regarded as the lower endof the prestige ladder.It's essentially a sales job.So that's another, I think, key,which we'll get to in Charlie Munger's analysisof this book later on,is the fact that Les had a fundamental, as you'll see,right, he had a fundamental understanding of human nature.He had magician-like powers with sales,persuasion, and incentives.So back to this, I attempted to put some pride,there's that word again.I attempted to put some pride into the circulation work.Didn't matter to him that it was low status.He's gonna make a ton of money doing this,ton of money for his day.I attempted to put some pride into the circulation workfor myself and for others.I was young, I was cocky,but the same cockiness helped me a lotin 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 businessas I'd always wanted to be a businessman,but I didn't have any money.I was going through a period at this point
[13:24]
Otherof not knowing just what I wanted to do.Five years later, still working 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 businessand 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 businessat a fairly young age,you would get into a rutand never make the big decision to jump.
QuestionerAnd this is so wild.He picks an industry.Wait till we get to this.He picks an industry where he has no experience.He's like, all right,well, there's this little tire shop.They're all franchises at this point.So it's called OK Rubber Welders.It's a franchisee of OK Rubber Welders.And he's like, all right,I thought the tire business had a future.
OtherI 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 flats.It was hard, knuckle-busting, dirty work.The price of the business was $11,000 plus inventory.
QuestionerAnd we're gonna see Les had a burn the boats mentality.It is now or never, I'm going all in.I borrowed $11,000 from my brother-in-law.I sold my house and I borrowed on my life insurance.With all the expenses,he's gonna spend about $17,000acquiring this small tire shop.This is the tire shop.This is gonna be in 1952.I was just reading about this yesterday.The fifth generation, his fifth generation,just sold the company to a private equity firmfor a rumored $3 billion.It is going to start in 1952 with $17,000.All of it borrowed.And so the very first sentencedescribing his very first day in business is mind-blowing.
OtherI had never fixed a flat tire in my life.
QuestionerAnd then this next paragraph,this is one of the reasonsthat Charlie Munger recommended this book.Charlie says over and over again,never ever think about something elsewhen you should be thinking about the power of incentives.Multiple times in Poor Charlie's Almanac,you see ideas just like that.Incentives rule everything around you.Never ever think about something elsewhen you should be thinking about the power of incentives.The most important rule in managementis get the incentives right.This is something that Munger repeated over and over again.And it's something that Les understoodand did a masterful job.
[15:44]
QuestionerHe's speaking about himself, right?
QuestionerYou and I are gonna get to why this is so important, but I wanna give you an overview because it's gonna happen a little bit later on.
QuestionerHe 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 epilogue. And he constantly talks about the fact throughout the book and in the updated versions that if I failed with the first store, there was never gonna be a second store. And if I failed with the third store, there's never gonna be a fifth store. And if I didn't fail with the fifth store, there's never gonna be a seventh store. And now I think at the end of the book, they have hundreds of stores. And so one problem he's gonna 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 fantastic job with it, which we'll get to in a minute. It's crazy 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 a 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 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's 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
[17:38]
Otherthat 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 than sales.But in March, I started going.And by June and July, I was doing $10,000or more per month in sales.At year's end, I had $150,000 in sales.The man I bought the business fromdid 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 pageis being good at sales is like being a magician.And so right away, he realizesthat the tire business is a bad businessbecause there is complete collusion.At this time that he's getting started,all the rubber companies are Americanand they dominate the entire marketand they also collude on pricing.And he's competing against the big tire companiesalso have their own stores.And of course, they are gonna give a better priceon the tires to their own stores than they give to Les.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 problemand it actually produces the greatest opportunity.This is one of the waves that he rides in success,which we'll go into a little bit later on.And Charlie talks about a lot.And so Les says, I had to contend with this,essentially this completely dominatedand colluded market, right?I had to contend with thisand so I made connectionswith 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 terminologyof Charlie Munger was a massive onebecause 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 gonna 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 outand then removing the remaining layer of old treadand then just applying a new treadso that the tires has fresh tread again.This saves you from having to buy new tires.
[19:51]
OtherThis is where all of his profit,this is going to actually bridge the gap.This is how he's gonna be able to surviveuntil he gets a reliable and better tire supply.Tire supplier and Toyo Tire Company from Japan is the first.He's gonna diversify into other suppliers,but he definitely rides the Japanese tire trend.He says, it was impossible to make a reasonable profiton new tires.I usually got the retreadingand I could make a decent profit on that.By handling the business on a one-man basis,he did the sales, the service, the credit, the whole works,I could operate very cheaply.I had a theory that went like this,never take advantage of a customer,never take advantage of an employee,but take all the advantage you possibly couldof a rubber companybecause they were not being fair and honest.Today in 1985,I don't feel the same way towards rubber companiesas I did 25 to 30 years ago.This is a very important point, right?Because they try to screw them,they try to put them out of 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 didin order to survive 25 to 30 years ago.I am proud that I had the guts to fight.This goes back to this cockiness,this pride thing that's very apparentfrom the very first page of this book.I'm proud that I had the guts to fight hard enoughto survive this period.I feel strongly that the rubber companieswere very unfair to their dealersduring the early days of my entire 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 closure.You're gonna screw me over so bad,you're gonna mistreat me.So what am I gonna do?I'm not gonna sit there and take it.I'm gonna look for better options.And he found a better option with the Japanese.And then he rides that waveand he destroys the peoplethat were trying to screw him over.And he says so here,the five major American rubber companieshave received their just awardsas two of them have dropped truck tires entirely.And the other three are doing very wellwith truck tire sales.It serves them right.They earned their failure.So he immediately starts to expand.He winds up opening a second store a year later.That second store also has one employeeand that employee shares in the profit.
[21:57]
QuestionerAnd 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 programthat we still use today.But this is what I meantthat he repeats something over and over againthat, hey, if I messed up on the first store,there is no second store.If I wind up messing on the second storeand I'm not there, there's no fifth store.There's no 200th store.And so I have to get the incentives right from day one.I told Frank, that's his, the first hire.I told Frank that if this store was successful,I plan to build more.If this store failed,I would go back and just run one store.There wouldn't be the chain of Les Schwab tire centersthat we have todayif 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 independentbecause the first two are actually franchisesof the okay rubber welders.And he's got a contract with them.And I'm telling you, it's very,it's impossible to read this bookand not love Les as a person.And he's like, no, I'm going to be independentand I'm going to fightbecause I don't think what you guys are doing are right.And he also has, he was really,Charlie's going to talk about this later,but he thought he was an artist.Like he was really giftedwith marketing and advertising as well.So he goes to the franchise company and he's like,hey, I'm going to open an independent tire store.And the guy goes, you can't do that.And Les goes, let's not argue.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 anyways.Like, I'm not here for a discussion.I'm just letting you know,because I thought it would be the right thing to do.And so he's like, all right,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 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 OK.They were threatening to take all my equipment away from meand cancel me as a franchise member.And this was his response when they told him that.I lost my temper.And I told them hereafter,
[23:58]
OtherI didn't want any more harassment from them.If they had anything more to say, say it in court.I walked the floor nights.
QuestionerSo, okay, this is a very important termthat he uses over and over again.He talks later on how stressful foundingand then expanding the company over three decadesto hundreds of stores and thousands of employees were.And so many times in his book,he's sharing with us not just the wins,but times where he's almost like depressedand extremely stressed.In fact, he talks about everybody blew their top.I think the three top executives all had a heart attack,including him.And so when he's under stressand he's trying to figure out what he does,he says, I walked 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 reasonthat they didn't take me to court was due to the factthat if they lost,it would have messed up the franchise nationwide.So you pay X amount per year to be a franchiseeand they had 1,100 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 contractsand the treatment of the other 1,100 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 themthat I will not accept the cancellation.And it winded up working.Like he winds up getting out of this later on,but he is in a hell of a troubleat the very beginning of his career.The early days were full of struggleand he describes it to you and I here.The pressure on me was tremendous.My largest account was way behind on paymentsand 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 themand the Les Schwab story would have ended there.There's a lot of Sam Walton-esque kind of behaviorin this book.I feel that Sam Walton and Les Schwabare very similar people.In fact, one of my favorite things that Charlie saidlast week in Poor Charlie's Almanacwas 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,
[26:15]
Questionerand say, let's get the hell out of townfor at least one night, maybe two nights.
And we'd do just that.
But guess what?
I would usually visit other tire dealers.
This is exactly, exactly.
It's incredible how similar these great foundersare to each other, right?
Where Sam Walton's kids would talk about his autobiography,the fact that any time they went on vacation,they just had to accept the factthat no matter where they went,dad was going to go in to visit the retail storesof wherever he was.
And we see the same thing here.
And it's during one of these tripswhere Les actually lays out to his wifethat his initial modest goals,and he says, like, I had no idea how big this could get.
I told Dorothy I was gelling on an idea for the future.
Maybe in the future, I could build six or sevenor 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 managersand make them successful.
He's really describing what Charlie describes lateras like this Lollapalooza effect,like all these different things that Les Schwab did smartand did right over many, many decadesthat got this nonlinear return.
And so the first one was, hey, find a better supplier,ride the wave, that's your Japanese tire wave.
Knew how to advertise and promote.
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 going to want to get to eight.
When he gets to 199, he wants to get to 200.
That's just how he is.
This is more on how he set up the corporationat the very beginning.
Each store operates as a separate entityand each store operates as a separate business.
The store employees share only in the profitsof 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 businessesthat Berkshire owns, the person running that businessis only incentivized and paid and rewardedor punished based on the performanceof that individual business and not Berkshire as a whole.
And Les takes that exact same idea,or I guess he did even before Berkshire existed
[28:27]
Otherbecause we're still in the early 1950s here.Another comparison you can makebetween Sam Walton and Les Schwab,if you know, if you studied the early daysof Sam Walton's career,he winds up building a great franchise,but he made the mistake of not owning the groundupon which he was building.He was renting, he was leasing his store.When Sam goes to re-up, the guy's like,okay, yeah, I'm not going to release it to you.Winds up kicking Sam out of his store,opening up his own, essentially just copying what Sam didand then running both, owning the buildingand running the retail shop.And there's this great, there's a great scene in,this is actually not in Sam Walton's autobiography.There's another biography of Sam Walton I read.I think it's called Sam Walton, Richest Man in America,by this guy named Vance Trimble.I think it's episode 150, if I'm not mistaken,but 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 Sam goes to his lawyer, he's like,surely this guy can't do this, this is unfair.How do we get out of this?And Sam's still, he's just inexperienced.He just didn't know what he didn't know.And his lawyer's like, no, you're screwed here.This guy's going to take, he's not going,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 fistand clenching and unclenching his fistand clenching and unclenching his fist.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 townthat he goes to is Bentonville, Arkansas.So again, he took,problems are just opportunities and work clothes.Okay, I made that mistake.That's a big fuck 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 storeor winds up leasing,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,less 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.And he repeats that over and over again.He's like, I already seen,I had already seen the wisdom of owning property
[30:43]
Otherand I wanted a contract so that I would own it somedayif I made it.And then he'd also cap his downside.This guy, again, I love,I just love everything about Les,like the way he acts.He's very clear communicator.We'll tell you exactly what's important to him,exactly how he thinks,but he also was just really a business genius.And so in every contract,he also would cap his downside.He called it an escape clause.And he says, I had an escape clause in the contractthat I could turn the property back to himand not have to pay it off if the store failed.And there's just this great linethat Charlie uses to describe him later on.He says he was a talented fanaticand he had to get a hell of a lot of things rightand 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 know I've already said this,but Munger said that he was an advertisingand marketing artist.And so you see this,all of his stores are in places where it snows.And he winds up going to this company in California.It's called the Mohawk Rubber Company.Actually goes to where the manufacturing plantand he wants to watch what they're doingand see if there's any opportunity for improvement.And he has a product ideathat he's going to use for a very long time.So he says, I was watching them make retreaded rubber.And I noticed that he used a measuring shovelto add the walnut shells and sawdust.So you could buy either a rubber mix with walnutor rubber mix with sawdust.They use this in like sleet and snowand icy conditions, right?They add two shovelfuls to each batch of rubberwhile mixing.Since we had such a hard time decidingwhich one was best, Walmart or sawdust,I asked them, could you put one shovel of walnutand one shovel of sawdust?They said, yes.I told them to make all of my tires that wayunless I told them differently.Then I went home and I started a big advertising campaign.The new rubber, especially designedfor the Les Schwab company.Walnut for ice, sawdust for snow.Many people brought in their old tiresand asked us to redo their tiresbecause the new rubber sounded so goodand they wanted that.We use this campaign and this rubberfor years and years and years.The power of one idea is the factthat it can be valuable and long lastingfor years and years and years.It took him just going to visit and paying attentionand then one idea pops to his mind
[33:13]
Questionerand he winds up using that throughout his company,multiple stores for years.Ideas, great ideas are like magic.He's got a lot of time to think about his businessbecause just like Sam Walton when he's drivingthrough those mountain towns,this is before he gets the plane, the Cessna.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 aroundand visiting all of his stores.Let's go into more of his ideasabout advertising and marketing.He writes all of the radio ads for his company himselfand he winds up getting inspired by other ads.Lucky Strike Cigarettes was one of the largesttobacco producers at this timeand they spent a ton of money on advertising.Their tagline was LSMFT.That was their slogan.They used it on their ads.They printed it on the cigarette packsand they would hammer it over and over againand they said, Lucky Strike means fine tobaccoand so he heard that and he winds up telling his wifewho's next to him and they go, look, LSMFT.That means Les Schwab means fine tires.I started to use this slogan immediatelyand it was very effectiveand so he comes up with a campaign for lady driversand he says, hey, Les Schwab will change your flatand 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 tagline on the ad, right?They'll come to your house.They'll change and repair the flat tire for freeand so this idea over time grew his business.It was very, very shrewd because think about it.If somebody comes to your houseand fixes your tire for free,when it's time to replace those tiresand to get new tires, who are you going to go to?This is the reciprocity tendencythat Charlie talks about in his speechat the end of Portroyal's Almanacon the psychology of human misjudgment.Humans have this embedded, innate and very strong desirethat if you do me a favor, I feel the need to repay you.That person is going to the Les Schwab Tire Centerand they're going to buy their tires from themand he says, I always knew that if we fixedall 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
[35:43]
Questionerof your competitors and so 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 it at this time.
Most tire businesses had a small showroom,
so what the customers 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 is this illustration of another idea
that Charlie Munger repeats over and over again,
understand the circle of your competence
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 so 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 five million dollars richer
if I'd 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, 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 like tire supermarket showcase
and 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 about how crazy that is.
Nobody else was doing this in his business.
The tires on display were cleaned daily.
And so one of the great things about this book
is he does all these like memos,
his internal company memos and they're dated
and you could see what he was thinking about.
And 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.
[37:58]
OtherI sincerely hope I have made myself very clear about the fact that you better clean this every day. I better not walk into your store and it's 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 have made myself very clear. I love you, but I love a supermarket tire store even more.
OtherIn 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 reason, right? That we're 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 is trying to get more of his store managers to, he wanted to promote from within all the time. In fact, one of his main directives to his companies, and one of the, I think, the main ideas he used to build a successful company was promoting from within. It reminds me of one of my favorite quotes from Sam Zimmery, the Banana King, that said, there's no problem you can't solve if you know your business from A to Z. So actually, I'm going to pause where I'm at in this sentence 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 250 managers and assistant managers started at the bottom, changing tires. They have all earned their management jobs by 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 autobiography
[40:09]
Otherwhen people ask like how he built Walmart.He says, we just got after it, and then we stayed after it.Les Schwab would say that once you get on the ball,he uses that word 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 employeesthat's reprinted in the book is the fact thatyou have to focus and you have to avoid complacency.If we think there's a free lunch,if we rely on last year's 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 bookthat I really love is the fact thatif you do stay on the ball, you'd be shocked at how badand 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 thisbecause he's dealing with all thesemonopolistic rubber companies.And so he says, as a young person,I always thought that the heads of large corporationsmust be human calculators.As I got deeper into the tire businessand met many of these people, I was surprised.So often, all they knew was the policy of the company.Ask 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 gutshad dropped out of the company long agoand went out on their own.I've often said that we should send Goodyear, Firestone,and the other large rubber companiesa Christmas card each yearand thank them for their policies,as their policies made it possible for us to be successful.And so 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 ideasand has had this idea where it's like,well, at this time, tire dealers were constrainedin 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 productsif it's the best for their customers,if they have a good relationship with their supplier,but once they don't, they just move it outand they actually substitute it for something else.He's like, I'm gonna do the same thing for tires.
[42:17]
OtherI was so disgusted with the tire suppliers,I was willing to do almost anythingto help my company survive.In 1966, I made a big decision.I decided to go straight independent,to buy tires like Safeway buys groceries,to buy the best possible tire,good quality and at the lowest possible price.This was a major move at that timeand no one had tried it before.The idea was to be a supermarket tire store.In no way were we identified or affiliatedwith any individual rubber company.
OtherLet's go back to the fact that incentives drive behavior.One benefit, one unexpected benefitof sharing profits with employees,less theft from within.Again, never ever think about something elsewhen you should be thinking about the power of incentives.
OtherHe's talking about the fact that they will expand.I think at this point they have 163 storesand people would analyze this company like,where are all your controls?And he's like, well, we don't have many controls.Why?Because the incentives are controlling behavior.
OtherWe didn't have many controls.The thing that held it togetherwas that we ran each store as a separate entity.As long as we made sure that every tire was billed to them,as long as they made sure that every tire they soldwas billed to the customer, we would come out all right,as long as the people were honest.
OtherOur contracts with the managers said,another shrewd system here, okay?Our contracts with the managers saidthat in case of dishonesty,you forfeit all your money in the contractand so this would accumulate throughout the year.After they had about 20,000 or so in their contract,it helped everyone be honest.
OtherNow we share with all the people in the store.Now this is so important.He's really describing, again,he just fundamentally understands human nature.If any one employee sees another employee 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.
OtherFor 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 didis the most important thing he did in his entire careerand he can't, multiple times in the book,he's like, I don't understandwhy other companies are copying thisand so he calls it being unselfish for good reasons.I think it's a good way to think about that.
[44:27]
OtherMy 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 thisas it's being unselfish for good reasons.It helps other people.And he talks about the factthat you're helping other people succeedactually will provide you a deeper satisfactionif 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 fatherto hundreds of other men and women.Last night, I attended a weddingof a young man from our office.This young man told methat 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 dealtwith the worst thing that a human can go through,which is the death of his son.Les is gonna be, he's gonna have heart attacks,he's gonna be, he drinks, he says, 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 daughter's gonna 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 truck tire,and the lock ring was under too much pressure,and the lock ring flies up and hits him in the head.And he's gonna be alive for a few more years after this,but he was never really the same.And I'm just gonna read part of this to you.His son's name is Harlan.Harlan 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 Harlan.It was too much for Harlan.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.Harlan Schwab would have been a tremendous helphad 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 26, 1971, my doorbell rang.A policeman was at the door.He came in and told me that Harlan was dead.He had run into the back of a log truck.I sometimes have thoughts that he might have done this
[47:05]
Otheron purpose, as he was very depressed.He was 31 years old.Harlan left his wife, Jean, his daughter, Diana,10 years old, and his son, Alan, eight 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 of how small the amounts wind up.They are today, not realizing that you'reon this rocket ship, it's working.Just hold on, don't mess this up.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 number one breakupin Y Combinator is not external factors.It's actually co-founder conflict,and you just see it a lot in these books.I'm gonna read this whole thing to youand explain to you what's gonna happen,but when I'm reading it this time,I couldn't help but think about the falling outthat Ray Kroc had with the McDonald's brothers,and they're falling out over moneyand a disagreement about 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've ruined it.It's hard enough to start a successful company,and then one that's succeeding more than 99.99%of all other companies, and yet there's somethingwhere we just can't help but shoot ourselves in the foot.Reminds me of this, there's this lyricthat 50 Cent talks about, then 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 takenout of the company, they didn't leave it in there.Their salary was enough to live on,but the rest stayed in the companyto be used for expansion.They each owned 20% of this money,but here's what happens.Now they're seeing how much the company's making,now the money that's in the companythat technically they could have access tois growing and growing, so 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 families saw all the money they were making,and their wives wanted to get their hands on some of it,
[49:23]
Otherand so they wind up having a disagreement about this,and so now Norm and Don wind up teaming against Les,so now it's two on one,but even though Les owns way more of the company,owns 60% to their 20% each,I soon found out that I had run into a buzzsaw,as both Norm and Don 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 moneythat these men were now making.I went home, and I was talking to my wifeabout nothing else that night.At breakfast the next day, she suggested,why don't you buy them both out?You'll get by some way.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,in the six months that we've been talking about it.The agreements that I had with Norm and Donsaid that I could buy them out at book value at any timeby giving them 30 days notice.And so he goes and meets his partner.Don, you want a swimming pool?Because they wanted like swimming pool on boats,and you know, the stuff people wantwhen 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'll get around $300,000.So he winds up buying out his partners.What's the value of this decision to his,the fifth generation that winds up selling the company?That's another thing that's talked about.I don't want to confuse you too much,but over and over again, he talks about,I want my company to run this wayor take 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 possibleto have this multi-generational succession plan?Because now they're five generations out,and they're like, oh yeah, great-great-grandpa,or whatever, didn't want to sell the company,but this company's offering us $3 billion.Yeah, we're going to take it.So I don't know, it's just a thought
[51:28]
David Senrathat's in the back of my mind.If you're a successful entrepreneur,you're used to having control and influenceand bending the world to your will,and yet all that is not going to existwhen you're not here anymore.It's just something to think about.So anyways, winds up getting,buys out 20% of the company for $300,000,and then the other 20% for 225, okay?It's just one part of their contract,not including their 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 yearjust 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 disagreementthat Ray Kroc 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 it, it was like 293.It was earlier this year.Ray Kroc winds up buying out the McDonald Brothers,and it cost him $14 millionand a bunch of interest or whatever, right?And at the time, it was a lot of money,but now he's looking back, 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 salesin every single McDonald's anywhere, now and in the future.And so even though he's, I think he's,I think Ray Kroc is writing that book.What, that book is probably written in the 70s.Who knows what it'd be worth today?But if they had just held on, instead of taking,I think it was 12 million to the McDonald Brothers.I think they had to pay like 2 millionin transaction costs or interest, something like that.But let's say the McDonald's Brothersmade 12 million one time.If they just held on, they would be making,at that time that Ray Kroc produced, published a book,$15 million in royalties every year.And that's, now 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,
[53:44]
Questionerterrible financial decision.And now that I'm thinking about it, let me look for it.Something just popped my mind.I'm going to search my ReadWise.There is, I'm doing this while I'm talking to you.There is a lot, yep, found it.Okay.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 this huge falling out.Now think about, think about owning a partof 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 return.This is Henry Ford speaking now, okay?He got $175,000.Hardly a bad return on an investment of $10,000three years earlier.So that's great.You invested $10,000.Three years later, you push this issueto get your money out, and you got $175,000.You did great, right?But if he had stuck it out for a decade longer,he would have gotten $100 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 there was, life is hard is probably the thingthat he repeats the most.Life is hard, but again, it turned out to bethe best thing that could have ever happened to the company.Greed was entering into the company, and greed destroys.Their interest today would be worth around $12 million each.So again, their equity interest would be worth12 million in 1985 when the book came out.Their annual bonus would be another millionon 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.I think this was 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.$1.8 billion.They could have still been aliveand have 20% of that company,and instead, they sold it,their interest for $225,000so they could buy a swimming pool.Incredible.This is why I love biographies.There's just so many lessons,and hopefully I hit you in the head,or excuse me, hit you in the heart,but that takes place over three, four pages.It's just absolutely incredible,and then it just makes you think
[56:25]
David Senraof all the other biographiesand maybe other episodes of Foundersthat you've listened to.You can kind of tie it all together,and it really, I think,makes it resonate much morethan 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, his autobiography,says, if you are not serving the customeror 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 peopleare the only ones that are important.We have had over the years,some people in the officethat sometimes think that they are more importantthan the stores.The office serves only one purpose,and that is to serve the stores.The office and accounting peoplecan only tell the stores what they have done.If the store manager runs his store right,he doesn't have to spend hours and hourslooking at the office reports.If he's doing okay,the records will show it.In fact, if he spends too much timein his office reading the mailor 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 bitch to mebecause that is the way I want it.If you want to go out,start at the bottom changing tiresand work into a manager job,then hop to it.If it weren't for those men in these storesworking their butts off in all kinds of weather,missing meals 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 officeand he continues this line of thinking.Again, I could help another store managermore in one hourthan a professional type management personcould in a week.Why?Because I had the same problems.He had done the job, right?The professional type management loses outand 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,
[58:37]
Otherlet me go find the book.
OtherI got to pick up Port Charlie's Almanac now.
And Charlie uses this idea or this story,this quick story to illustrate an idea.
He talks about like,once you have these skills that you have to constantlyuse them or you're going to lose them.
And he says,skills of a very high order can be maintainedonly with daily practice.
This famous pianist once saidthat 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've forgotten 50% of what you know.
And so then Les tells a storyabout how he wound up winning this competitionwith what he thought might be a formidable adversaries,this Nelson Tire warehouses.
And they made a mistake.
So he will constantly talk about,hey, you need to have a low 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 possiblebecause the higher wages you pay,the better quality employee you get,the better quality employee you get,the happier customers will be.
And so there's all these like second and third order effectsthat the people that just cut salariesand think about salaries and wages as a part of their costs,like never realized and it wound up dooming them.
And so it says, if Neil made a major mistakeand he must have because he went bankrupt,it was in moving too fast,but he had me concerned for quite a period of time.
They were springing up all over Oregonand 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 paynear the quality of employees that we had.
And this is the most important part.
As he's going throughand like having this competition head on head,he's like, oh, 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,I'm wondering if I shouldn't cut wages and benefits.
I finally made the 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?
[1:00:45]
OtherSo we did nothing and we won.The customer liked us best.Life is hard.This is his summary.This is his summary on the Neal Tire Warehouseand what doomed them.Life is hard for the man who thinks he can take a shortcut.And so this is an interesting historical factburied in this very hard to find bookthat a lot of people have not read.So, you know, KKR,I think it's like Kohlberg, Kravis, Roberts and company.I think they have like a trillion dollarsunder asset center management.It's like one of the biggest investment companiesin 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 upbecause 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 a lot of say in this.And so he talks about over and over againthat the company isn't 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 Michelin tire.They wanted to buy the companyand turns out KKR tried to buy the company as well.And this would have been shortly after KKR was foundedbecause KKR was founded in 1976.
QuestionerI'm so glad I resisted the urgeto have our stock on the market.I don't want a few investors around the country clubasking about our businessand questioning some of our decisions.They might even ask,how come some of those store managers make so much money?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 himand he wound up meeting with the guy.He takes the calls just for fun.This company was headed by a man in his seventieswho had made a fortune by buying up privately held companiesand letting the present management run them.How many people have used that idea successfully?Buying up privately held companiesand letting the present management run them.I told him that I didn't want to sell.The KKR people also contacted meand I spent a day with them.I was more curious than anything.Everyone knows about KKR.They have bought companies out in the billions.
[1:03:06]
OtherThey are nice people.
OtherAnd 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.
OtherAnd so this is causing him to think about like succession plans and what's going to happen.
OtherAnd he's very concerned because he says, I've seen companies fail and go downhill.
OtherAnd sometimes they disappear entirely after the founder retires or dies.
OtherI hope this doesn't happen with our company.
OtherWhere we are in this point, Les already had way more money than he ever needed.
OtherHe could have retired 15 years ago.
OtherI could come out with an, he's talking about selling the company.
OtherI could come out with an astronomical bundle of money if I sold the company.
OtherBut what would I do with it?
OtherWhat good is money beyond a certain point?
OtherI think the biggest misconception about public has about a successful businessman is that he's working for more money.
OtherYou won't find many truly successful ones that are only working for money.
OtherSuccess in my mind, they obviously like the money.
OtherHe's not saying that, right?
OtherSuccess in my mind comes from having a successful business.
OtherOne that is a good place to work.
OtherOne that offers opportunity for people and one that you could be proud of to own.
OtherAnd he goes right back into the fact that incentives drive behavior.
OtherAnd he's very proud of what he's done.
OtherIt is very rewarding to create a program and watch it work.
OtherThere'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 p.m. if needed.
OtherIt's not a big thick policy book.
OtherIt's not a lot of supervisors, which he doesn't have.
OtherIt's something that our programs created in him right in his heart.
OtherHe continues on this and he feels that most companies put the emphasis on the wrong part.
OtherWe are different from most American corporations as we think the most important people in the company are the people in the firing line.
OtherThe ones who sell, the ones who do service work and take care of the customer.
OtherMost 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.
OtherI guess that is why if you're on the ball, you can beat them on any type of fair competitive basis.
OtherAnd he practices what he preaches.
OtherThe warehouse executive people should be very happy that the store managers make good money.
OtherThey make more money than anybody else in the company
[1:05:09]
Otheras it helps them.If jealousy ever creeps in, goodbye Les Schwab company.
We have great people and this won't happenas long as I'm alive.
I'll kill them if it does.
Again, fanaticism and scale combined can be very powerful.
QuestionerThey'll find out that life is hardand you put life is hard in caps.
It's almost like his motto, life is hard.
And then he continues on this theme over many, many pagesabout 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.
This is a great line.
I need to do her biography.
Mary Kay, the founder of Mary Kay Cosmetics.
She has one of the best,in terms of like how to win friends and influence people,if you want to think about it in those terms,she has one of the best lines I've ever heard.
She says that Mary Kay said that everyone goes through lifewith an invisible sign hanging around their neckthat 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 otherwisedestroys an employee's self-esteemalso destroys the employee.
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 believes in building upand 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-makingtends to move up to the main office.
And this is one hell of a big mistake.
The decision-making should always be madeat the lowest possible level.
Give your manager the authorityto 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 bookbefore 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 of your ability todaythat gets you to tomorrow,and then continue that process over a long careerand you'll be surprised where you end up.
So he's looking back and talking aboutif he didn't do the day-to-day things correctly,they would have never got this far.
Most companies that have grown largemust have had as many of the same problems that we've had.
I think many times of the many things that have happened
[1:07:23]
Otherthat it could have stopped us from growing.If Frank had failed with that store in Redmond,this is when they expanded the second store.If the large commercial account I hadthat owed me so much money had gone broke at the wrong time.If I hadn't won my fight with the OK franchise,if the foreign tires hadn't been available to us,if I had not been able to get through the periodof the blow-up between my partners and me,if any of my first five or six stores had failed,if I hadn't gotten out of ranchingand got my mind on my business,and the many, many, many more waysthat it could have stopped the growthof the Les Schwab company.The parting advice that he hasreminds me of one of my favorite Edwin Land quotes.Edwin Land said,there's a rule that they don't teach youat Harvard Business School.It is, if anything is worth doing,it's worth doing to excess.The Les 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's Almanac.I go to talk number nine,and that is where Charlie analyzes the bookthat 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 Northwestthat has slowly succeeded over 50 years.It's the Les Schwab tire store chain.It just ground ahead.It started competing with the storesthat were owned by the big tire companiesthat made all the tires, like the Goodyears and so forth.And of course, the manufacturer favored their own stores,and those stores had a big cost advantage.Later, Les Schwab rose in competitionwith 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 analyzehow he did it.And so he says, let's think about thiswith some microeconomic fluency.Is there some wave that Schwab could have caught?So if you listened to last week,this is something that Charlie talks aboutover and over again, his surfing model.You get at the beginning of something and it's workingand you're riding the wave, stay on the surfboard.He's like, you would be shocked at how,if you just stay on the surfboard,it's going to take you a long way.
[1:09:41]
CharlieA 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 way that Schwab could have caught? The minute you ask the question and the answer pops in, the Japanese had a zero position in the tires in America, 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 Lollapalooza result that less 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 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. It was 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 of 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 Lashua, but it also applies to a lot of these other super successful companies. And he gives 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 break point 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 Lollapalooza result. And of course I've been searching for Lollapalooza results all my life. So I'm very interested in models
[1:12:06]
David Senrathat explain their occurrence.And so Charlie's also explaining Nutraflush Schwab.He uses Costco as an illustration of this point.Toyota is an illustration of this pointand Oracle is just some of them,but he mentions many more in Port Charlie's Almanac.Number three, an extreme of good performanceover many factors.That jumps right out of the bookif you read the Lashua 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 can read the Lashua book firstand then read Charlie's analysis.Because I read this book for the first time four years ago,but then I read Port Charlie's last week.I'm like, oh shit, I should go back and revisit Lashua.And then reading his analysisand 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 of those books.And if you buy them using that link,you'll be supporting the podcast at the same time.That is 330 books down, 1,000 to go.And I'll talk to you again soon.Okay, so what you're about to hearis this question I was asked a few months ago.I actually recorded this a few months ago.They asked, how did history's greatest entrepreneursthink about hiring?All the answers.People think I have a better memory than I actually do.You know, if people say, David, you have a great memory.My wife would laugh at that.I forget things all the time.It's not that I 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 hearin this 20 minute mini episodecame 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 companyand you want an easy way to referencethe ideas of history's greatest entrepreneursin a searchable databasethat you can go through at your convenienceanytime you want,then you go to foundersnotes.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 called In the Company of Giants.
[1:14:18]
David SenraI 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 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 this question is so important and you should really be spending, especially in the early days, like basically all your time doing this. In a typical startup, a 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 a 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 of the 10, 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 I have making founders and that you have as a biographer of listening to founders is not only that I've read, you know, 300 some 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 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, I just literally 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.
[1:16:34]
David SenraAnd so there's a bunch of, you know,I don't have, I may have like 10 or 15 different founderstalking about hiring.The first idea is the most obvious,but I think probably works bestwhen you're already established.So Steve Jobs is talking about,hey, you know, the great way to hireis just find great work and find the people that did thatand then try to hire them.When you're Steve Jobs, that's a lot easier, right?Than if you're just somebody that doesn't have a reputation,maybe you don't have resources,maybe your company's rather new or not as well known.David Ogilvie, I just did Confessions of an Advertising Mana couple episodes ago, I think 306 or something like that,307, and he did the same thing.But he's David Ogilvie at that point.So he would find, he'd go through magazines,find great advertising, great copywriting,and he'd write the person a letterand then set up a phone call.And he says he was so well-knownand he's one of the best in his fieldthat he wouldn't even have to offer a job,just the conversation, then the person would,he'd want to hire the person, never mention it,and the person would apply to him.And so again, I think if you can do that,then of course it's straightforward.Find somebody that 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.I have a friend that's really good at doing this.He's finding people that do great stuff on the internetand then just cold DMing themand then getting, convincing them to work on things.And that usually works, especially with people,like younger people early in their career.There's a bunch of different ways to think about thisand a bunch of different ways to prioritize.So the first thing that came to mindthat I found surprising is you readany biography on Rockefeller,and he had a couple ideas where he feltthe optimization, you know, table stakes,that you're intelligent and you're drivenand 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 purchasablea commodity as sugar or coffee.And I pay more for that abilitythan any other under the sun.There's a second part to this though.And this is also works wellif you have access to more resources.Rockefeller would hire people as he found,
[1:18:51]
David Senraas 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.It didn't even matter if he didn't knowwhat they were gonna do.He's like, I'm just gonna stack his team.And if you really think about his partners at Standard Oil,he essentially built a company,an executive team of founders,because he was buying up all their companies.So it's very rare, but there's a line from TitanI wanna read to you.Taking for granted 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 a guy named Vannevar Bush.I did two episodes on him, I think it's 270 and 271.He is the most important American ever in historyin terms of connecting the scientific field,private enterprise, and the government.The most important person to keep alivefor the American war effort was FDR.The second one was Vannevar Bush.Vannevar Bush is like the Forrest Gumpof this historical period.He is involved in everything from the Manhattan Projectto discovering like a young Claude Shannonto building a mechanical computer.Like this guy literally has done,he pops up in these books over and over again.If you were reading about American business historyduring World War II and post-World War II,you are going to come across the nameVannevar Bush over and over again.I read his fantastic autobiographycalled Pieces of the Action.And I came across this weird highlight.And so this is his brilliantand unusual job interview process.And so he's talking about this organizationhe's running called Amrad.At Amrad, I hired a young physicistfrom Texas named C.G. Smith.The way I hired him is interesting.An interview of that sort is always likely to beon an artificial basis and somewhat embarrassing.So I discussed with him a technical pointon which I was then genuinely puzzled.The next day he came in with a neat solutionand I hired him at once.Here's another idea.This is from Nolan Bushnell.Nolan Bushnell's the founder of Atari,founder of Chuck E. Cheese, 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.One of the best ways, his whole thing washe wanted to build, all of his companieslaid on a foundation of creative people.
[1:21:08]
OtherSo that's what he's looking for.He's like, I need creative people.One of the best ways to find creative peopleis to ask a simple question.What books do you like?I've never met a creative person in my lifethat didn't respond with enthusiasmto a question about reading habits.Actually, which books people readis not as important as the simple factthat they read at all.I've known many talented engineerswho hated science fiction but loved,say, books on birdwatching.A blatant but often accurate generalization.People who are curious and passionate read.People who are apathetic and indifferent don't.I remember one, that's such a great lineand I obviously agree with it.I remember one, I'm gonna 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 womanwho during an interview told methat she had read every book that I had read.So I started mentioning books I hadn't readand she had read those too.I didn't know how someone in her late 20sfound this much time to read so much.But I was so impressed that I hired her right thereand 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 brainthat has a lot of moving parts.It wouldn't be possible to have read that many bookswithout such a brain.So do you see what I mean?We start with, so you're just sayingthis is the most important thing that your roleas the leader of the company and the founder is to do.And you are, and it's so important to studyand this is why I'm glad this question existsand why I'm glad that I took the timeand I had the foresight to like,hey, I should really organize my thoughts and notesbecause there's no way I would have remembered all thiswithout being able to search my read-wise, right?But you have Rockefeller saying,this is what's important to me.You have Bush saying, this is how I hire.Now you have Nolan Bush now saying,well, here's another weird thing that I learned.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, Peter Thiel,this just pops up over and over again.They talk about the importance of trying to find peoplethat are better than you.The hiring bar constantly has to increase.
[1:23:13]
OtherNow, obviously the larger the company gets,that's impossible.Steve Jobs has this great quote where he's like,Pixar was the first time I saw an entire team,entire company of A players, but they had 400 players.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 towhere 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'll take Steve's word for it on there.And Pixar definitely produced great products,but it's probably a lot lower than that as well.So Warren Buffett would tell you to useDavid Ogilvie's hiring philosophy.And so Warren said, Charlie and I knowthat the right players will makealmost any team manager look good.Again, that is why it's the most important functionof the founder, maybe directly next to the productor right above the product, actually,because those are the people building your product.We subscribe to the philosophy of Ogilvie & Mathersfounding genius, David Ogilvie.This is what Ogilvie said.If each of us hires people who are smaller than we are,we should become a company of dwarves.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 Ogilvie's idea too.Jeff used to say in Amazon, every time we hire someone,he or she should raise the bar for the next hireso that the overall talent pool is always improving.And they talk about this idea in Amazonwhere the future hires that we do should be so goodthat if you had applied for the jobyou already have at Amazon, you wouldn't get in.That's a very interesting idea.Take your time with recruiting.Take your time with hiring.There's this great book on the history of PayPal.Actually, I've recently become friends with the author.His name is Jimmy Stoney.And this is in his book.The most fascinating thing that I foundwas that PayPal prioritized speed.So from the time they're foundedto the time they sell to eBay, it's like four years.Jimmy spent more time researching the book than,he spent six years researching the book.I always tease him.He's like, you took longer on a bookthan they took to start and sell their company.It just speaks to the quality he's trying to do.But as a byproduct of that, obviously they move fast,but they prioritize speed over everything else
[1:25:25]
Otherexcept in one area, recruiting.Max Lutgen kept the bar for talent exceedingly higheven if that came at the expense of speedy 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.Additionally, the company leaders mandatedthat 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 studied, I did this three part on Larry Ellison,three part series on Larry Ellison.I should read those books againbecause the podcast is like 50 times biggerthan when I published those episodes.And he's just, he's crazy.So he would hire based on the confidence,the self-confidence level of the candidate.Listen to this.I have tears in my eyes, I don't know why I'm laughing.Okay, this is just so,because you read about Larry Ellisonand he's one of these peopleit's like really easy to interface withbecause you just know exactly who he isand what's important to him.That's why I think it's so funny.Ellison insisted that his recruitershire 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 isand they would go hire that guy instead.I don't know if you got the smartest people that waybut you definitely got the most arrogant.Ellison, and this is why,the personality of the founderis largely the culture of the company.Apple is Steve Jobs.Apple is just Steve Jobs with 10,000 lives, right?I was just texting a founder friend of mine.He listens to the podcast.I actually met him through the podcastand he's going through this process of self-discovery.He's already started a bunch of companiesthat are really successful but he's like,I think I'm more of this type of founderthan the other type of founder.And that's good that he's doing thatbecause hopefully his next missionis like his life's mission, you know?And you can't get your life's missionunless you figure out who you are.Ellison knew who he was.Ellison's swaggering, combative stylebecame 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.
[1:27:42]
QuestionerIzzy Sharp, the founder of Four Seasons, actually figured out that in his business, which was hotels, right, that hiring 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 was trying to build Four Seasons. What do you think he did? He picked up a biography of Cesar Ritz, the guy that Ritz Carlson is named after, arguably the greatest hotelier of all time. And when he realized that, oh shit, Ritz, he says, remembering that Cesar 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? Cesar Ritz went out and partnered with August Escoffier. What Cesar Ritz was 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 they're world famous chef, and now they know about your hotel that leads to more activity in your restaurant that you own, but also leads to more brand recognition of your hotel, and then as a byproduct of 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 the 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 our mission, this is what 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 a 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 this book called Liftoff, which is about the first six years of SpaceX. This is what Elon Musk did. They had anticipated his friend's issue. Having convinced Musk 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.
[1:29:54]
OtherThese were solvable problems,and Elon's better at solving problemsthan almost anyone else.Musk therefore came into his job interview prepared.About halfway through, Musk told the guythat 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 Larryand 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 in 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 a guy named Les Schwabwho built this really valuable chainof tire companies in the Pacific Northwest.I actually found out about himbecause Charlie Munger's like,hey, you should read this biography.He said it in a,he didn't say it to me personally.He said it to,in like one of the Berkshire meetings,that to study,Les Schwab had one of the most,one of the smartest financial incentive structuresin any company that Charlie Munger had come across.So this is what Les Schwab did.He did not want to hire from,he didn't want to hire people from other companiesbecause 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 managersand assistant managersstarted 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 and A players,A players don't like to be micromanaged.And so this came in Larry Miller's autobiographycalled 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 NBA team, Utah Jazz.And what was fascinatingis he's trying to recruit Jerry Sloanas the coach 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 donewas hire Jerry Sloan as coach.
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OtherAt 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 slash business.Here's another idea from Thomas Edisonthat I think is fascinating.Really the way I think about a founderis like you're developing skillsthat you can't hire for.You're going to hire for everything else,but you shouldn't be hireable.And Edison wasn't.Edison expressing his viewson 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 myselfwas develop skills that you can't hire for.Capitalism rewards thingsthat are both rare and valuable.Estee Lauder would give you advicethat you need to hire peoplewho align with your thinking and values.Hire the best people.This is vital.Hire people who think as you doand treat them well.In our business,they are 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 wayto build a business.I think that your businessshould be an expression of your personalityand who you are as a person at the core.And so I think there is an artto the building of your business.And the reason I use the word art,I don't mean in like a hoity-toity,you know, pretentious manner.That's not me at all.I don't even care about art at all, really.I mean that you're making decisionsnot just based on economics.Like there are non-economic important decisionsbased on how you're building your business.Like you could probably make more moneydoing decision A,but decision A goes against who you are as a personor you just don't like itor 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, hire people who think as you do.And for whatever reason,when I read Estee Lauder say that,I was like, okay,there's like this art to what she's doing.One thing that's gonna be helpful in recruiting,this comes from Peter Thiel.I think this is the book, Zero to One.Understand that most companiesdon't even differentiate their pitchesto potential recruits and to hiring.So therefore like they're just gonna,as a byproduct of that,you're gonna wind up with a lower overall talent base.And so he says, what's wrong with valuable stock,smart people or pressing problems?
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OtherNothing.But every company makes these claims.So they won't help you stand out.General and undifferentiated pitches to join your company.Don't say anything about why a recruitshould join your company instead of many others.So that idea of like your pitch,your actual, he would tell you,you shouldn't be buildingan undifferentiated commodity business.But even above and beyond that,like the mission that you're trying to engage everybodyto join you in, that pitch,that sale you're trying to make to potential recruitsshould 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,they may not like your pitch,but they shouldn't be able to compare it to anything else.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 characteristicthat separates Steve Jobs from the mass of employees,it was his passionate enthusiasm.Steve had one speed, full blast.This was the primary reason we hired him.And one thing all these founders have in commonis that you 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 3000 employees at SpaceX.That's how important it was.One of Musk's most valuable skillswas his ability to determinewhether 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 thereand not many who are the real deal,Musk said of his approach to interviewing engineers.I can usually tell within 15 minutesand I can for sure tell within a few daysof working with them.Musk made hiring a priority.He personally met with every single personthe company hired through the first 3000 employees.It required late nights and weekends,but he felt it was importantto get the right people for his company.And then to close on this,we started with Steve Jobs telling uswhy it was so importantand why it should be a large partof 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 is what he says.It's not just recruiting.After recruiting, it's building an environmentthat makes people feel they are surroundedby equally talented peopleand their work is bigger than they are.The feeling that their work
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David Senrawill have a tremendous influenceand is part of a strong, clear vision.So that is the end to that 20-minute mini episode.I just re-listened to the whole thingand it really does, I think,it's a perfect explanation and illustrationof why I think Founders Notes is so valuablebecause some of those books I haven't readin five, six years.And just the ability to have a searchable databaseof all these ideas, like this collected knowledgeof some of history's greatest entrepreneursto reference and then contextually applyto our own businesses.It's nothing short of, it's magic.That's really the way I think about it.I think it's a massive superpower.It gives me a massive superpower.I couldn't have made 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 subscriptionand you can do that by going to foundersnotes.com.