American History Revised (46 page)

His father’s fortune came from a stroke of financial acumen. In 1908 the father invented the drilling bit that enabled oil exploration companies to finally cut through the bedrock that lay above Texas’s huge reserves of oil. But unlike most inventors, the elder Mr. Hughes refused to sell his products; rather, he rented them. Oil exploration companies and wildcatters paid $30,000 per well for the use of a Hughes bit; once oil was struck, the bit had to be returned to the Hughes Tool Company, where it was cleaned, sharpened, and rented out again for other drilling attempts. “Sheer genius,” said the president of Standard Oil (which rented fifteen thousand bits in the first decade alone). “Highway robbery, of course, but genius all the same.”

Renting to 75 percent of the world’s oil wells provided a nice “cash cow” income stream to the Hughes empire for the rest of the century.

Today’s most successful investor is Warren Buffett, the world’s second-richest man after Bill Gates. Mr. Buffett is a man who knows his history. “Successful investing,” he says, “means knowing when to buy, when to sell, and when to rent.”

1915
By popular demand, the most influential motivational speech of all time
was finally published: “Acres of Diamonds” by Russell Conwell, a Baptist minister in Philadelphia. Having first delivered the sermon during the Civil War, Conwell traveled the country and delivered it six thousand times before his death in 1925. It’s a parable about a successful Persian farmer named Ali Hafed, “the man who would be rich.” It seems that Ali was a man of some wealth, but he was unhappy because he lusted to possess the richness of diamonds. Told there were diamonds in a faraway land, Ali Hafed sold his farm and set off in search of diamonds. Years later, after thousands of miles and poor and despondent, he threw himself into the sea, never to be seen again. In the meantime the man who bought Ali Hafed’s farm took his camel out for water one day, and saw something flashing in the sunlight. It was a diamond. Looking further, the man found the place was filled with diamonds greater than the diamonds of Golconda, greater than the diamonds of the Kimberly Mine. Poor Ali Hafed! Says Conwell, “Had Ali Hafed remained at home and dug in his own cellar or in his own garden, instead of wretchedness, starvation, poverty and death [in] a strange land, he would have had ‘acres of diamonds’!” Continues Conwell, “Acres of diamonds are to be found in this city, and you are to find them. Many have found them. And what man has done, man can do. They are not in faraway mountains or in distant seas, they are in your own backyard if you will but look for them.” The moral of the story: stick with what you know, don’t give up so easily, don’t be swayed by the allure of greener pastures, the seeds of fortune are close at hand. Dig in your own backyard! Using Conwell as an inspiration, here are some stories of investors and businessmen who missed the diamonds lying in their gardens:

Henry Comstock, an illiterate miner who staked a claim to the Nevada mine that bears his name, sold all his holdings for $11,000 so he could open a trading-goods store. The store went belly-up and Comstock ended up putting a gun to his head. In the meantime the Comstock Lode turned out to be the biggest mine in North America, far richer than the California Gold Rush. Between 1859 and 1878, the Comstock Lode yielded $400 million in silver and gold (equivalent in GDP terms to $600 billion today).

In 1878, after eighteen months in business, the Bell Telephone Company ran out of money and Alexander Graham Bell offered to sell out to Western Union for $100,000. Western Union’s president turned him down: “What use could this company make of an electrical toy?” Western Union’s lead investor Cornelius Vanderbilt agreed: why would people want to talk when they could use Western Union’s telegraph and get a printed message? With no investors in sight, Bell turned to franchising, and within a year was self-financing with 185 franchisees. “Ma Bell” eventually became the second-largest company in the United States, and was on its way to becoming number one when the government broke it up in 1982.

In 1888, in Atlanta, a brilliant chemist named John Pemberton—who had earned his medical degree at age nineteen, gone on to start up eighteen companies, and owned a research lab that was recognized as the best in the state of Georgia—invented a wine drink that he changed into a mouthwash and finally into a soft drink that tasted pretty good. After incorporating the company, he became discouraged by first-year sales of seventy-five dollars—incurring a personal loss of fifty dollars—and, in need of money to pursue other interests, he sold the Coca-Cola company to one of his employees for $2,300. Within ten years Coca-Cola was the number-one drink in the United States.

In 1894 Alvah Roebuck, cofounder of Sears, Roebuck, sold his half-share to Richard Sears for $25,000. Years later, at the beginning of the Great Depression, after he had squandered the money and was flat broke, he went back and got a menial job at the company that once had been half his. Richard Sears, in the meantime, had recently died, leaving an estate of $25 million.

In 1906 Alex Malcolmsen, founding partner and chairman, sold out to his partner Henry Ford for $175,000; fifteen years later that stake was worth $63 million. Down the road at General Motors, an equal debacle took place. In 1910 Will Durant, the founder of General Motors, got turned down by J. P. Morgan as a “visionary nitwit” for predicting that there would soon be fifty thousand automobiles on the road. Durant went to another investment group and finally got a $15-million loan. But the terms were stiff. The investment group demanded control of the board and all the company’s assets pledged as security. The lawyers who drew up the agreement considered General Motors so shaky they cut their fee in half just to get all cash, no stock. From 1913 to 1919 the share price rose from thirty dollars to $850.

Lenin once said that “of all the arts, the cinema is the most important.” Yet few industries have been so out of touch with the public as the movie business. When the technology of sound became feasible in the mid-1920s, Harry Warner of Warner Bros. dismissed the idea: “Who the hell wants to hear actors talk?” Equally shortsighted was Darryl Zanuck of 20th Century Fox. Offered the opportunity in 1946 to bankroll a company starting to manufacture television sets, Zanuck turned it down: “Video won’t be able to hold any market after the first six months. People will soon get tired of staring at a plywood box every night.”

An inventor named Chester Carlson came up with a new process to make photocopies of a document on plain paper. He went to the predominant image company in America, Eastman Kodak, and offered to sell them his patents for a cheap price if they would commercialize his invention. Kodak, fearful of antitrust problems, turned it down. Carlson then went to a much smaller company called IBM; IBM,
too, gave him the cold shoulder. Finally, in the late 1940s, a small company making photographic paper agreed to acquire the patents and give Carlson the platform he needed. The company’s name was Haloid, later changed to Xerox, and an industry was born.

At about that time, 1948, the Ford Motor Company was offered the opportunity to buy Germany’s largest auto manufacturer, Volkswagen. The offer was simple: just take over the company. Don’t pay anything. Yet Ford turned it down. The Englishman in charge of Ford-Europe opposed the deal because he feared the Ford German subsidiary might eventually become stronger than Ford in England. Asked by Henry Ford II what he thought of the German offer, he retorted, “I don’t think what we are being offered here is worth a damn!” By 1954 Volkswagen had become the world’s fourth-largest automobile manufacturer (after the Detroit Big Three), and in 1972 the Volkswagen Beetle surpassed the Model T to become the best-selling car of all time. To this day, Volkswagen remains the most powerful auto company in Europe. Even greater errors were still to come. In the mid-1950s the Ford Motor Company was approached, hat in hand, by two Japanese auto companies, seeking an alliance of some sort. Ford blew them away as makers of “tin cars.” Today, Toyota is a lot bigger than Ford, and Nissan is more profitable than Ford. Admits a former Ford CEO: “[We] made some strategic errors … by not properly assessing the strength of the Japanese.”

In 1955 every bank in town turned up their noses at the businessman seeking a loan for his young company, even though it was already profitable. Getting desperate, he offered to sell half the business for $25,000; there were no takers. Today that $25,000 would have made one a multibillionaire. The company, of course, was McDonald’s. The businessman was its founder, Ray Kroc.

In the late 1970s two college students developed a prototype personal computer for the general public. They went to Atari with this offer: “What do you think about funding us? Or we’ll give it to you. We just want to do it. Pay our salary, we’ll come work for you.” Atari said no. The young men then went to Hewlett-Packard, who told them, “We don’t need you, you haven’t got through college yet.” The two entrepreneurs never did finish college; instead they went on to bigger things. Steve Jobs and Steve Wozniak founded Apple Computer.

We close with a quintessential all-American story Ben Franklin would have liked, a story with a happy ending.

In 1924, forced to sell the family farm after his father died, and mired in debt, he dreamed of striking it rich in the Kansas oilfields. Teaming up with two partners and borrowing money from his mother, he headed off to Kansas. He and his partners
acquired a 320-acre site and commenced drilling. After several false starts, they got down as far as nine hundred feet when their funds ran out and they had to stop. They parted ways, and the dejected young man trudged back to Missouri to face his mother and his fiancée. The man who bought the property resumed drilling and immediately hit a gusher. His company went on to become Cities Service, one of the largest oil companies in the United States.

Harry Truman: He quit too early.

As for the young man, he started another business—a store—but it went bankrupt. The only thing good in his life was that his fiancée stuck with him. Finally, at the urging of a friend, he entered politics. Many years later, sitting in the Oval Office, Harry Truman admitted had he struck it rich in the Texas oilfields he never would have become president of the United States.

1929
“He should be the most thanked man in the world,” said the
New York Times
on his seventy-fifth birthday. No buccaneer like many self-made moguls, this enormously wealthy man sought more than money. He was George Eastman, founder of Eastman Kodak, the pioneer of roll film and the simple box camera. His company slogan: “You press the button, we do the rest.” By creating an affordable product that helped preserve memorable moments, George Eastman richened people’s lives.