Post Written by Rob Minton
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For this article, I read David Nasaw’s biography titled “Andrew Carnegie.” It is a fascinating book, and I highly recommend it. Anything in quotes was excerpted from this book.
Andrew was what everyone would consider a “rags to riches” story. His family immigrated to the United States from Scotland when he was 13 years old. He began working at a cotton mill upon arrival. After a short time, he changed jobs and began to work as a telegraph messenger for the Pennsylvania Railroad. During his employment with the railroad, he started to invest in companies that supplied the railroad. Soon after he made these investments, these companies began paying big dividends. At the age of 26, he had enough money to travel whenever he chose. His dividend checks arrived whether he was in Pittsburgh or Scotland, working or playing. His railroad salary constituted only 5 percent of his income.
At age 30, he resigned his railroad position to go into business for himself with his former bosses at the Pennsylvania Railroad. By his early 30s, he had accumulated his first fortune in oil wells, iron manufacturing, bridge building and bond trading.
At the age of 66, he sold his steel empire for $400 million dollars. Andrew Carnegie’s share came to $226 million, nearly $120 billion in today’s dollars. He went from zero to $120 billion in 53 years, which translates into $2.3 billion a year. This was accomplished during a time when there were no phones, no fax machines, no Internet, no e-mail, no cars and no smartphones.
In fact, I was amazed to learn that his workday was confined to only a few hours in the morning. He typically would accomplish as much in these hours as most men do in a week. He left the day-to-day decision-making to his partners and managed his businesses remotely via mail and telegraph.
Andrew Carnegie was fascinating. He built an enormously profitable empire in his spare time. Andrew Carnegie’s career started out in the railroad business. He rose to high ranks within the organization and was able to see the future of the railroads, as well as the business opportunities available. The railroad was entering a period of steady and unparalleled expansion. Andrew decided to invest his money in companies that supplied the railroads. He invested in more than 10 companies that sold their products to the railroads. In fact, one of the companies he invested into was a company that built bridges for the railroads. Andrew Carnegie, with partners from the Railroad Company, launched a bridge building company. The company profited from contracts with his former employer, the Pennsylvania Railroad. He had an inside connection because his silent partners remained employed in high-level positions at the railroad. This would probably be illegal today.
His bridge company was spending a great deal of money on ore to manufacture the bridges. So he started an ore company to supply his bridge company. Now, he and his partners made money on both ends of the deal. “They profited from the contract between the railroad and the bridge company; then profited again when the bridge company purchased its iron from their iron mill.”
When he turned 33, he sat down and analyzed his finances. His net worth was about $75 million (in today’s dollars). His annual income in dividends was more than $10 million. He figured that “if he carefully managed his assets over the next two years … he would, he estimated, be able to guarantee this level of income in the future.” Although he could have retired at the age of 35, he didn’t.
At the age of 37, he began to focus all his attention and capital on the steel business. Andrew and a few partners started a steel manufactory. They named this new business “Edgar Thompson” after the nation’s most respected railroad executive.
In 1873, there was an economic panic and Andrew used this situation to buy out many of his partners. These buyouts gave him the controlling interest in the growing steel business.
In 1880, Carnegie decided to purchase about 11 percent of H.C. Frick Coke Company when the owner needed capital to expand his holdings. This was a good deal for the Carnegie because Frick’s company supplied coke to his steel companies. Two years later, Carnegie would increase his ownership to 50 percent. By 1888, Andrew Carnegie would own 74 percent of the stock in Frick’s coke company.
Let’s stop for a moment and summarize four lessons. They are:
- He was able to foresee the demand for railroad transportation and the unlimited opportunities surrounding this demand.
- He put all of his eggs in one basket by investing in companies that supplied the railroads. His mission was to supply the railroads with whatever they needed and make a profit while doing so.
- He had calculated his “enough is enough number” and was focused on obtaining it in order to retire.
- He consistently increased his ownership percentages of the various businesses by buying out his partners. Usually, this occurred when times were tough or his partners needed money. He turned adversity into opportunity.
These actions by Andrew were obviously very smart, but his true genius came from his overall business strategy. Andrew Carnegie profited from his business expenses by controlling the companies providing his companies with supplies or raw materials. This strategy allowed him to profit from every step in the manufacturing process. Most companies only profit from one step, while he was profiting from multiple steps.
His bridge company purchased ore from his ore company. His bridge company also purchased steel from his steel company. His steel company purchased coke from his coke company. This means he was extracting multiple profits at the same time.
Now this is all fine and dandy for Andrew, but how does it apply to us? How can we use his overall business strategy ourselves?
I believe there are two separate ways to apply his strategy to our real estate sales businesses.
First off, we can look at where our money is going and try to own or profit from our expenses. Where do the majority of your business expenses go? Do you do a lot of printing? If so, could you own a print company? Do you do a lot of advertising in the newspaper? If so, could you create and own your own newspaper? Do you spend a lot of money on rent for your office? If so, could you own the building and pay rent to yourself? Take some time and study where your money flows. Think of how you might be able to profit from your expenses. Andrew set himself up to profit from his expenses by owning businesses that supplied his steel manufacturing business.
Granted, Andrew Carnegie used inside information and applied strategies that would be considered illegal today. I’m not suggesting that you break any laws. However, I am suggesting that you consider his “profit from your expenses” strategy and decide if you can leverage it yourself in some fashion — legally!
Let’s move on to the second way to use Andrew’s overall business strategy. I am going to flip this around a little, but hopefully you will still be able to see the connection.
Andrew started at the top of the business chain and worked his way down. He went from bridge company to suppliers. Could this strategy work going the other way? Could you start at the bottom of the chain and profit going up?
The idea is to build secondary businesses serving the same customers on top of your real estate sales business. I have built secondary businesses on the back of my real estate sales business. I have leveraged one business into new businesses. However, it is important for you to note that this idea does not work unless you specialize. It is very hard to build secondary businesses if you don’t have a target market.
Think about Disney – they specialize in families. They have built multiple secondary businesses on the back of their primary business, all targeted towards families.
Andrew specialized and leveraged one business into many other businesses. This is an extremely valuable wealth-building lesson.