$1.20 a week → $480 million exit. How did a 13-year-old Scottish immigrant become one of the richest men in history?
In this deep dive into Andrew Carnegie's life, we uncover the four timeless principles that built the largest steel empire in the world—and why they're more relevant than ever for real estate investors.
What You'll Learn:
🔍 Information Arbitrage: How Carnegie turned telegraph operator insights into massive investment wins (including a $217 investment that generated $5,000 annually)
⚙️ Cost Control Obsession: The revolutionary systems Carnegie used to track every penny—including weighing scales at every point in his mills and daily cost reports sent across oceans
📉 Counter-Cyclical Genius: How Carnegie built his first steel mill during the Panic of 1873 while 89 railroads went bankrupt around him
🏗️ Vertical Integration: Why Carnegie owned everything from iron mines to railroads—and how this applies to modern real estate
The Uncomfortable Truth: Everything Carnegie did is "anti-scale" by today's standards. He stayed in operational details even as a multi-millionaire. But if it built a $15 billion empire, maybe we're thinking about scale wrong.
Real Estate Applications:
- Why your information network matters more than your spreadsheets
- The laundry contract ripoff costing you $6,000+ annually
- Why most investors delegate operations too early (and lose fortunes doing it)
- How to build cash reserves for counter-cyclical investing
This isn't just a history lesson—it's a masterclass in operational excellence that applies directly to building wealth through real estate today.
Key Quote: "Cut the prices, scoop the market, watch the costs and the profits will take care of themselves." - Andrew Carnegie
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Get your own copy of Timeless Wealth: Real Estate Through the Ages.
If you want to learn about new investment opportunities through Lombard Equities Group (accredited investors only), please reach out here.
Think Well. Act Wisely. Build Something Timeless.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_00 (00:01):
Welcome back to the Timeless Investor Show.
I'm Ari Van Gemeren, fundmanager, student of history, and
host of this show.
And today, we're going to diveinto one of my absolute favorite
biographies and businessmen ofall time, Andrew Carnegie.
Picture this, a 13-year-oldScottish immigrant working
(00:24):
12-hour days in a Pittsburghcotton mill for$1.20 a week.
His family had fled Scotlandwith essentially nothing after
his father's weaving businesswas destroyed by mechanization.
They lived in a one-room house.
This kid had no formaleducation, no connections, no
(00:44):
capital.
There's countless stories likethat, and many of them don't go
anywhere.
But 53 years later, Thisimmigrant kid sells his steel
company for$480 million, roughly$15 billion in today's money,
making him one of the wealthiestmen in history and somebody that
(01:06):
has been written about anddiscussed extensively since it
happened because there's so muchto learn.
That is Andrew Carnegie's story.
It's not a fairy tale.
There is gold.
in the pages of his biographiesand the pages of his story.
(01:27):
So today, we're going to diveinto him, his life, and what
lessons we as real estateinvestors, entrepreneurs, and
timeless builders can take awayfrom what he did.
Because here's the thing, hisrise from a$1.20 a week telegram
boy to steel baron isn't just aninspiring rags to riches story,
(01:49):
although it is definitely that.
We're going to actually lookinto the exact principles that
helped him to build U.S.
Steel into one of the mostsuccessful conglomerates of all
time.
And I want to tell you somethingabout this episode.
I was looking at some of ourrecent real estate deals and
looking at operational metrics,and I kept coming back to
(02:13):
something Carnegie said.
And you're going to have toexcuse the Scottish brogue.
We are going to have a healthydose of William Wallace-esque
vibes on this show.
But here's an exact quote fromthe man.
Watch the costs and the profitswill take care of themselves.
Most investors, includingmyself, many times in my career,
(02:35):
have gotten this completelybackwards.
We, Royal We, obsessed over thebig picture, the acquisition,
the financing, the exitstrategy.
And the reason is because it'sexciting.
It's fun.
It's cool to post on LinkedIn orInstagram or whatever your
social media choice is aboutyour latest deal you just
crushed or what you're takingcare of.
But nobody's posting and gettinga lot of public acclamation for
(03:00):
late nights reviewingspreadsheets and understanding
stuff.
And I think that's true of theindustry in general.
I think a lot of people arerelatively sloppy on details,
again, including myself atseveral points in my career.
I don't think everyone trackstheir true cost per unit.
They don't know their realmaintenance expense.
They're not digging in andauditing the actual invoices
that are coming in on a monthlybasis.
(03:20):
And that's especially true asyou scale your portfolio.
It becomes harder to do it, butit doesn't mean that it's not
important.
And I think at a general level,we just say, we don't always
understand our own actualmanagement efficiency.
But Carnegie did, and heunderstood something that most
people miss.
Wealth isn't built...
(03:41):
in a fancy boardroom withleatherback chairs and nice
pictures.
It's built in the boiler room.
It's built in the day-to-dayoperational discipline on the
ground that compounds overdecades to create massive value.
So today, we're going to extractthe timeless lessons from
Carnegie's playbook and see howthey apply to building real
(04:03):
wealth in real estate,investing, and entrepreneurship
today.
So do you remember Carnegie'sstart as a telegraph boy?
That information advantage helearned never left his playbook.
So here's the real story.
In 1853, Carnegie caught theattention of Thomas Scott,
superintendent of thePennsylvania Railroad, who hired
(04:24):
him as his personal telegrapher.
But Carnegie didn't just deliverthe messages and be satisfied
that he had a pretty cool job.
He actually studied them.
He understood that he was seeingthe nervous system of American
commerce in real time.
And remember, this This is anera that predates telephones and
mobile phones and all this kindof stuff.
(04:45):
Telegraph was how messages weresent.
And then there came a momentthat changed everything.
One morning, an accident hadcreated a massive traffic jam on
the Western Division.
Scott couldn't be located.
So Carnegie, who was just 18years old, made a decision that
could have easily gotten himfired.
(05:07):
He sent instructions viatelegraph under Scott's name,
rerouting several trains andquickly unclogging the system.
So when Scott found out, he wasso pleased that he bragged to
company president J.
Edgar Thompson, calling Carnegiehis little white-haired Scottish
devil.
But here's where the informationarbitrage really started paying
(05:29):
off.
Scott began alerting Carnegie toinvestment opportunities that
only railroad insiders wouldknow about.
In 1855, Scott told Carnegieabout an upcoming sale of Adams
Express Company shares, apackage shipping company that
had contracts with thePennsylvania Railroad.
Carnegie's mother mortgagedtheir family home for$500 to buy
(05:51):
the shares.
Then came the big one, theWoodruff Sleeping Car Company.
Carnegie invested just$217.50,money he'd saved from his
railroad salary.
But he knew something that hiscompetitors didn't.
the railroad was about to givesleeping car contracts to
Woodruff.
And within two years, that tinyinvestment was generating$5,000
annually, more than three timeshis railroad salary.
(06:16):
Carnegie later said, it was asthough I was lifted to paradise.
I felt that my foot was upon theladder and I was bound to climb.
But here's the key.
Carnegie wasn't just passivelyreceiving tips.
He was actively building aninformation collection system.
He cultivated relationships withrailroad executives, steel
suppliers, government officials.
(06:37):
He understood that in a rapidlyindustrializing economy,
information moved faster thanmoney, and whoever had the best
information could make the bestinvestment decisions.
And so that information networkbecame the foundation for
building U.S.
Steel.
When Carnegie was ready to sellhis steel company in 1901, he
knew exactly who had the capitaland ambition to buy it, J.P.
(06:59):
Morgan.
But more importantly, Carnegieknew that the true value of what
he was selling because he hadbetter information about steel
demand, production capacity, andmarket dynamics than anyone else
in the industry.
And his network told him thatMorgan was assembling a steel
conglomerate and would needCarnegie's assets to make it
work.
Carnegie could have asked forany price and he basically did.
(07:23):
He sold his business for$480million, as I mentioned in the
introduction.
So this is Carnegie's firstmajor principle, information
asymmetry creates profitasymmetry.
And I want to point out anobvious fact here as we discuss
this story.
(07:44):
A lot of his informationasymmetry I just described would
today be described as insidertrading.
But the key is, if we get pastthe fact that he was doing that,
let's just talk about the keyprinciples there.
He was cultivating thosenetworks.
He was in the flow ofinformation.
He understood what was going on.
He was working.
(08:05):
He was working his network tounderstand where the
opportunities lay.
And so many people, ourselvesincluded at times, sort of
neglect that part of the story.
We spend a lot of time behindspreadsheets, behind our
computer, not out with peoplelearning.
(08:26):
So in real estate, yourinformation network is
everything.
You need relationships withbrokers who can help guide deals
to you.
You need, if you're a developer,you need connections with city
planners who understand zoningchanges.
It's a reason that thedevelopers, as a macro class of
real estate people, generallyare very political people.
(08:48):
and very involved in thepolitical scene.
You need relationships withcontractors who can give you
accurate renovation estimatesquickly.
You need trusted relationshipswith them.
Better yet, if you haveconnections with the direct
supplier of the materials youneed so you can try to cut out
the middlemen and not get hosedby people that are buying
appliances on your part,something we've been looking at.
(09:10):
Most investors...
And this is a broadgeneralization, but most
investors are passiveinformation consumers.
They read the same blogs, theyattend the same conferences, and
they hear the same opportunitiesas everyone else.
But Carnegie built an activeinformation collecting system.
He paid for insights that othersdidn't have access to.
He cultivated relationships thatgave him advanced notice of
(09:33):
opportunities.
He understood his market at avery deep level and And I'm
going to get into that much morebroadly later.
But he understood theinformation flow of his market
really well.
I want to give you guys a smallexample from my own life that
I've recently been working on.
So we've been seeing this issueday in and day out.
(09:54):
But the other night, I was outto drinks with a good friend.
And I hadn't seen him in years,right?
So he's a local real estate guyhere in Portland and owns a
property management company.
And we were just out at...
his club having drinks andtalking.
And I asked him, what are youdoing on insurance right now?
And he was like, well, we justmoved our entire portfolio to
(10:16):
this insurance company thatended up pricing us at about the
cost of American Family, who wasan insurance company that has
basically exited multifamilycompletely.
And we've seen insurancepremiums go up two to three X in
that time.
So Immediately, I said, I got totalk to these guys.
And on the spot, he made anemail introduction to that team.
(10:38):
And now I'm meeting with them todiscuss potentially rolling our
entire real estate portfolio inand cutting our premiums by 50%.
If I hadn't gone to drinks withhim, right?
If I hadn't gone out and startedactively gathering information
on this from other operators, ifI stayed behind my spreadsheet
and just crunched numbers...
(10:59):
this would not have happened.
Or let's take this newsletterand podcast, for instance.
I mean, this is a contentproduction ecosystem where, you
know, I hate to say that.
Somebody told me I'm a contentcreator the other day and I was
embarrassed because it's notreally what I am.
But that's okay.
I am a content creator.
I guess it's the end of the day.
But this ecosystem Newsletterand podcast is also an active
(11:21):
source of information.
I'll tell you why.
Last week, I had a podcastinterview with Tony DeFede, who
came to me through this podcastand this newsletter.
And he shared insights onbuilding captive insurance
companies, something I've beentrying to figure out how to do
for like two years, right?
And that's active informationgathering, guys.
(11:43):
It's so critical.
And it's important becauseeveryone's getting crushed on
insurance.
And if I had stayed in myoffice, it wouldn't have
happened.
So all of this informationgathering, asymmetry, active
management of your stuff ismaterially important for staying
ahead of the game and makingreal money.
Okay, the next thing I want todive into on my list of things
(12:05):
about Carnegie that I findfascinating is probably one of
my favorites.
Information asymmetry is great,but Carnegie had a cost control
obsession.
Most biographies of Carnegiefocused on his philanthropy, his
libraries, his gospel of wealth.
But that's not actually whatmade him rich.
What made him rich was an almostpathological obsession with
(12:27):
operational efficiency.
Carnegie didn't just own a bunchof steel mills and sit at the
top of his fiefdom.
He revolutionized how steel wasmade by implementing what he
called detailed costs ofproduction accounting
procedures.
that enabled the company toachieve greater efficiencies
(12:47):
than any other manufacturingindustry of the time.
Here's his famous philosophy.
Cut the prices, scoop themarket, watch the costs, and the
profits will take care ofthemselves.
Excuse me.
I'm so sorry.
Please forgive the Scottishbrogue.
I'm just having too much funwith this.
I'm going to keep going.
Think about what I just said,what he just said for a second.
Most business owners focus onrevenue.
(13:10):
And then they worry about cost.
Carnegie flipped it completely.
He obsessed over cost first,knowing that if he could produce
cheaper than anyone else,profits were inevitable.
But Carnegie's cost obsessionswent far beyond just being a
general principle.
He implemented specific systemsthat were revolutionary for his
time.
First, he installed weightingskills at every single point in
(13:34):
his steel mills.
Every piece of material thatmoved through his plants was
weighed and tracked.
He wanted to know exactly wherematerial was saved and where it
was wasted.
This was unprecedented in thesteel industry.
Second, he compared every workerdoing the same job against every
other worker.
This wasn't just aboutproductivity.
It was about finding the mostefficient methods and
replicating them across all hisoperations.
(13:56):
Third, he demanded daily costreports from every plant, no
matter where he was in theworld.
When Carnegie was traveling forpleasure...
which he frequently did in hislater years, he relied on
detailed cost sheets that weresent to him wherever he was.
He could be vacationing inScotland and still know exactly
what it costs to produce a tonof steel in Pittsburgh.
(14:18):
And think about that for asecond.
I mean, everything I justdescribed is basically modern
day big data analytics, right?
I mean, it's a whole industrytoday in technology to track and
assess some of these metrics.
Carnegie did it with scales andaccuracy.
paper books where somebody waswriting it meticulously into the
books and delivering it to him.
(14:38):
I mean, think about that for asecond.
The mindset of a man to buildthat system when it was not easy
to do.
It's so easy today, and yet somany of us still don't do it.
Why?
Like, Carnegie could do it inScotland with...
Reports being shipped across theocean to him in coal-driven
(15:01):
steam liners, or I'm mixing shiptypes there, but you understand
what I'm saying.
And we have that data today atour fingertips, and we still
don't look at it.
So just think about that.
And here's where things getreally interesting.
Carnegie hired a German chemistspecifically to figure out what
was happening inside his blastfurnaces.
Most iron worker owners, ironworks owners at the time, had no
(15:25):
scientific understanding oftheir own processes.
Carnegie was surprised to findthat owners of ironworks knew
very little about what went oninside the furnace.
But by understanding the actualchemistry, Carnegie and his team
figured out how to significantlyincrease output through what
they called hard-drivingfurnaces, increasing the airflow
(15:47):
to maximize efficiency.
This wasn't an operationalimprovement.
It was scientific improvementthat he invested in and found
for his own businesses, right?
First principles thinking.
Carnegie recognized that most ofhis competitors didn't even
understand the way theirprocesses work.
(16:08):
He figured it out.
And Carnegie found his perfectpartner in operational
obsession, Captain WilliamJones, who superintended the
Edgar Thompson Steelworks.
Jones was described at the timeas probably the greatest
mechanical genius that everentered the Carnegie shops.
Jones shared Carnegie'sobsession with costs and speed
(16:29):
of production, and he madenumerous improvements to
accelerate the flow of metalthrough various stages before it
cooled.
So by 1892, in the middle ofwhat should have been a
challenging economic year,Carnegie Steel made$4.5 million
in profits.
Carnegie himself said,"'Wasthere ever such a business?'
While his competitors werestruggling, his cost control
(16:51):
systems allowed him to thrive.
Here's the thing that I reallywant you to take away from this.
Carnegie's competitors hadaccess to the same technology.
They had access to the same rawmaterials.
They had access to the samelabor markets.
But Carnegie won throughoperational discipline that
others couldn't match.
His mills operated likeprecision machines while his
(17:13):
competitors were chaotic.
So here's Carnegie principlenumber two, micromanagement of
costs can and does create macrowealth.
In real estate, this meansknowing your true cost per unit,
not your ballpark expenses.
It means tracking maintenancecosts with precision, auditing
invoices, understanding the flowof cash through your property.
(17:36):
When you look at a P&L from yourmanagement company or from your
sponsor, they're Do youunderstand what the adjustments
and all the below the line moneymovements actually mean from a
first principles basis in termsof where money's going, where
it's being allocated, how it'sbeing spent?
You have to understand it.
You have to be deep.
(17:56):
I know there's a focus in thisindustry on scale, scale, scale.
And sometimes scale, scale,scale doesn't work well with
micromanage, micromanage,micromanage.
But I've come to realize, in mytime, acquiring over$150 million
of real estate and being in thisbusiness now for eight plus
years, that it is the only thingthat matters.
(18:20):
Micro management and precisioncontrol of what's happening at
your property.
You have to understand.
I see investors, again, quotingmyself to my chagrin over time,
who couldn't tell you what theircap rates were on entry or what
their current valuations were Ormany questions that sponsors
(18:41):
don't even track or LPs maybedon't even understand about
their own deals.
But they all track theiracquisitions obsessively and
their inbound revenueobsessively.
Yes, we increase top linerevenue.
We increase top line revenue.
What about the cost controls?
Carnegie, if he was a realestate operator, would have
(19:01):
crushed all these people.
And in competitive markets likesteel mills, he did.
The third piece I think is partand parcel with cost control is
that vertical integration isyour competitive moat.
He understood something that Ithink a lot of business owners
do miss.
If you don't control your supplychain, your supply chain will
(19:25):
control you and it will dictatethe cost of owning your assets.
Carnegie didn't just own thesteel mills.
He owned the iron ore mines inMinnesota.
He owned the coal mines inPennsylvania.
He owned the railroads thattransported raw materials.
He owned the ships that carriedore across the Great Lakes.
When his competitors, forexample, needed iron ore, they
(19:45):
paid market prices to suppliers.
When Carnegie needed iron ore,he paid himself.
His competitors were subject tosupply disruptions.
Carnegie controlled his ownsupply.
So this is Carnegie principlenumber three.
control the value chain and orbe vertically integrated.
And look, let's talk about thisfor a second, because what
Carnegie did, again, right,different era, different time,
(20:08):
this is the Gilded Age, peoplegot away with this kind of
stuff.
We would call that a trust or amonopoly today, and the
government wouldn't allow it.
But in real estate, they don'tcare.
So why aren't you verticallyintegrated?
Why aren't you thinking like avertical integrator to take
complete control of youroperations and and Own
everything.
So vertical integration andproperty ownership looks like
(20:29):
controlling the propertymanagement input.
It looks like having your ownmaintenance crews and building
relationships with the people sothat you're not getting
contractor markups andeverything.
It looks like having directrelationships with lenders so
you're not going through brokersevery single time.
All of this, by the way,everything I'm describing is
anathema to the guru industryAnd most sponsors, the way they
(20:54):
think, because the industry isfocused so much on scale, scale,
scale, drive acquisition fees,drive deal fees, and all of this
is the enemy of scale.
I don't think it's the enemy ofscale.
I think it is the foundationnecessary to scale, and that is
something that is missed in thisbusiness.
It was missed for me, by theway.
I came up in this businesslistening to BiggerPockets and
(21:17):
reading every book I could find,and the constant advice was,
Don't manage your own deals.
Don't manage your own deals.
Because if you manage your owndeals, you are buying yourself a
job.
Okay, maybe that's true.
But then the missing piece ofeducation is what do property
management companies do?
How do they rip you off?
How are they taking money fromyour pocket and paying
themselves?
And you don't even realize itbecause you've never been in the
(21:39):
trenches.
You never figured it out.
Carnegie would never haveallowed that to happen in this
business.
But it's something that mostsponsors routinely and
systematically do.
and think they're being smart byscaling and working with, and
I'm using air quotes, best inclass third party property
management companies, best inclass contractor, best in class
(22:00):
this, best in class that.
We have been focused more hereon vertical integration as I've
started to realize howincredibly important the cost
inputs are in this business.
Management's a key one, right?
Here's a small one that I'vetalked about before.
Laundry contracts.
I've been talking about this adnauseum.
Laundry contract, leasing yourlaundry out is a massive rip
(22:22):
off.
Think about the math on this.
A laundry machine costs about, Idon't know, a thousand bucks,
right?
So a washer and dryer, maybe youbuy a bulk scale, you're getting
$1,500, right?
You give 50% of the revenue fromthose machines to the laundry
leasing company.
(22:43):
And it's questionable what theyactually do, right?
It's questionable what they doother than put some capital into
buying the machines and givingto you up front.
But I'll give you an example.
We have a building with eightmachines in it.
And those machines produce to usnet revenue of about$6,000 a
(23:04):
year.
But the leasing firm takes 50%of the revenue, so they're
making$6,000 a year.
Now, think about the math.
I invest$8,000, call it$1,000per machine, into those eight
machines, and I make$6,000 ayear.
So two things.
First of all, it's a huge ripofffor you as an operator.
(23:25):
It's a huge ripoff.
Why would you do that?
Well, most people do itbecause...
I don't know.
They're lazy or they don't havethe money or they don't want to
buy the machines or they thinkthey're getting some sort of
value from outsourcing to alaundry leasing company.
But you're giving up$6,000 ayear on an$8,000 investment.
Think about that.
Why do we do that?
Why would we do that?
(23:45):
Well, the answer is most peopleare outsourcing their costs,
right?
We are not verticallyintegrating.
Why not?
Get control of it.
So I've ranted enough on costcenters being important.
It's incredibly important.
It's one of the most importantparts of this business.
Actually, not one of.
It is the most important part ofthis business.
Cost, control, verticalintegration, own everything,
(24:08):
control what goes in and out ofyour business, and you will
thrive.
That's what Carnegie did.
That's what we can do.
The fourth principle iscountercyclicality and striking
when...
Other people are scared.
The time to expand is when noone else does, okay?
(24:33):
And let's dig into this a littlebit.
So Carnegie, when times are bad,when the market is bad, many
people hunker down and they justtry to weather the storm.
Carnegie did the opposite.
Here's a quick anecdote for youguys.
In 1872, Carnegie startedconstruction on his first steel
mill.
the Edgar Thompson Steelworksjust outside Pittsburgh.
(24:55):
He began concentrating on steelat age 38, which by the way is
awesome for me to hear and toknow because I'm 38 and it makes
me feel good about myself forwhere I am right now in life.
And Carnegie was just gettingstarted at 38.
That is awesome.
So he went on to at 38 and hebegan concentrating on it at 38
and began founding what wouldbecome a steel empire.
(25:16):
And then the panic of 1873 hit.
In September 18th, 1873, thebanking firm of Jay Cook and
Company, which had been thegovernment's chief financier
during the Civil War, it washeavily invested in railroad
construction, declaredbankruptcy.
This triggered what became knownas the first Great Depression in
(25:37):
American history.
The economic collapse wasdevastating.
89 of the country's 364railroads crashed into
bankruptcy.
A total of 18,000 businessesfailed in just two years.
By 1876, unemployment had risento 14%.
14%.
But here's the thing.
Carnegie finished theconstruction of his Edgar
(25:58):
Thompson Steelworks in 1873,right in the middle of the
economic panic.
While his competitors were goingbankrupt, Carnegie was building
the most advanced steel mill inAmerica.
Why was he able to do this?
Well, because of his principleof cost control.
Carnegie's operations were soefficient that he could remain
profitable even when steelprices collapsed.
(26:19):
But more importantly, he hadretained cash reserves from his
profitable years specifically inpreparation for moments like
this.
Carnegie's business philosophywas simple.
He retained a large part of theprofits earned in good times to
tide him over and give himflexibility in bad times.
I'm going to say it over andover again, guys.
The key to success in businessis to survive.
(26:40):
It is to survive.
Survivorship bias is a realthing in all industry, in all
business, especially in realestate.
And the people that we look upto today that have survived four
cycles, they survived.
That's why you know who theyare.
And how do you think theysurvived?
Cost control, conservatism, cashmanagement.
All of the above, but that's whywe know their names.
(27:03):
But the economic collapse alsogave Carnegie access to
everything he needed at firesale prices.
Construction costs plummeted,labor was cheap and available,
competitors were selling assetsto raise cash.
So while others were forced tocontract, Carnegie was able to
expand.
And the timing was perfect.
In August 1875, just as theeconomy was starting to recover,
(27:24):
Carnegie's Edgar ThompsonSteelworks made its first blow
using the revolutionary Bessemerprocess.
He was perfectly positioned tocapture the recovery, and the
results were extraordinary.
Carnegie alone estimated that heearned a 40% return on his
investment, a profit of$40,000from a$100,000 investment in the
(27:44):
mill.
While his competitors had spentthe Depression struggling to
survive, Carnegie's had builtthe foundation of what would
become the largest steel companyin the world.
But his counter-cyclicalstrategy didn't just take place
in 1873.
He repeated his strategythroughout his career.
During the depression of the1890s, while competitors were
cutting back, Carnegie was againexpanding, buying distressed
(28:06):
assets and positioning himselffor the next recovery, driven
again by his aptitude or desireor capability for withholding
and preserving cash and costcontrol.
So he understood, as weunderstand, I think, at a high
level today, that economiccycles can create the great
wealth transfer mechanisms andopportunities.
(28:28):
During panics, assets getrepriced from their peak
emotional highs to their troughemotional lows, and that's when
you're really able to buildgenerational wealth.
In real estate, this is obvious,this means building cash
reserves.
It means building operationalefficiencies today, to get ahead
of when things get rough.
(28:50):
It is all about control,surviving, cash control.
And Carnegie's counter-cyclicalapproach worked because he
combined three elements,operational efficiency that
allowed him to survivedownturns, cash reserves that
allowed him to invest duringdownturns, and the psychological
fortitude to expand wheneveryone else was contracting in
(29:13):
fear.
Most investors...
get this backwards.
They expand a lot when times aregood and credit is easy, and
then they're forced to contractwhen times get tough.
Carnegie built when otherscouldn't, and he reaped the
rewards when the cycle turned.
We are watching this happen on amacro level in real estate
today.
(29:33):
Everybody who bought big in thelead up, in the sunbelt, leading
into 2020, 2021, through theCOVID years when the treasuries
were under 1%, Those were thegood times, guys.
And a lot of people overexpandedin that time.
Any developer that went big inthat time is in severe financial
(29:54):
distress now.
And it's a big problem.
And this would be the time tobuild, honestly.
This is the time that developersprobably should be building.
And they're not.
None of them are.
There's a few forward-sightedguys that are building.
And I find it to be anincredibly courageous move to do
because I still thinkdevelopment's a crazy business.
But they're doing it, right?
So...
(30:15):
The last thing I just want topoint out is everything Carnegie
did requires discipline,discipline and operational
excellence.
His competitors would delegateoperational oversight once they
got successful.
(30:35):
Carnegie never left the detailsof his business.
He understood everything thatwas happening.
He never got soft.
even when he was worth hundredsof millions of dollars and he'd
be golfing in Scotland, he wasstill personally reviewing cost
reports from his steel mills.
Think about that.
And how many of us haveoutsourced that job to someone
(30:55):
else as fast as humanly possibleso we don't have to do it?
Shame on us.
Shame on me.
Shame on all of us.
This is so critical.
We have to get on top of it.
This all connects back tosomething I talked about before
in the Letters from Gall podcastfrom Julius Caesar.
It's so relevant.
In war, events of importance arethe result of trivial causes.
(31:20):
Well, what do you think thosetrivial causes are?
They're the little things,right?
The same is true in business andinvesting.
The small operationalefficiencies that you ignore
today become major profit leaksthat will kill your returns.
Carnegie's competitors were bigand strong, if we want to extend
the analogy to war, but Carnegiewon through discipline and
(31:42):
systems.
just like the Roman legions beatthe Germanic tribes in a similar
way, or all of Gaul, right?
Discipline, systems, operations.
While his competitors weremaking heroic one-off decisions,
Carnegie was building repeatablesystems.
So how do we build these today?
I'm going to wrap this up.
(32:02):
This has been a long-winded soloepisode.
Thank you for sticking with me.
But it's so good.
And Carnegie is so awesome.
And I'm so inspired just talkingabout his life and walking
through this.
So first, build your informationnetwork.
We talked about it.
Stay on the edge.
Understand what's happening outthere.
Second, obsess over operationalmetrics.
(32:22):
Track everything.
Understand everything.
Understand the flow of funds.
Understand what all theadjustments mean at the bottom
of your P&L.
Understand what is happening atthe ground level on your
property.
Third, control the criticalparts of your value chain.
You don't necessarily need toown everything, but the big cost
(32:44):
inputs, I would look hard atgetting deep and controlling it.
If you're not going to go forthat, that's fine.
Be in the weeds on yourmanagement company, on your
maintenance contracts, on yourinvoices.
Be in the weeds.
Understand what's happening.
Fourth, build cash reserves.
During good times, have cashreserves.
I mean, have them, right?
(33:06):
Fifth, never, ever, everdelegate operational oversight.
Stay involved in the details asyou scale.
Do not think someone else isgoing to run your business the
way you'll run your business.
And everything I'm saying isanti-scale, right?
Everything I'm saying isanti-scale.
Then how did Carnegie build a$15billion exit with US Steel by
doing all of this stuff.
If he can do it, so can you, socan I.
(33:29):
Let's not give it up.
So let's wrap this up.
As we wrap today's episode, Iwant you to think about your own
operational discipline.
Are you tracking the metrics?
Do you have informationadvantages?
Are you building systems thatwill compound over time?
Carnegie's story isn't just acool rags to riches historical
inspiration.
(33:49):
It is a blueprint for buildingwealth that works just as well
today, if not better than it didthen, because we have access to
technology that he didn't have.
We can get it better.
And one of these days, I'm goingto interview a PropTech VC, and
we're going to talk about someof the really cool stuff that's
coming out for real estate dataand technology, because there's
a lot of really cool stuff.
But here's the thing.
Here's the timeless truth toleave you with.
(34:12):
Markets change, technologiesevolve, but operational
excellence will never go out ofstyle.
Style is eternal, as I tell mywife about my clothing choices.
So use it wisely.
If you haven't done so already,please, please be sure to leave
a written review for our show.
It really helps with thealgorithms and with all those
(34:32):
undecided investors out therewho glance over the Timeless
Investor Show and say, I don'tknow, maybe I should listen,
maybe not.
Not a lot of reviews.
I don't know.
I'm going to move on.
Help us out here.
Here's a nice review left forus.
I want to give a shout out hereto I love when people don't
leave their real name.
AS80810.
This podcast is a greatextension of Ari's book,
Timeless Wealth, Real EstateThrough the Ages, by the way,
(34:54):
seamlessly blending engagingstorytelling with historical
analysis.
He does an excellent job ofdistilling timeless lessons that
remain highly relevant today.
Look forward to more.
Keep up the great work.
Hey.
Thanks, AS80810.
I really appreciate it.
I hope you guys are as inspiredby this story and biography as I
am.
I read this bio years ago.
(35:16):
And it was like a 1500 page tomeand it was awesome.
And the story still sticks withme.
It informs me on the right wayto build your business, your
investing empire, whatever it isyou're pushing the envelope on.
For me, just the act ofpreparing this podcast episode
and thinking about what I wantedto say just gave me so many
(35:36):
ideas, lots and lots of ideas,lots of ways to improve cost
efficiencies to control theoutcome and thereby deliver
better returns for ourinvestors.
I hope it's inspired And thatyou leave this ready to conquer
the world.
With that, think well, actwisely, and build something
timeless.
(35:56):
I'm Ari Van Gemeren, host of theTimeless Investor Show.
I deeply appreciate you beinghere, and I look forward to
seeing you next week.
Welcome back to the Timeless Investor Show.
I'm Ari Van Gemeren, fundmanager, student of history, and
host of this show.
And today, we're going to diveinto one of my absolute favorite
biographies and businessmen ofall time, Andrew Carnegie.
Picture this, a 13-year-oldScottish immigrant working
(00:24):
12-hour days in a Pittsburghcotton mill for$1.20 a week.
His family had fled Scotlandwith essentially nothing after
his father's weaving businesswas destroyed by mechanization.
They lived in a one-room house.
This kid had no formaleducation, no connections, no
(00:44):
capital.
There's countless stories likethat, and many of them don't go
anywhere.
But 53 years later, Thisimmigrant kid sells his steel
company for$480 million, roughly$15 billion in today's money,
making him one of the wealthiestmen in history and somebody that
(01:06):
has been written about anddiscussed extensively since it
happened because there's so muchto learn.
That is Andrew Carnegie's story.
It's not a fairy tale.
There is gold.
in the pages of his biographiesand the pages of his story.
(01:27):
So today, we're going to diveinto him, his life, and what
lessons we as real estateinvestors, entrepreneurs, and
timeless builders can take awayfrom what he did.
Because here's the thing, hisrise from a$1.20 a week telegram
boy to steel baron isn't just aninspiring rags to riches story,
(01:49):
although it is definitely that.
We're going to actually lookinto the exact principles that
helped him to build U.S.
Steel into one of the mostsuccessful conglomerates of all
time.
And I want to tell you somethingabout this episode.
I was looking at some of ourrecent real estate deals and
looking at operational metrics,and I kept coming back to
(02:13):
something Carnegie said.
And you're going to have toexcuse the Scottish brogue.
We are going to have a healthydose of William Wallace-esque
vibes on this show.
But here's an exact quote fromthe man.
Watch the costs and the profitswill take care of themselves.
Most investors, includingmyself, many times in my career,
(02:35):
have gotten this completelybackwards.
We, Royal We, obsessed over thebig picture, the acquisition,
the financing, the exitstrategy.
And the reason is because it'sexciting.
It's fun.
It's cool to post on LinkedIn orInstagram or whatever your
social media choice is aboutyour latest deal you just
crushed or what you're takingcare of.
But nobody's posting and gettinga lot of public acclamation for
(03:00):
late nights reviewingspreadsheets and understanding
stuff.
And I think that's true of theindustry in general.
I think a lot of people arerelatively sloppy on details,
again, including myself atseveral points in my career.
I don't think everyone trackstheir true cost per unit.
They don't know their realmaintenance expense.
They're not digging in andauditing the actual invoices
that are coming in on a monthlybasis.
(03:20):
And that's especially true asyou scale your portfolio.
It becomes harder to do it, butit doesn't mean that it's not
important.
And I think at a general level,we just say, we don't always
understand our own actualmanagement efficiency.
But Carnegie did, and heunderstood something that most
people miss.
Wealth isn't built...
(03:41):
in a fancy boardroom withleatherback chairs and nice
pictures.
It's built in the boiler room.
It's built in the day-to-dayoperational discipline on the
ground that compounds overdecades to create massive value.
So today, we're going to extractthe timeless lessons from
Carnegie's playbook and see howthey apply to building real
(04:03):
wealth in real estate,investing, and entrepreneurship
today.
So do you remember Carnegie'sstart as a telegraph boy?
That information advantage helearned never left his playbook.
So here's the real story.
In 1853, Carnegie caught theattention of Thomas Scott,
superintendent of thePennsylvania Railroad, who hired
(04:24):
him as his personal telegrapher.
But Carnegie didn't just deliverthe messages and be satisfied
that he had a pretty cool job.
He actually studied them.
He understood that he was seeingthe nervous system of American
commerce in real time.
And remember, this This is anera that predates telephones and
mobile phones and all this kindof stuff.
(04:45):
Telegraph was how messages weresent.
And then there came a momentthat changed everything.
One morning, an accident hadcreated a massive traffic jam on
the Western Division.
Scott couldn't be located.
So Carnegie, who was just 18years old, made a decision that
could have easily gotten himfired.
(05:07):
He sent instructions viatelegraph under Scott's name,
rerouting several trains andquickly unclogging the system.
So when Scott found out, he wasso pleased that he bragged to
company president J.
Edgar Thompson, calling Carnegiehis little white-haired Scottish
devil.
But here's where the informationarbitrage really started paying
(05:29):
off.
Scott began alerting Carnegie toinvestment opportunities that
only railroad insiders wouldknow about.
In 1855, Scott told Carnegieabout an upcoming sale of Adams
Express Company shares, apackage shipping company that
had contracts with thePennsylvania Railroad.
Carnegie's mother mortgagedtheir family home for$500 to buy
(05:51):
the shares.
Then came the big one, theWoodruff Sleeping Car Company.
Carnegie invested just$217.50,money he'd saved from his
railroad salary.
But he knew something that hiscompetitors didn't.
the railroad was about to givesleeping car contracts to
Woodruff.
And within two years, that tinyinvestment was generating$5,000
annually, more than three timeshis railroad salary.
(06:16):
Carnegie later said, it was asthough I was lifted to paradise.
I felt that my foot was upon theladder and I was bound to climb.
But here's the key.
Carnegie wasn't just passivelyreceiving tips.
He was actively building aninformation collection system.
He cultivated relationships withrailroad executives, steel
suppliers, government officials.
(06:37):
He understood that in a rapidlyindustrializing economy,
information moved faster thanmoney, and whoever had the best
information could make the bestinvestment decisions.
And so that information networkbecame the foundation for
building U.S.
Steel.
When Carnegie was ready to sellhis steel company in 1901, he
knew exactly who had the capitaland ambition to buy it, J.P.
(06:59):
Morgan.
But more importantly, Carnegieknew that the true value of what
he was selling because he hadbetter information about steel
demand, production capacity, andmarket dynamics than anyone else
in the industry.
And his network told him thatMorgan was assembling a steel
conglomerate and would needCarnegie's assets to make it
work.
Carnegie could have asked forany price and he basically did.
(07:23):
He sold his business for$480million, as I mentioned in the
introduction.
So this is Carnegie's firstmajor principle, information
asymmetry creates profitasymmetry.
And I want to point out anobvious fact here as we discuss
this story.
(07:44):
A lot of his informationasymmetry I just described would
today be described as insidertrading.
But the key is, if we get pastthe fact that he was doing that,
let's just talk about the keyprinciples there.
He was cultivating thosenetworks.
He was in the flow ofinformation.
He understood what was going on.
He was working.
(08:05):
He was working his network tounderstand where the
opportunities lay.
And so many people, ourselvesincluded at times, sort of
neglect that part of the story.
We spend a lot of time behindspreadsheets, behind our
computer, not out with peoplelearning.
(08:26):
So in real estate, yourinformation network is
everything.
You need relationships withbrokers who can help guide deals
to you.
You need, if you're a developer,you need connections with city
planners who understand zoningchanges.
It's a reason that thedevelopers, as a macro class of
real estate people, generallyare very political people.
(08:48):
and very involved in thepolitical scene.
You need relationships withcontractors who can give you
accurate renovation estimatesquickly.
You need trusted relationshipswith them.
Better yet, if you haveconnections with the direct
supplier of the materials youneed so you can try to cut out
the middlemen and not get hosedby people that are buying
appliances on your part,something we've been looking at.
(09:10):
Most investors...
And this is a broadgeneralization, but most
investors are passiveinformation consumers.
They read the same blogs, theyattend the same conferences, and
they hear the same opportunitiesas everyone else.
But Carnegie built an activeinformation collecting system.
He paid for insights that othersdidn't have access to.
He cultivated relationships thatgave him advanced notice of
(09:33):
opportunities.
He understood his market at avery deep level and And I'm
going to get into that much morebroadly later.
But he understood theinformation flow of his market
really well.
I want to give you guys a smallexample from my own life that
I've recently been working on.
So we've been seeing this issueday in and day out.
(09:54):
But the other night, I was outto drinks with a good friend.
And I hadn't seen him in years,right?
So he's a local real estate guyhere in Portland and owns a
property management company.
And we were just out at...
his club having drinks andtalking.
And I asked him, what are youdoing on insurance right now?
And he was like, well, we justmoved our entire portfolio to
(10:16):
this insurance company thatended up pricing us at about the
cost of American Family, who wasan insurance company that has
basically exited multifamilycompletely.
And we've seen insurancepremiums go up two to three X in
that time.
So Immediately, I said, I got totalk to these guys.
And on the spot, he made anemail introduction to that team.
(10:38):
And now I'm meeting with them todiscuss potentially rolling our
entire real estate portfolio inand cutting our premiums by 50%.
If I hadn't gone to drinks withhim, right?
If I hadn't gone out and startedactively gathering information
on this from other operators, ifI stayed behind my spreadsheet
and just crunched numbers...
(10:59):
this would not have happened.
Or let's take this newsletterand podcast, for instance.
I mean, this is a contentproduction ecosystem where, you
know, I hate to say that.
Somebody told me I'm a contentcreator the other day and I was
embarrassed because it's notreally what I am.
But that's okay.
I am a content creator.
I guess it's the end of the day.
But this ecosystem Newsletterand podcast is also an active
(11:21):
source of information.
I'll tell you why.
Last week, I had a podcastinterview with Tony DeFede, who
came to me through this podcastand this newsletter.
And he shared insights onbuilding captive insurance
companies, something I've beentrying to figure out how to do
for like two years, right?
And that's active informationgathering, guys.
(11:43):
It's so critical.
And it's important becauseeveryone's getting crushed on
insurance.
And if I had stayed in myoffice, it wouldn't have
happened.
So all of this informationgathering, asymmetry, active
management of your stuff ismaterially important for staying
ahead of the game and makingreal money.
Okay, the next thing I want todive into on my list of things
(12:05):
about Carnegie that I findfascinating is probably one of
my favorites.
Information asymmetry is great,but Carnegie had a cost control
obsession.
Most biographies of Carnegiefocused on his philanthropy, his
libraries, his gospel of wealth.
But that's not actually whatmade him rich.
What made him rich was an almostpathological obsession with
(12:27):
operational efficiency.
Carnegie didn't just own a bunchof steel mills and sit at the
top of his fiefdom.
He revolutionized how steel wasmade by implementing what he
called detailed costs ofproduction accounting
procedures.
that enabled the company toachieve greater efficiencies
(12:47):
than any other manufacturingindustry of the time.
Here's his famous philosophy.
Cut the prices, scoop themarket, watch the costs, and the
profits will take care ofthemselves.
Excuse me.
I'm so sorry.
Please forgive the Scottishbrogue.
I'm just having too much funwith this.
I'm going to keep going.
Think about what I just said,what he just said for a second.
Most business owners focus onrevenue.
(13:10):
And then they worry about cost.
Carnegie flipped it completely.
He obsessed over cost first,knowing that if he could produce
cheaper than anyone else,profits were inevitable.
But Carnegie's cost obsessionswent far beyond just being a
general principle.
He implemented specific systemsthat were revolutionary for his
time.
First, he installed weightingskills at every single point in
(13:34):
his steel mills.
Every piece of material thatmoved through his plants was
weighed and tracked.
He wanted to know exactly wherematerial was saved and where it
was wasted.
This was unprecedented in thesteel industry.
Second, he compared every workerdoing the same job against every
other worker.
This wasn't just aboutproductivity.
It was about finding the mostefficient methods and
replicating them across all hisoperations.
(13:56):
Third, he demanded daily costreports from every plant, no
matter where he was in theworld.
When Carnegie was traveling forpleasure...
which he frequently did in hislater years, he relied on
detailed cost sheets that weresent to him wherever he was.
He could be vacationing inScotland and still know exactly
what it costs to produce a tonof steel in Pittsburgh.
(14:18):
And think about that for asecond.
I mean, everything I justdescribed is basically modern
day big data analytics, right?
I mean, it's a whole industrytoday in technology to track and
assess some of these metrics.
Carnegie did it with scales andaccuracy.
paper books where somebody waswriting it meticulously into the
books and delivering it to him.
(14:38):
I mean, think about that for asecond.
The mindset of a man to buildthat system when it was not easy
to do.
It's so easy today, and yet somany of us still don't do it.
Why?
Like, Carnegie could do it inScotland with...
Reports being shipped across theocean to him in coal-driven
(15:01):
steam liners, or I'm mixing shiptypes there, but you understand
what I'm saying.
And we have that data today atour fingertips, and we still
don't look at it.
So just think about that.
And here's where things getreally interesting.
Carnegie hired a German chemistspecifically to figure out what
was happening inside his blastfurnaces.
Most iron worker owners, ironworks owners at the time, had no
(15:25):
scientific understanding oftheir own processes.
Carnegie was surprised to findthat owners of ironworks knew
very little about what went oninside the furnace.
But by understanding the actualchemistry, Carnegie and his team
figured out how to significantlyincrease output through what
they called hard-drivingfurnaces, increasing the airflow
(15:47):
to maximize efficiency.
This wasn't an operationalimprovement.
It was scientific improvementthat he invested in and found
for his own businesses, right?
First principles thinking.
Carnegie recognized that most ofhis competitors didn't even
understand the way theirprocesses work.
(16:08):
He figured it out.
And Carnegie found his perfectpartner in operational
obsession, Captain WilliamJones, who superintended the
Edgar Thompson Steelworks.
Jones was described at the timeas probably the greatest
mechanical genius that everentered the Carnegie shops.
Jones shared Carnegie'sobsession with costs and speed
(16:29):
of production, and he madenumerous improvements to
accelerate the flow of metalthrough various stages before it
cooled.
So by 1892, in the middle ofwhat should have been a
challenging economic year,Carnegie Steel made$4.5 million
in profits.
Carnegie himself said,"'Wasthere ever such a business?'
While his competitors werestruggling, his cost control
(16:51):
systems allowed him to thrive.
Here's the thing that I reallywant you to take away from this.
Carnegie's competitors hadaccess to the same technology.
They had access to the same rawmaterials.
They had access to the samelabor markets.
But Carnegie won throughoperational discipline that
others couldn't match.
His mills operated likeprecision machines while his
(17:13):
competitors were chaotic.
So here's Carnegie principlenumber two, micromanagement of
costs can and does create macrowealth.
In real estate, this meansknowing your true cost per unit,
not your ballpark expenses.
It means tracking maintenancecosts with precision, auditing
invoices, understanding the flowof cash through your property.
(17:36):
When you look at a P&L from yourmanagement company or from your
sponsor, they're Do youunderstand what the adjustments
and all the below the line moneymovements actually mean from a
first principles basis in termsof where money's going, where
it's being allocated, how it'sbeing spent?
You have to understand it.
You have to be deep.
(17:56):
I know there's a focus in thisindustry on scale, scale, scale.
And sometimes scale, scale,scale doesn't work well with
micromanage, micromanage,micromanage.
But I've come to realize, in mytime, acquiring over$150 million
of real estate and being in thisbusiness now for eight plus
years, that it is the only thingthat matters.
(18:20):
Micro management and precisioncontrol of what's happening at
your property.
You have to understand.
I see investors, again, quotingmyself to my chagrin over time,
who couldn't tell you what theircap rates were on entry or what
their current valuations were Ormany questions that sponsors
(18:41):
don't even track or LPs maybedon't even understand about
their own deals.
But they all track theiracquisitions obsessively and
their inbound revenueobsessively.
Yes, we increase top linerevenue.
We increase top line revenue.
What about the cost controls?
Carnegie, if he was a realestate operator, would have
(19:01):
crushed all these people.
And in competitive markets likesteel mills, he did.
The third piece I think is partand parcel with cost control is
that vertical integration isyour competitive moat.
He understood something that Ithink a lot of business owners
do miss.
If you don't control your supplychain, your supply chain will
(19:25):
control you and it will dictatethe cost of owning your assets.
Carnegie didn't just own thesteel mills.
He owned the iron ore mines inMinnesota.
He owned the coal mines inPennsylvania.
He owned the railroads thattransported raw materials.
He owned the ships that carriedore across the Great Lakes.
When his competitors, forexample, needed iron ore, they
(19:45):
paid market prices to suppliers.
When Carnegie needed iron ore,he paid himself.
His competitors were subject tosupply disruptions.
Carnegie controlled his ownsupply.
So this is Carnegie principlenumber three.
control the value chain and orbe vertically integrated.
And look, let's talk about thisfor a second, because what
Carnegie did, again, right,different era, different time,
(20:08):
this is the Gilded Age, peoplegot away with this kind of
stuff.
We would call that a trust or amonopoly today, and the
government wouldn't allow it.
But in real estate, they don'tcare.
So why aren't you verticallyintegrated?
Why aren't you thinking like avertical integrator to take
complete control of youroperations and and Own
everything.
So vertical integration andproperty ownership looks like
(20:29):
controlling the propertymanagement input.
It looks like having your ownmaintenance crews and building
relationships with the people sothat you're not getting
contractor markups andeverything.
It looks like having directrelationships with lenders so
you're not going through brokersevery single time.
All of this, by the way,everything I'm describing is
anathema to the guru industryAnd most sponsors, the way they
(20:54):
think, because the industry isfocused so much on scale, scale,
scale, drive acquisition fees,drive deal fees, and all of this
is the enemy of scale.
I don't think it's the enemy ofscale.
I think it is the foundationnecessary to scale, and that is
something that is missed in thisbusiness.
It was missed for me, by theway.
I came up in this businesslistening to BiggerPockets and
(21:17):
reading every book I could find,and the constant advice was,
Don't manage your own deals.
Don't manage your own deals.
Because if you manage your owndeals, you are buying yourself a
job.
Okay, maybe that's true.
But then the missing piece ofeducation is what do property
management companies do?
How do they rip you off?
How are they taking money fromyour pocket and paying
themselves?
And you don't even realize itbecause you've never been in the
(21:39):
trenches.
You never figured it out.
Carnegie would never haveallowed that to happen in this
business.
But it's something that mostsponsors routinely and
systematically do.
and think they're being smart byscaling and working with, and
I'm using air quotes, best inclass third party property
management companies, best inclass contractor, best in class
(22:00):
this, best in class that.
We have been focused more hereon vertical integration as I've
started to realize howincredibly important the cost
inputs are in this business.
Management's a key one, right?
Here's a small one that I'vetalked about before.
Laundry contracts.
I've been talking about this adnauseum.
Laundry contract, leasing yourlaundry out is a massive rip
(22:22):
off.
Think about the math on this.
A laundry machine costs about, Idon't know, a thousand bucks,
right?
So a washer and dryer, maybe youbuy a bulk scale, you're getting
$1,500, right?
You give 50% of the revenue fromthose machines to the laundry
leasing company.
(22:43):
And it's questionable what theyactually do, right?
It's questionable what they doother than put some capital into
buying the machines and givingto you up front.
But I'll give you an example.
We have a building with eightmachines in it.
And those machines produce to usnet revenue of about$6,000 a
(23:04):
year.
But the leasing firm takes 50%of the revenue, so they're
making$6,000 a year.
Now, think about the math.
I invest$8,000, call it$1,000per machine, into those eight
machines, and I make$6,000 ayear.
So two things.
First of all, it's a huge ripofffor you as an operator.
(23:25):
It's a huge ripoff.
Why would you do that?
Well, most people do itbecause...
I don't know.
They're lazy or they don't havethe money or they don't want to
buy the machines or they thinkthey're getting some sort of
value from outsourcing to alaundry leasing company.
But you're giving up$6,000 ayear on an$8,000 investment.
Think about that.
Why do we do that?
Why would we do that?
(23:45):
Well, the answer is most peopleare outsourcing their costs,
right?
We are not verticallyintegrating.
Why not?
Get control of it.
So I've ranted enough on costcenters being important.
It's incredibly important.
It's one of the most importantparts of this business.
Actually, not one of.
It is the most important part ofthis business.
Cost, control, verticalintegration, own everything,
(24:08):
control what goes in and out ofyour business, and you will
thrive.
That's what Carnegie did.
That's what we can do.
The fourth principle iscountercyclicality and striking
when...
Other people are scared.
The time to expand is when noone else does, okay?
(24:33):
And let's dig into this a littlebit.
So Carnegie, when times are bad,when the market is bad, many
people hunker down and they justtry to weather the storm.
Carnegie did the opposite.
Here's a quick anecdote for youguys.
In 1872, Carnegie startedconstruction on his first steel
mill.
the Edgar Thompson Steelworksjust outside Pittsburgh.
(24:55):
He began concentrating on steelat age 38, which by the way is
awesome for me to hear and toknow because I'm 38 and it makes
me feel good about myself forwhere I am right now in life.
And Carnegie was just gettingstarted at 38.
That is awesome.
So he went on to at 38 and hebegan concentrating on it at 38
and began founding what wouldbecome a steel empire.
(25:16):
And then the panic of 1873 hit.
In September 18th, 1873, thebanking firm of Jay Cook and
Company, which had been thegovernment's chief financier
during the Civil War, it washeavily invested in railroad
construction, declaredbankruptcy.
This triggered what became knownas the first Great Depression in
(25:37):
American history.
The economic collapse wasdevastating.
89 of the country's 364railroads crashed into
bankruptcy.
A total of 18,000 businessesfailed in just two years.
By 1876, unemployment had risento 14%.
14%.
But here's the thing.
Carnegie finished theconstruction of his Edgar
(25:58):
Thompson Steelworks in 1873,right in the middle of the
economic panic.
While his competitors were goingbankrupt, Carnegie was building
the most advanced steel mill inAmerica.
Why was he able to do this?
Well, because of his principleof cost control.
Carnegie's operations were soefficient that he could remain
profitable even when steelprices collapsed.
(26:19):
But more importantly, he hadretained cash reserves from his
profitable years specifically inpreparation for moments like
this.
Carnegie's business philosophywas simple.
He retained a large part of theprofits earned in good times to
tide him over and give himflexibility in bad times.
I'm going to say it over andover again, guys.
The key to success in businessis to survive.
(26:40):
It is to survive.
Survivorship bias is a realthing in all industry, in all
business, especially in realestate.
And the people that we look upto today that have survived four
cycles, they survived.
That's why you know who theyare.
And how do you think theysurvived?
Cost control, conservatism, cashmanagement.
All of the above, but that's whywe know their names.
(27:03):
But the economic collapse alsogave Carnegie access to
everything he needed at firesale prices.
Construction costs plummeted,labor was cheap and available,
competitors were selling assetsto raise cash.
So while others were forced tocontract, Carnegie was able to
expand.
And the timing was perfect.
In August 1875, just as theeconomy was starting to recover,
(27:24):
Carnegie's Edgar ThompsonSteelworks made its first blow
using the revolutionary Bessemerprocess.
He was perfectly positioned tocapture the recovery, and the
results were extraordinary.
Carnegie alone estimated that heearned a 40% return on his
investment, a profit of$40,000from a$100,000 investment in the
(27:44):
mill.
While his competitors had spentthe Depression struggling to
survive, Carnegie's had builtthe foundation of what would
become the largest steel companyin the world.
But his counter-cyclicalstrategy didn't just take place
in 1873.
He repeated his strategythroughout his career.
During the depression of the1890s, while competitors were
cutting back, Carnegie was againexpanding, buying distressed
(28:06):
assets and positioning himselffor the next recovery, driven
again by his aptitude or desireor capability for withholding
and preserving cash and costcontrol.
So he understood, as weunderstand, I think, at a high
level today, that economiccycles can create the great
wealth transfer mechanisms andopportunities.
(28:28):
During panics, assets getrepriced from their peak
emotional highs to their troughemotional lows, and that's when
you're really able to buildgenerational wealth.
In real estate, this is obvious,this means building cash
reserves.
It means building operationalefficiencies today, to get ahead
of when things get rough.
(28:50):
It is all about control,surviving, cash control.
And Carnegie's counter-cyclicalapproach worked because he
combined three elements,operational efficiency that
allowed him to survivedownturns, cash reserves that
allowed him to invest duringdownturns, and the psychological
fortitude to expand wheneveryone else was contracting in
(29:13):
fear.
Most investors...
get this backwards.
They expand a lot when times aregood and credit is easy, and
then they're forced to contractwhen times get tough.
Carnegie built when otherscouldn't, and he reaped the
rewards when the cycle turned.
We are watching this happen on amacro level in real estate
today.
(29:33):
Everybody who bought big in thelead up, in the sunbelt, leading
into 2020, 2021, through theCOVID years when the treasuries
were under 1%, Those were thegood times, guys.
And a lot of people overexpandedin that time.
Any developer that went big inthat time is in severe financial
(29:54):
distress now.
And it's a big problem.
And this would be the time tobuild, honestly.
This is the time that developersprobably should be building.
And they're not.
None of them are.
There's a few forward-sightedguys that are building.
And I find it to be anincredibly courageous move to do
because I still thinkdevelopment's a crazy business.
But they're doing it, right?
So...
(30:15):
The last thing I just want topoint out is everything Carnegie
did requires discipline,discipline and operational
excellence.
His competitors would delegateoperational oversight once they
got successful.
(30:35):
Carnegie never left the detailsof his business.
He understood everything thatwas happening.
He never got soft.
even when he was worth hundredsof millions of dollars and he'd
be golfing in Scotland, he wasstill personally reviewing cost
reports from his steel mills.
Think about that.
And how many of us haveoutsourced that job to someone
(30:55):
else as fast as humanly possibleso we don't have to do it?
Shame on us.
Shame on me.
Shame on all of us.
This is so critical.
We have to get on top of it.
This all connects back tosomething I talked about before
in the Letters from Gall podcastfrom Julius Caesar.
It's so relevant.
In war, events of importance arethe result of trivial causes.
(31:20):
Well, what do you think thosetrivial causes are?
They're the little things,right?
The same is true in business andinvesting.
The small operationalefficiencies that you ignore
today become major profit leaksthat will kill your returns.
Carnegie's competitors were bigand strong, if we want to extend
the analogy to war, but Carnegiewon through discipline and
(31:42):
systems.
just like the Roman legions beatthe Germanic tribes in a similar
way, or all of Gaul, right?
Discipline, systems, operations.
While his competitors weremaking heroic one-off decisions,
Carnegie was building repeatablesystems.
So how do we build these today?
I'm going to wrap this up.
(32:02):
This has been a long-winded soloepisode.
Thank you for sticking with me.
But it's so good.
And Carnegie is so awesome.
And I'm so inspired just talkingabout his life and walking
through this.
So first, build your informationnetwork.
We talked about it.
Stay on the edge.
Understand what's happening outthere.
Second, obsess over operationalmetrics.
(32:22):
Track everything.
Understand everything.
Understand the flow of funds.
Understand what all theadjustments mean at the bottom
of your P&L.
Understand what is happening atthe ground level on your
property.
Third, control the criticalparts of your value chain.
You don't necessarily need toown everything, but the big cost
(32:44):
inputs, I would look hard atgetting deep and controlling it.
If you're not going to go forthat, that's fine.
Be in the weeds on yourmanagement company, on your
maintenance contracts, on yourinvoices.
Be in the weeds.
Understand what's happening.
Fourth, build cash reserves.
During good times, have cashreserves.
I mean, have them, right?
(33:06):
Fifth, never, ever, everdelegate operational oversight.
Stay involved in the details asyou scale.
Do not think someone else isgoing to run your business the
way you'll run your business.
And everything I'm saying isanti-scale, right?
Everything I'm saying isanti-scale.
Then how did Carnegie build a$15billion exit with US Steel by
doing all of this stuff.
If he can do it, so can you, socan I.
(33:29):
Let's not give it up.
So let's wrap this up.
As we wrap today's episode, Iwant you to think about your own
operational discipline.
Are you tracking the metrics?
Do you have informationadvantages?
Are you building systems thatwill compound over time?
Carnegie's story isn't just acool rags to riches historical
inspiration.
(33:49):
It is a blueprint for buildingwealth that works just as well
today, if not better than it didthen, because we have access to
technology that he didn't have.
We can get it better.
And one of these days, I'm goingto interview a PropTech VC, and
we're going to talk about someof the really cool stuff that's
coming out for real estate dataand technology, because there's
a lot of really cool stuff.
But here's the thing.
Here's the timeless truth toleave you with.
(34:12):
Markets change, technologiesevolve, but operational
excellence will never go out ofstyle.
Style is eternal, as I tell mywife about my clothing choices.
So use it wisely.
If you haven't done so already,please, please be sure to leave
a written review for our show.
It really helps with thealgorithms and with all those
(34:32):
undecided investors out therewho glance over the Timeless
Investor Show and say, I don'tknow, maybe I should listen,
maybe not.
Not a lot of reviews.
I don't know.
I'm going to move on.
Help us out here.
Here's a nice review left forus.
I want to give a shout out hereto I love when people don't
leave their real name.
AS80810.
This podcast is a greatextension of Ari's book,
Timeless Wealth, Real EstateThrough the Ages, by the way,
(34:54):
seamlessly blending engagingstorytelling with historical
analysis.
He does an excellent job ofdistilling timeless lessons that
remain highly relevant today.
Look forward to more.
Keep up the great work.
Hey.
Thanks, AS80810.
I really appreciate it.
I hope you guys are as inspiredby this story and biography as I
am.
I read this bio years ago.
(35:16):
And it was like a 1500 page tomeand it was awesome.
And the story still sticks withme.
It informs me on the right wayto build your business, your
investing empire, whatever it isyou're pushing the envelope on.
For me, just the act ofpreparing this podcast episode
and thinking about what I wantedto say just gave me so many
(35:36):
ideas, lots and lots of ideas,lots of ways to improve cost
efficiencies to control theoutcome and thereby deliver
better returns for ourinvestors.
I hope it's inspired And thatyou leave this ready to conquer
the world.
With that, think well, actwisely, and build something
timeless.
(35:56):
I'm Ari Van Gemeren, host of theTimeless Investor Show.
I deeply appreciate you beinghere, and I look forward to
seeing you next week.
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