0:00

At the beginning of this episode, I give a recap

0:02

of the first founders conference and announced two more events.

0:04

If you're not interested, you want to get right to

0:06

the episode, skip ahead by about seven minutes. But I

0:08

do think the story is interesting and worth hearing. I

0:11

had an absolutely incredible experience a few weeks ago.

0:13

I flew to New York to have dinner with

0:15

Daniel Eck, the founder of Spotify. Daniel's a remarkable

0:17

person and without a doubt, one of the best

0:20

founders alive. And out of that

0:22

conversation, not only did I get some great

0:24

advice, but I left with a ton of

0:26

inspiration, a ton of energy. But I also

0:28

got a very unique book recommendation. And so

0:30

this episode is on the book that Daniel

0:32

told me about. And I don't think I've

0:34

ever read. I can't think of another story

0:36

that I've read like this. It

0:38

will blow your mind. Before we jump into

0:40

that, I need to tell you about something

0:43

that is time sensitive. I am announcing two

0:45

new founders conferences that are taking place this

0:47

year, July 29th through the

0:49

31st in Scotts Valley, California. That's about

0:51

an hour outside of San Francisco and September

0:54

27th through the 29th in Austin,

0:57

Texas. I am doing each

0:59

event in partnership. So the

1:01

Scotts Valley, California event is

1:03

in partnership with Rick Burnham and Paul Bueser. They're the

1:05

founders of Seder Grove, which is this $500 million holding

1:08

company. And they're the hosts of the Art of

1:11

Investing podcast. That event is going to be limited

1:13

to around 130 people. The

1:16

Austin event is in partnership with Matt Russell,

1:18

who's an investor, the CEO of Colossus and

1:20

host of Business Breakdowns. That event will be

1:23

limited to around 150 people. You

1:26

can find all the details

1:28

at founderspodcast.com/events. But the reason

1:30

these events exist, the reason

1:32

I'm doing it, there's only one reason. And that's

1:34

to help you build relationships with other founders, investors

1:37

and high value people. And that's exactly what happened

1:39

at the last event I did a few months

1:41

ago. I'm going to give you some details on

1:43

that. But really, there's a backstory here that I

1:46

think is very important. Number one, for years, people

1:48

have been asking me like to build a community

1:50

to find ways to connect other people. Listen, they

1:52

wanted to be connected to other people, listen to

1:55

founders. And so that idea just stayed in the

1:57

back of my mind. I went to this private

1:59

invite only. event in Texas last year. And

2:02

there was a guy there who actually

2:04

worked for a very wealthy family office

2:06

in Texas. And his job was to

2:09

do these in-person events for other family

2:11

offices. In other words, helping people inside

2:13

of these family offices to build relationships with each other.

2:16

And they were putting a ton of time

2:18

and energy and money and resources behind this.

2:20

And I was asking why. And he had

2:22

a great line to describe why they were

2:24

doing this. He says, because relationships between these

2:26

two kinds of people – these like investor

2:28

types, these founder types – relationships

2:30

between these two types of people

2:33

produce nonlinear returns. This

2:35

is something that we see in the books that you and I study over and

2:37

over again. Relationships run the world. When

2:39

I got to speak to both Sam

2:41

Zell and Charlie Munger before they passed

2:43

away, they said it in different ways.

2:45

But the idea behind what

2:47

they were telling me, the idea of the

2:50

advice they were giving me was the same.

2:52

Invest heavily in relationships, build a seamless web

2:54

of trust, find the most talented people you

2:56

possibly can and work with them forever because

2:59

relationships run the world. And so that was

3:01

the thesis behind the first event I did.

3:04

And the result of that event, I'm going to give

3:06

you a list of these things that have just –

3:08

I haven't even asked for them. This is just people

3:10

sending me messages, in some cases calling me and telling

3:12

me what happened as a result. So I obviously am

3:15

not going to say any names. But one founder told

3:17

me, he's like, listen, this one relationship with this person

3:19

that he met at the event that

3:21

he did not know beforehand, he goes, David, that is

3:23

worth 20 times what I

3:25

paid. The person he met there

3:28

is now advising him, they're working on this deal

3:30

together on how to buy out existing shareholders in

3:32

a private company. He's helping them think through how

3:34

to do this and potentially helping them secure the

3:36

capital to do so. But they also genuinely like

3:38

each other. They become friends. They talk on the

3:40

phone. They have visited each other. This is the

3:42

craziest thing, which I'll tell you about, is how

3:44

many people met in the last event was in

3:46

Austin in March too. And how many people met

3:48

there and now have flown all over the country,

3:50

in some cases all over the world, to spend

3:52

more time in person. And that was another example

3:54

that I was given where these two people met.

3:56

They did not know before – they did not know each

3:58

other before the – the – conference, the

4:00

first conference, one of them

4:02

visits the other. They're having this random

4:05

walk. There's not like this agenda that

4:07

they went into this, they spent two days together.

4:09

They didn't go into this within general. So they're

4:11

having this talk and one of the guys has

4:14

investments in a bunch of different companies and he

4:16

says one of their biggest holdings is having a

4:18

problem. The person he's talking to just happens to

4:20

have a ton of experience and connections in that

4:23

industry became an advisor and a board member to

4:25

that other person's largest holding. And what the guy

4:27

told me after was fascinating. He goes, in person

4:29

is the way you seed relationships. You can get

4:32

more done in an hour in person than hours

4:34

on Zoom. There is no way we could have

4:36

got to this level this quickly without

4:38

being in person first. I

4:41

have a long list here. I'm not going to go through all of them,

4:43

but I'm just giving you some examples. Here's another one. So

4:45

two people strike up a conversation randomly at dinner. We're

4:48

all business nerds so we know exactly where the conversation

4:50

is eventually going to get to. We're all obsessed and

4:52

so they start talking about what they're working on and

4:54

the problems they're having and one guy was

4:56

having an issue. He runs this giant company

4:59

and he has a problem he needed to

5:01

solve. The guy he wind up talking to

5:03

just happens to own a software company that

5:05

builds products in the same industry. That one

5:08

random conversation turned into a massive lead for

5:10

his company. And then the last example I'll

5:12

give you is really fascinating. Guy attends the

5:14

event. He has a massively profitable bootstrap

5:17

business that him and his partner own 100% of.

5:19

He thinks that using the same principles of how

5:21

they built their business, they could attack different industries.

5:24

He has a long private one-on-one conversation with somebody

5:26

he met at the conference. That person has a

5:28

giant pool of capital and so the end result

5:30

of that conversation is for the first time ever

5:33

he's considering taking outside money and expanding into different

5:35

industries. And the punchline was that one conversation drastically

5:37

increased the size of my ambition. I could talk

5:39

about this forever because I think it's fascinating. I

5:41

think this idea that relationships run the world because

5:44

people do business with people they like is fascinating.

5:46

I could talk about it forever, but I do want

5:48

to give you some details. So one, I ran out

5:50

the when I do these events, I ran out the

5:52

entire venue. There's

5:54

nobody on site that is not part of

5:56

the event. Nobody has not been vetted by

5:59

my events team. Every single

6:01

person you see is there for the same

6:03

reason and has the same interest as you.

6:05

The second thing, these are all inclusive locations.

6:07

You get yourself there, I take care of

6:09

everything else. You're lodging, your hotel

6:11

room, your food, access to all the events,

6:13

everything is taken care of. Number

6:15

three, if there is a way to

6:17

bold something in audio, this

6:19

number three would be bolded. These events

6:22

are for already successful people. The

6:24

price should not be a stretch for you by

6:26

any means. I need to repeat that. These events

6:29

are for already successful people. The price should not

6:31

be a stretch for you. Multiple

6:33

people came up to me after the event and

6:35

in emails and phone calls since then because I

6:37

think you already know that founders has an excessively

6:39

high-value audience. What did Charlie

6:42

Munger say? He's like, I've never met anybody that didn't read

6:44

all the time. If you're building a business, why the hell

6:46

would you not listen to a podcast that spends 40 hours

6:48

reading a book and trying to give you an hour of

6:50

ideas that you can use in your company? The

6:53

book from history is a form of leverage, and

6:55

this podcast is a tool to do that. So

6:57

it attracts very valuable audiences where people pull me

6:59

to the side and they're like, listen, I'm not

7:01

joking. Multiple different founders and

7:03

investors have told me, David, if you

7:06

can connect me to other people

7:08

that are like me, I have an

7:10

unlimited budget for that. And that leads

7:12

directly into the last point, which is number

7:14

four. These are intentionally smaller events. The

7:18

one in San Francisco or outside of San Francisco, it's going to

7:20

be 120, 130 people at most. The one in Austin is only

7:22

going to be about 20 people more than that. So

7:24

if you want to attend Do Not Dilly-Dally, the

7:26

waiting list could sell out both of these events

7:28

a few times over and the difference between these

7:30

events and the events in the past. I

7:33

sold out the last event and the only time – I mentioned

7:35

on two podcasts. That's it. Didn't send it

7:37

to my email list. Didn't tweet it. Didn't send

7:39

it to link to anything else. These events are

7:41

not only going to be advertised on this podcast.

7:43

They're going to be advertised on Business Breakdowns, on

7:45

Invest Like the Best, and Art of Investing Podcasts.

7:47

Also, you're welcome to attend both events if you'd

7:49

like. And to do

7:51

so, you go to founderspodcast.com/events.

7:54

And with that, let's jump into the episode

7:56

on the financial genius behind a century of

7:58

Wall Street scandals. The

8:01

man whose life forms the basis of

8:03

this book was a master of investor

8:05

psychology. The Match King had

8:07

perpetrated the greatest financial fraud in history.

8:10

The world now saw an epic betrayal.

8:13

A villain, not a hero. A

8:15

schemer, not a planner. A destroyer,

8:17

not a builder. Ivar

8:19

became the Judas of the financial markets.

8:22

Ivar's company suffered a similar fate to his

8:24

body. Panicked selling reduced

8:26

them to dust. Less

8:28

than two weeks after the public

8:30

learned of Ivar's death, investigators from

8:33

Price Waterhouse declared that his companies

8:35

were insolvent. The Swedish

8:37

committee investigating his construction firm concluded

8:39

that its 1930 balance sheet grossly

8:43

misrepresented the true financial position

8:45

of the company. Investigators

8:48

estimated the loss at $2 billion,

8:50

more than Sweden's national debt. The

8:53

accountant said Ivar had treated

8:55

his public companies as personal

8:58

assets. He had wired millions

9:00

of dollars among secret subsidiaries

9:02

and arranged for dubious intercompany

9:04

transactions. The details were

9:06

too complex to unravel. At

9:09

first it was difficult for some people to accept Ivar

9:11

as a fraud. He had helped

9:14

Europe avert a financial crisis. He was

9:16

a friend and advisor to government leaders

9:18

including the American president Herbert Hoover. At

9:21

the height of the roaring 20s Ivar Kroger was

9:23

one of the richest men in the world. Through

9:26

an ingenious plan to sell stakes

9:29

in foreign matchstick monopolies to American

9:31

investors, he built up a tremendous

9:33

enterprise, paying impressive dividends to his

9:35

investors. His company was one

9:37

of the few to survive the crash of 1929. But

9:41

shortly after his death in 1932, it became

9:43

clear that the great financier was not all

9:45

that he had seen. Driven

9:47

by success to adopt ever more

9:50

perilous practices, Kroger had turned to

9:52

shell companies, tax havens,

9:54

off balance sheet accounting, fudged

9:56

income statements and even forgery.

10:00

Kroger Crash that followed bankrupted

10:02

millions. That

10:04

was an excerpt from the book that we

10:06

talked about today which is The Match King,

10:08

Ivar Kruger, The Financial Genius Behind a Century

10:10

of Wall Street Scandals and is written by

10:12

Frank Partnary. So there

10:15

is a pretty amazing story how I came

10:17

to know about this book and

10:19

read it this week. And last week

10:22

I actually got to have this

10:24

incredible almost four hour dinner with

10:26

Daniel Eck, the founder of Spotify.

10:29

The dinner was me, Daniel and my friend

10:31

Patrick from Invest Like the Best. I've

10:34

been a fan of what Daniel's been able to build. I

10:36

think his life story, I've heard him on a bunch of

10:38

other podcasts, his life story is absolutely incredible. And

10:40

one of the coolest things to happen to me over the last few years

10:42

is Daniel's constantly like tweeting about the

10:44

fact that he likes his podcast, he goes

10:46

on other podcasts and mentions founder's

10:49

podcasts. And so during the dinner when

10:51

Daniel asks like, can I give you a recommendation for a book to

10:54

cover on the podcast? I was like, of course. And

10:56

it is this book that contains one

10:58

of the most unique stories. I cannot

11:00

think, I went back through the list

11:03

and I cannot think of another example

11:05

of somebody that had a life like

11:07

Ivar Kroger had. This book

11:09

reads like a thriller. It's almost like he's

11:11

some kind of evil genius secret

11:13

agent. So before I jump into it, and keep

11:15

in mind, this is not a typical biography. We're

11:18

going to heavily focus on the last 10 years

11:20

of his life. He shoots himself, or at least

11:22

that's the rumor. Some people believe he

11:25

was murdered. He shoots himself at the age of 52.

11:28

But before I jump into the book and try

11:30

to start explaining how he was able to do

11:32

what he did, I need to differentiate because anytime

11:34

that you hear his name, and a lot of people don't

11:36

know who he is, in his day,

11:39

he was one of the wealthiest and

11:42

most famous businessman on the entire planet. And

11:44

anytime you read about him or you search

11:46

about him, he's always compared to the metro

11:48

the Ponzi scheme or the person that the

11:50

Ponzi scheme is named after Charles Ponzi. I

11:52

need to read this one paragraph from Ivar's

11:55

Wikipedia page that explains why that

11:57

comparison is not a good thing.

12:00

100% accurate. It says

12:02

Kroger's financial empire has been described

12:04

by one biographer as a Ponzi

12:06

scheme. However, in a Ponzi scheme,

12:08

early investors are paid dividends from

12:11

their own money or from that

12:13

of subsequent investors. Although Kroger did

12:15

this to some extent, he also

12:17

controlled many legitimate and often very

12:19

profitable businesses. He owned banks,

12:21

real estate, a gold mine, pulp and

12:23

industrial companies. In addition to his

12:26

many matched companies, many of these companies have

12:28

survived to this day. He owned

12:30

or controlled over 400 companies. So

12:33

his main company, probably his most

12:36

profitable company, was this Swedish Match

12:38

Monopoly company. It's called Swedish Match.

12:41

It was founded in 1915, but

12:43

it existed up until a few

12:45

years ago when Philip Morris, the

12:47

gigantic tobacco company, launched a takeover

12:49

bid for Swedish Match and they actually

12:51

took it private. They took it – they delisted it

12:53

from the Swedish stock market. That just happened a few

12:55

years ago. So when the

12:58

book starts, Ivar is 42 years old

13:00

and he's going to America to try

13:02

to pitch American investors on this European

13:04

monopoly. Something that'll become

13:06

very apparent is he's got

13:09

world-class charisma and selling

13:11

skills. I would say a main part

13:14

of his early success was based on

13:16

this charisma and selling ability that he had.

13:19

But one of the most surprising things about this

13:21

guy is just how simply hell it methodically is.

13:23

His charisma was not natural. He practiced lines. He

13:25

practiced what he was going to say for hours,

13:27

just like great actors do. And when I say

13:30

practice, I don't mean just if he's going to

13:32

do a presentation in front of

13:34

an investment bank or something like that. I mean if

13:36

he's going to a party, if he's going to a

13:38

meeting, he is practicing what he's going to say. And

13:41

the end result is a bunch of

13:43

descriptions of Ivar in the book, such

13:45

as he spoke in beautifully constructed paragraphs.

13:48

When Ivar began weaving a story, a listener had no

13:50

choice but to follow him to the end. He

13:53

dominated every conversation. Those

13:55

around him wanted him to say more, not

13:57

less. Whatever the top he

14:00

always returned to business. There

14:03

was an air of greatness about him. He

14:05

could get people to do anything. They fell

14:07

for him. They couldn't resist his peculiar charm

14:09

and magnetism. And you're gonna

14:12

see world-class communication skills because we

14:14

see how his first pitch to

14:16

investors is simple, easy to understand, and this

14:18

is the important part. It is completely legitimate

14:20

what he's doing at this point. And

14:23

so as I was reading this part of the book, it's

14:25

talking about he's on a boat. He's sailing

14:27

from Europe, going to America, and he's like,

14:29

well, why is he going to America? He

14:31

says, for one simple reason. That's where the

14:34

money was. In 1922, America was awash in

14:36

cash. Now, this

14:38

is remarkable. It's amazing to me how

14:40

many times the same principles you and I talk

14:42

about are applicable to multiple different fields. And this

14:44

is a theme that you and I are going

14:47

to talk about a lot today when you analyze

14:49

the career of Ivar Kroger. And so

14:51

Ivar is on this boat. He's like, listen, I have

14:53

a product to sell. I need to go to where

14:55

the money is. A few weeks ago, I did

14:57

this episode on this guy named

15:00

Joseph Duveen. This is episode

15:02

339. Joseph Duveen was the

15:04

art dealer to the robber variance. And

15:07

in that episode, there's a line that

15:09

says, Duveen noticed that Europe had plenty

15:11

of art and America had plenty of

15:14

money. And his entire astonishing career was

15:16

the product of that simple observation. Ivar

15:19

did the exact same thing. Instead of

15:21

bringing European art to America, he's bringing

15:23

European match monopolies. He's giving American investors

15:26

a chance to invest in European match

15:28

monopolies. And that may sound funny today,

15:30

like when's the last time you bought some matches. But

15:32

at this point in history, matches were a basic and

15:34

essential product that everyone used. And so we need to

15:37

go back to this idea that his first pitch –

15:39

these are excellent communicators, right? It's simple,

15:41

easy to understand, and legitimate. And

15:44

so it says, he wasn't trying to sell

15:46

anything complex, at least not at first. His

15:48

pitch involved a basic and essential product that

15:50

everyone used and could understand the match. At

15:53

the time, matches were a staple. People used

15:55

matches to light kerosene lamps, gas heaters, stoves,

15:57

and tobacco. Everyone carried matches. Everyone used. They

16:00

used them and everyone bought them. So

16:02

his pitch is simple. American investors

16:04

could earn profits from a monopoly

16:06

abroad. And what is

16:08

fascinating is how he came to build

16:10

this Swedish match monopoly. He uses a

16:12

lot of ideas. In fact, he studied

16:15

in detail John D. Rockefeller, Andrew Carnegie, and he essentially

16:17

did what you and I do on this podcast. Like

16:19

we study the principles behind, right? We're not trying to

16:22

copy the what. We're trying to copy the how. He

16:25

copied the how. How did Rockefeller build Monopoly

16:27

and Oil? How did Carnegie build Monopoly and

16:29

Steel? And he's like, oh, okay, I can

16:32

take those exact same principles and I'll apply

16:34

it, right? I'm not building the American oil

16:36

monopoly, the American steel monopoly, but I

16:38

can take those principles, export them, and actually

16:40

use them to build a Swedish match monopoly,

16:43

and it works. And

16:45

so before he starts building this monopoly in the

16:47

match industry, he actually has

16:49

a really successful career building this

16:51

construction firm and construction partnership. And

16:54

as he makes more money, he gets

16:56

more interested in – instead of building

16:58

bridges and buildings, he gets more interested

17:01

in constructing companies. And so

17:03

he starts branching out into other industries. He's trying

17:05

to build film companies in real estate and telecommunications.

17:09

And he's already a millionaire by this point in his

17:11

life, and then he sees that his family's match business

17:13

in Sweden was struggling. And

17:15

he identifies – really smart. This guy's likely

17:18

a legit genius. And

17:20

so what he notices is there's a lot of

17:22

characteristics in the Swedish match industry that's very similar

17:24

to the early American oil industries. Essentially,

17:26

if you wanted to open an oil

17:28

refinery in Rockefeller's day, there was almost

17:31

no barrier to entry. In

17:34

Rockefeller's opinion, that industry's only going to

17:36

survive if it's under the complete control

17:38

of one formidable individual. Evar

17:40

runs this exact same playbook in the

17:42

match industry, so it says he quietly

17:44

purchased match factories throughout Sweden. He

17:46

was a pioneer of vertical integration. He'd

17:49

buy timber tracks and chemical factories to

17:51

secure the raw materials needed to make

17:53

matches. This is exactly what Rockefeller did.

17:55

He merged the leading competitors to form

17:57

Swedish Match. It was a single dominant

17:59

business. His plan was

18:01

to limit competition and increase profits by

18:04

securing a monopoly on match sales throughout

18:06

the world, mimicking the 19th century oil,

18:08

sugar, and steel truss. Swedish

18:11

Match Corporation was just one part of

18:13

his empire. He controlled ten other businesses

18:15

through his public holding company. He

18:18

controlled the holding company with a tight grip.

18:20

Annual meetings were perfunctory. At

18:24

this point that he's coming to America, his

18:26

two largest and most profitable businesses is Swedish

18:28

Match and then his construction firm, Kruger &

18:30

Toll. He's going to use the

18:32

track record of these two successful companies in raising

18:34

a ton of money. He raises hundreds of millions

18:36

of dollars from American investors. And the

18:39

main theme of his life and career is that too

18:41

much finance ruined the legit business. His two companies were

18:43

making a profit. That wasn't enough for him. He wanted

18:45

to be richer. He wanted to operate on a bigger

18:47

scale. He wanted to have hundreds and hundreds of different

18:49

companies. And so what they would do is he

18:51

would say, hey, we pay a 25% dividend. And

18:55

even though his financial statements contained almost

18:57

no information, it didn't matter. When investors

18:59

learned that Kruger & Toll had

19:01

been paying 25% dividends each year, they simply

19:03

went mad. And

19:06

this is an important point. He understood

19:08

human psychology. He was studying the history

19:10

of finance. Now, I would say he

19:13

studied the history of finance. It's

19:15

not clear to me. In fact, I would argue

19:17

– I always say that learning is not memorizing

19:19

information. Learning is changing behavior. So he

19:21

studied this, but it never affected his behavior.

19:23

And to me, he never really learned. It

19:25

said that he had studied financial history and

19:27

was aware of the infamous periods of mania

19:29

and later panic, such as the South Sea

19:31

Bubble of 1720 and

19:33

the infamous rise and collapse of the Dutch

19:36

tulip bubble in 1637. In

19:38

those cases, men became rich as

19:40

they rode the wave of investors

19:43

speculating. He knew that timing was

19:45

crucial, that American optimism would not

19:47

persist forever. When

19:49

investors were manic, they would purchase

19:51

just about anything. But during

19:54

the panic that inevitably followed mania,

19:56

the opposite was true. No one

19:58

would buy. And

20:00

so even at this point in the book,

20:02

we know how his story ends. He loses

20:04

millions of dollars for a ton of people.

20:07

Some are just normal investors. Then he also

20:09

loses a ton of money for very wealthy

20:11

people. He kills himself and then he dies

20:13

in disgrace. And so I'm reading this. I'm

20:15

only a few pages into the book, and

20:17

I immediately think of what Charlie Munger said

20:19

that I feel is true over and over

20:22

and over again. And he said, the problem

20:24

isn't getting rich. The problem is staying sane.

20:27

The problem isn't getting rich. The

20:29

problem is staying sane. Evar was

20:31

not able to stay sane. And

20:34

so when he gets to America, Evar starts to

20:36

target several different investment banks. And what he does

20:38

is really smart. He knows, hey, JP Morgan, they're

20:40

not going to give me any money. Goldman Sachs

20:43

is not going to give me any money. And

20:46

so he targets this bank called Lee Higginson.

20:48

It was one of the most prestigious and

20:50

profitable banks in the world, but it was

20:52

a step behind JP Morgan, Goldman Sachs, and

20:54

Lehman Brothers. Before they get

20:56

involved with Evar, it's a seven-decade old.

20:58

It's a 70-year-old company. By the time

21:01

they're done, they are bankrupt, and the

21:03

partners are impoverished. And

21:06

this is the first example that I referenced earlier of. Evar

21:08

just had this fundamental understanding of

21:10

human psychology, this genius level, this

21:12

evil genius level way to manipulate

21:14

people. And so there is a partner

21:16

at Lee Higginson, this guy named

21:18

Donald Durant, who's going to be his main banker

21:21

throughout this entire thing. And so

21:23

as he's on his way to America, he

21:25

starts seeding this. They're covering what he's

21:27

doing in newspapers. He's having

21:29

rumors spread within the finance industry about how

21:31

profitable Kruger & Tolle is and how successful

21:34

Swedish Match is. He

21:36

is watering the ground before he ever

21:38

meets him, so Durant is devouring all

21:40

the details of Evar's trip

21:42

to America. All these people around

21:44

him are telling him, hey, Kruger & Tolle and Swedish Match

21:46

are the two hottest companies outside the United States. The

21:49

colleagues – there is a branch of

21:51

Higginson & Company in London. His colleagues

21:53

in London reported that Evar already had

21:55

made them a fortune on a highly

21:57

unusual and complex swap transaction. of

22:00

this sentence is really important that even

22:02

the sharpest investment bankers could not understand.

22:04

That is another main theme that he

22:06

got away with that made this scheme

22:08

of his success. He intentionally muddied the

22:10

waters to make them appear deep. Turns

22:12

out in the end, he didn't even understand what he

22:15

had built. But we're still half a decade at least

22:17

from there. So in addition to

22:19

this, Ivar pays a Swedish stockbroker, this

22:21

guy named Lagerkranz, to set an appointment

22:23

with Durant to inquire about syndicating some

22:26

investments for some of his Swedish clients.

22:28

That was the stated goal. This is

22:30

what I meant. This guy is like

22:33

an international man of mystery. Nothing

22:37

is as it appears with Ivar Kroger. So

22:39

he sends Lagerkranz before he gets there. He says,

22:41

hey, I'm going to pay. He actually pays him

22:44

to do this. Go and have this meeting with

22:46

Durant under this false pretense.

22:48

And then happen to mention me

22:51

and what I'm up to. And the fascinating

22:53

thing is this appeared as just an inside,

22:55

just something that casually came up in conversation.

22:57

Durant never imagined that Ivar had arranged it

22:59

all the entire time. And so by this

23:01

point, news about Ivar and how great his

23:03

companies are and the fact that he's coming

23:05

to New York, he's got these great opportunities.

23:08

Durant's heard about it from three or four

23:10

different sources. So he contacts Ivar and he's

23:12

like, let's please have a meeting. Now this

23:14

is what I meant that Ivar understood human

23:16

psychology. If something is limited and

23:18

hard to get, that increases desire. This

23:21

works for both products like Ferrari

23:23

and for people like celebrities. At

23:26

this point, Ivar made himself a

23:28

business celebrity. And so even though

23:30

he wanted to meet Durant the whole time, when Durant

23:32

asked to meet him, Ivar's like, no, I'll try to

23:34

fit it in. Let's see what I can do. I've

23:37

read three or four books on Enzo Ferrari.

23:39

There's a great story that I've never forgotten

23:42

where in the early days of

23:44

Ferrari, I think he's making maybe 100 cars a

23:46

year by this point. All

23:48

these rich Americans are coming to Italy. Enzo

23:50

Ferrari gives them a tour of the entire factory.

23:53

And he's Like, please, Enzo, let me

23:55

buy a car. And He's like, oh, no, of course. I'll see

23:57

what I can do. But You have to know. You

24:00

know it's going to be a least a few months, maybe a year where

24:02

the cases. And. The the American leaves and

24:04

and those ah employ walks up to six

24:06

I don't understand like why did you tell

24:08

that and him behind Factor: We have a

24:10

parking lot full of unsold for hours and

24:12

Enzo said yeah before he has to be

24:14

desired it can be Sunday these in it's

24:16

to that's readily available. He understood that the

24:18

very beginning. In a very early

24:20

days. Of. The

24:23

his Ferrari. That fundamental. Understanding

24:25

of human psychology that like genius of old

24:27

i'm sitting human psychology. the Ferrari had you

24:29

see that eve are Kroger had as well.

24:32

And so says. When. Duran requests meeting you

24:34

are a spot of the. He was busy with other

24:36

business but he would try to arrange a time. He.

24:39

Had learned that playing hard to get

24:41

was a promising strategy with America's Elite.

24:44

He. Waited a few more days to ensure that

24:47

the publicity about him had saturated li he

24:49

gets in which is the bank that Du

24:51

Randt works for, the bank that ybarra going

24:53

to take down. And.

24:55

Finally, He. Arranged to have a

24:57

meeting with doing it. And as a great

24:59

line in the book a few pages later, this

25:01

meeting ultimately will lead to the destruction of their

25:03

farm. And so this

25:05

is the pitch to direct. This is

25:08

a great descriptions of Eve Ours plant.

25:10

Listen this plan would and did work.

25:12

He was only the lying. The philosophies

25:15

falsifying hims financial statements and being over

25:17

extended that caused his down for good

25:19

for. The. That that's why says like

25:22

it's not a clear ponzi scheme is a

25:24

was working. He just took it for some

25:26

reason he wrist what he had to pursue.

25:28

What he didn't have in didn't need is

25:30

a great line in one of Warren Buffett

25:32

Sure horror let letters about this and when

25:35

I was reading this section and what you

25:37

are ones of doing to the scene are

25:39

taking a good plan and destroying it. reminded

25:41

me of something that more and wrote about

25:43

on imports of using debt sparingly. The make

25:46

sure that you're putting survival ahead of every

25:48

single thing else I mean a rigid is

25:50

excerpted comes. From the The Book The Essays of

25:52

Warren Buffett if you have a sufficient Founders notes,

25:54

highly recommend. after this going back

25:56

i've sixty five highlights and notes from

25:59

this book spend 10 minutes it

26:01

takes to reread those highlights. It's excellent. And

26:03

on the note, the note I left myself

26:05

on this, it says, all that matters is

26:07

to survive, the rest is just words. That

26:10

is a quote from Charles LeGaul and this

26:12

is what Warren Buffett says in his shareholder

26:14

letters, we use debt sparingly. We will reject

26:16

interesting opportunities rather than over-leverage our balance sheet.

26:18

As one of the Indianapolis 500 winners

26:21

said, to finish first, you must first

26:23

finish. The financial calculus that Charlie and

26:25

I employ would never permit our trading

26:27

a good night's sleep for a shot

26:29

at a few extra percentage points of

26:31

return. I've never believed, this is what

26:34

Warren Buffett is about to tell us that he

26:36

never believed in is exactly what

26:38

Yvar Kueger, the mistake that he made. This

26:40

is what I mean. Learning is not just

26:42

memorizing behavior. Learning is not just memorizing information.

26:45

Learning is changing your behavior. Yvar

26:47

knew this and he could not change his behavior.

26:49

This is like my worst nightmare. I'm like sweaty.

26:51

I have sweat above my lip right now thinking

26:53

about this. I've never believed,

26:55

go back to Warren Buffett, I've never

26:57

believed in risking what my family and

27:00

friends have and need in

27:02

order to pursue what they don't have

27:04

and don't need. With

27:07

that in mind, this is the plan. This

27:09

is the new idea, the prospect of Americans

27:11

investing in foreign monopolies. You can't monopolize in

27:14

America. This is after they'd

27:16

broken up trust like Standard Oil and Steel

27:18

and everything else. Antitrust laws

27:20

prohibited a match monopoly in the United

27:22

States but nothing prevented American investors from

27:24

buying into monopolies abroad. The smart

27:26

thing that Yvar does, again, he's a student

27:28

of history. He's like, oh, this idea worked.

27:30

I can adapt it to my circumstances, my

27:32

industry, and my environment now. He knew that

27:35

there was this extraordinary scheme that was orchestrated

27:37

during the 17th century by this guy named

27:39

Robert Harley. He's the one that formed the

27:41

South Sea Company. The history behind

27:43

this is fascinating. He forms the South

27:45

Sea Company to assume England's national debt.

27:48

The scheme had become known as the South Sea

27:50

Bubble for the sharp increase in the price of

27:52

South Sea Company shares. But the original idea is

27:54

the same idea that Yvar is going to use

27:56

in exchange for the South Sea Company's share of

27:58

the South Assuming the debt

28:00

of England of the British government, the

28:03

British government gave the company a

28:05

monopoly on trade to the South

28:07

Seas. These government-granted monopolies are very,

28:09

very common in Europe. That

28:12

is another important idea. Nothing that Ivar was doing

28:14

was new. He just applied it to a different

28:16

industry. It was an audacious deal, but a simple

28:18

idea. And the idea could be replicated. It was

28:20

not limited to England and the South Seas or

28:22

to a time 200 years earlier. In

28:25

theory, if a government needed money

28:27

and a company wanted a monopoly,

28:29

both sides could benefit from a

28:31

similar compact, anytime, anywhere, with any

28:33

products. Ivar's idea was to

28:35

do just what Harley had done, except

28:38

with matches instead of South Sea trade.

28:41

Ivar would lend money to the government

28:43

of Europe in exchange for a

28:45

monopoly concession for the production and

28:47

sale of matches within their territory.

28:50

There was one problem, though. Ivar didn't have enough

28:52

money to lend millions of dollars to foreign governments.

28:54

Ivar needed the backing of a major bank. You see

28:56

where he's going here. It's very easy to follow what

28:59

he's trying to do. I'm coming to

29:01

you because I need the money. I'm going to take the

29:03

money raised from American investors. I'm going

29:05

to help out European governments that are in

29:07

debt in return from lending them money. They

29:10

have to give me a monopoly in

29:12

their country on match production and selling

29:14

matches. And so this is the summary.

29:16

It's very similar to what I just said. A single thread runs

29:18

throughout. Americans would lend

29:21

money through Ivar to foreign governments,

29:23

and in return, everyone would make

29:25

unimaginable profits from match monopolies. He

29:28

hooked Durant with his simple, brilliant

29:30

idea. Government loans

29:33

in exchange for match monopolies.

29:35

That's seven words, and

29:37

you understand exactly what you're buying into. Government

29:39

loans in exchange for match monopolies.

29:43

And so I want to give a little background because I want

29:45

to go back to this insane idea to me, the

29:47

fact that you risked a successful, legitimate

29:49

business to speculate. And he's not a

29:51

loan. There's a million examples in the book.

29:54

There's a million examples through history. And that's why it's, I

29:56

think, so important to spend time talking about. Most

29:58

of this book is just about the law. decade of

30:00

his life. But there are a few he's

30:19

working on the construction of

30:21

the Archbold Stadium at Syracuse University

30:23

and I thought this paragraph was

30:25

fascinating. He regarded his

30:28

bosses there as inferiors. Men

30:30

who lack the intellect and

30:32

ambition of the stadium's namesake.

30:34

John Deed Archbold, the

30:36

great capitalist, oil refiner, and philanthropist.

30:39

Ivar wrote to his parents, I cannot

30:41

believe that I am intended to spend

30:43

my life making money for second-rate people.

30:46

I shall bring American methods back home

30:48

to Sweden. I shall bring American methods

30:50

back home. Wait and see. I shall

30:53

do great things. I am

30:55

bursting with ideas. I'm only wondering

30:57

which to carry out first. So

30:59

as he's working on the construction

31:01

of the stadium he meets

31:03

this other guy named Julius Kahn.

31:05

Julius Kahn is the inventor of

31:08

this method for making iron called

31:10

Kahn Iron. Kahn introduces Ivar to

31:12

another Swedish engineer named Paul Toll

31:15

and that is when Ivar leaves America goes

31:17

back and founds him and Paul Toll together

31:19

form this this company. This very

31:21

legitimate one's being very profitable construction

31:24

company called Kroger and

31:26

Toll and what he

31:28

does next is rather genius because it's

31:30

not like construction. Humans have been building

31:32

things forever. It's like one of the

31:34

most ancient industries and yet the

31:36

way that Ivar, young

31:38

Ivar, figures out to gain entry

31:40

in a foothold in an existing

31:42

industry is fascinating. It is by

31:44

real lining incentives and if

31:47

there is a the main character of the

31:49

story is Ivar Kroger. The

31:52

supporting character is the

31:54

superpower of incentives. I almost started

31:57

the podcast with this long speech

31:59

that Charlie Munger gives on incentives, which I'll read

32:01

to you in a little bit. It is so

32:03

obvious in the story, the power of incentives, like

32:05

the role that it plays. And so not

32:08

only do they make innovation and

32:10

actually the method of constructing buildings,

32:12

right? But maybe even more important

32:14

than that, he's able to

32:16

take customers from other existing businesses

32:20

by realigning their incentives. And so

32:22

it says he came up with

32:24

novel contract features. This

32:27

is a really surprising way to get customers,

32:29

a really surprising way to increase your distribution.

32:32

So, Evar is willing to change

32:34

the standard terms of construction contracts

32:37

to reallocate the risks to him.

32:40

If I want to build a building and

32:42

I hire a construction firm, anybody that's built

32:44

anything knows that these timetables, most

32:46

times they're late, they're like almost like they just pick dates out

32:48

of the bin air and just completely make it up. And

32:51

so up until this point, construction firms had

32:53

not been willing to take on the risk

32:55

associated with delays because that's every day my

32:57

construction firm that has not built my building

32:59

is late. That costs me money. And

33:02

yet I don't have any control over when they

33:04

complete the creation of the building. And

33:06

so the ability to speed the project lies with the construction

33:08

company, but the risk of them failing to do so lies

33:10

with the client. Evar understood

33:12

this misalignment of a sentence and all he did is

33:15

just realigned it. And he's like,

33:17

I'm going to take on that risk. Construction

33:19

firms, not clients, were in the best position

33:21

to reduce delays. Evar realized that

33:23

the best way to minimize construction delays

33:25

was to shift the risk of loss

33:27

that arose from such delays to him,

33:30

meaning to his firm. Then Kroger and

33:32

Toll would have the incentive and the

33:34

ability to speed up a project. And

33:36

here was the punch line. Clients would

33:38

pay more if they knew the job

33:40

would be done on time. This

33:43

is really, really smart. Kroger and Toll

33:45

became the first firm in Europe to commit

33:47

to finished projects by a fixed date. Step

33:50

one, I guarantee that your building is done

33:52

by this date. Step two,

33:55

if I do not follow through on

33:57

that commitment, I have to pay you.

34:00

the client $1,200 for each day

34:02

I'm late. That is step two.

34:04

Step three, if I finish

34:07

early, you will pay me

34:09

for every day that I

34:11

beat that agreed upon fixed

34:13

date. Again, this

34:15

guy is a genius at aligning incentives, understanding

34:17

human psychology, and then making it very easy

34:19

to understand what he's trying to explain to

34:22

you. You customer hate construction

34:24

delays, so therefore I will guarantee you

34:26

that your building will be done by

34:28

this date. Any day I

34:30

go over, I pay you more money. Any

34:32

day I save you, you pay me more.

34:35

The end result. He repeated this

34:38

formula and earned completion bonuses for every single

34:40

project. Builders were happy to pay extra to

34:42

know a high-quality project would be finished ahead

34:44

of schedule. Within a few years, Kruger and

34:46

Toll was regarded as the best building company

34:48

in Sweden a few years later as one

34:51

of the top firms in Europe. That

34:53

is really smart. It also leads us

34:56

to the next part of the story.

34:58

Why is this important? Because he's going

35:00

to use his construction firm as collateral

35:02

to enter and then consolidate the match

35:04

industry. Now he goes to

35:06

banks and Sweden sites to look at this successful construction

35:08

firm. I want to run this playbook

35:10

that they use in America on the Swedish match

35:13

industry and I'm going to use this very successful

35:15

company that I have as collateral. He

35:17

saw that the match industry was in the

35:19

same economic position, oil, sugar, and steel had

35:22

been a few decades earlier. There's too many

35:24

owners of too many factories. Competition was driving

35:26

prices down. This

35:28

is when he starts doing and he doesn't own borrowed

35:30

money just like Rockefeller did at the beginning of his

35:32

career. You and I have gone over Rockefeller in detail.

35:34

I will do probably 15 more

35:37

episodes on Rockefeller or read every single

35:39

book on Rockefeller I could

35:41

find. Why? Because Charlie Munger believes that

35:43

Rockefeller built the greatest company of all

35:45

time. And you see in this book,

35:47

this is fascinating, Eivor is using Rockefeller's

35:50

domination tactics. I think the last

35:52

time I talked about this was on episode 324 where Rockefeller

35:55

is writing all those letters to his son. If you really

35:58

want to go about domination and like his conquering movements. So

36:00

this is what he's doing. Over the

36:02

next eight years, Ebar parlayed a few

36:04

family match factories into a conglomerate. He

36:06

modernized factories and expanded overseas sales. He

36:09

doubled production and tripled profits.

36:11

He reduced costs by purchasing the companies that

36:13

made his machines as well as companies that

36:15

supplied the chemicals that he needed to make

36:18

the matches. At the beginning, everybody

36:20

said Ebar's decision to enter the match business seemed foolish.

36:22

They said the exact same thing about Rockefeller. Ebar

36:25

would continually to vertically integrate. Now he's taking over

36:27

all the factories because you need all like phosphorous.

36:29

You need all these other chemicals to make matches.

36:31

So he would take over the suppliers, and then

36:34

he would choke off his competitors so

36:36

they can no longer buy the supplies they need to

36:38

manufacture the matches that they're trying to manufacture. He

36:40

would destroy anyone who refused to sell

36:42

with ruthless tactics. He took over supply

36:45

contracts, interfered with customers, and temporarily lowered

36:47

prices below cost. Rockefeller

36:49

did all of those. As a

36:51

result, Swedish Match was one of the few

36:53

European businesses that remained profitable throughout the war.

36:55

That is World War I that they are

36:57

referencing. And why are they profitable? Because they

36:59

are a monopoly. And

37:02

so that is an important backstory because now we're

37:04

back in America in 1922. He has control of

37:06

these two companies, the Swedish Match monopoly. He

37:08

has Kruger and Tolle. He's got a bunch

37:10

of these other companies too. But those are

37:12

the two main ones. And so now his

37:15

banker, the one that he's going to destroy,

37:17

Durant, makes – this makes Durant's pitch to

37:19

American investors very easy because investors like all

37:21

people. They like easy to understand stories. And

37:23

his whole point is like this guy's got

37:25

a great track record. He's got

37:27

a thriving business that is paying very

37:30

high dividends. And

37:32

so that same person with a great track

37:34

record, thriving businesses, high-paying dividends now

37:36

has a new idea that's easy to understand,

37:38

which is loans to governments for more match

37:40

monopolies. Do you want to invest? Oh, by

37:43

the way, one of his companies is

37:45

paying 25% dividends every year. And

37:48

so this is when he starts what he's

37:50

going to call International Match Corporation. This

37:52

is the company that American investors are going

37:54

to invest in. And so he

37:57

purposely sets up his board. He wants people

37:59

that are distracted. And so he's selecting

38:01

these directors that are supposed to, quote unquote,

38:03

oversee international matches business, and one of them

38:05

is the nephew of John D. Rockefeller, which

38:08

Ivar thought that was incredibly cool because he

38:10

idolized Rockefeller since he was a young man.

38:12

But why is he – this guy's named

38:14

Percy Rockefeller. Why is he picking Percy Rockefeller?

38:18

Ivar saw that Rockefeller was currently

38:20

serving on more than 60 other

38:23

boards. He was

38:25

an ideal director because he was

38:27

well-connected and far too busy to

38:29

care about any details. This guy's

38:31

an evil genius. Ivar

38:33

had idolized Rockefeller since he

38:36

was a boy, and now a member

38:38

of that family would serve on his

38:40

board. There's

38:42

a great line describing his corporate structure. It

38:44

was like a corporate family tree from hell,

38:46

and it had extended into obscurity. And

38:49

so this is his main mistake. This is when he's

38:51

constantly having to raise more money, raise

38:54

new funds to pay down past debts and

38:56

past promises. There's an excellent line. I went

38:58

and searched all my notes and highlights because

39:00

I remember he said something, so I just

39:02

put in the word survive,

39:04

and it comes right up. And it says, victory

39:07

in our industry is spelled survival. That is

39:09

Steve Jobs. Donald Durant and his partners had

39:11

no idea – this is the investment bankers

39:13

that helped Ivar raise money for American investors.

39:15

They had no idea how desperately Ivar needed

39:17

the money. Although his businesses seemed to be

39:20

thriving, he had promised too much to his

39:22

early investors. He had borrowed tens of millions

39:24

of dollars from Sweden's leading banks, and both

39:26

Kroger and Tolle and Swedish Mash were paying

39:28

double-digit dividends every year. The

39:31

company's profits alone did not always cover these obligations.

39:33

This is when we get into this like Ponzi-esque

39:35

scheme that he had going on. In order

39:38

for his businesses to continue to succeed,

39:40

they had to continue to grow. Now, that's

39:42

fine. This is 1922. They're going to grow.

39:45

In 1929, you cannot tap the markets anymore, and that's

39:47

what causes him to go bankrupt. If they

39:50

stopped growing, Ivar would not be able to repay

39:52

his earlier debts or continue to pay high dividends.

39:54

It wasn't rocket science. To pay a 25% dividend

39:56

every year, you either had to earn 25% from

39:58

your business or not. or else

40:00

raise more money. This is

40:03

crazy. A large portion of the dividends

40:05

recently paid by Swedish Match and Kroger

40:07

& Tol came from cash

40:09

raised by International Match in America.

40:11

In other words, the dividends paid

40:13

to old investors came from the

40:15

proceeds raised from new ones. That

40:18

is Ponzi. This is crazy that

40:20

he did this because unlike Charles Ponzi,

40:23

Ivar's profits were real. Swedish Match made

40:25

and sold billions of boxes of matches

40:27

every year. Kroger & Tol built landmark

40:29

buildings throughout Europe. Ivar

40:31

believed that if he kept raising cash

40:34

to pay earlier debts his business would

40:36

grow fast enough to survive. What are

40:38

you doing? Why are you

40:40

so smart and talented and why would you put

40:42

yourself in a position like that? Victory

40:45

in our industry and every industry is

40:47

spelled survival. Even the very

40:50

best ideas fail if a company runs out

40:52

of money. There's a great line

40:54

about this by the founder of Sequoia Don

40:56

Valentine. He says all companies that go out

40:58

of business do so for the same reason.

41:00

They run out of money. The

41:02

minute Ivar's businesses stop growing fast

41:04

enough and the minute he cannot

41:06

raise more money he goes out

41:08

of business. He destroys everything

41:10

that he spent 25 years building. For

41:15

what? Why? And

41:17

it goes back to what Charlie Munger

41:19

said. The problem is not getting rich.

41:21

It's staying sane. He was unable to

41:24

stay sane. Right

41:27

before he raises money from American investors for

41:29

the first time there's a public

41:31

accountant in Sweden that had found that

41:33

Swedish matches finances were so complicated that

41:35

he could not unravel them. What

41:38

he said at the time was that

41:40

the Swedish match consortium of companies should

41:42

be called the greatest speculation venture in

41:44

Sweden. You have Swedish regulators

41:46

that are coming down and again there's no

41:48

laws. There's a lot of stuff that he

41:50

did now would be illegal. Even

41:53

then the regulators start talking to

41:55

Ivar's main banker in Sweden. This

41:58

guy named Rybak. is

42:00

extremely influential. And so he's able to calm

42:02

down the regulators. He says, listen, it's our

42:05

interest to survive. We don't need like costly

42:07

new rules. We don't need extra regulation. And

42:10

so this report that's put out about

42:12

the dangers that's happening with the Switch

42:14

Match Company, it's phrased as advice from

42:16

regulators and it didn't require any action.

42:18

And so you're like, I don't understand.

42:20

Like why would the bank want

42:22

to do that if their

42:24

main customer is potentially taking

42:27

risks that could make them lose money?

42:29

And the answer is incentives. The

42:32

banks were not only lending money to Ivar,

42:34

they were his biggest shareholders. So

42:37

when the bankers help get the regulators

42:39

off of Ivar, they're in

42:41

turn getting the regulators off themselves.

42:44

And why? Because they like those fat

42:46

dividends that are coming in and when

42:49

you give people fat, effortless money, they

42:51

don't question things. When Swedish Match paid

42:53

hefty dividends, much of that money went

42:56

to the bank. Again, straight

42:58

out of Rockefeller's playbook, for different reasons, Rockefeller

43:00

went around in the early days. He did

43:03

something very similar in his early days of his

43:05

career. The banks that he was

43:07

borrowing money from to build the early days of

43:09

standard oil, he also gave them stock and he

43:12

gave them stock. So his competitors, his

43:14

other oil refining competitors would go to that same bank, hey,

43:16

give me a loan. I need to be in business and

43:18

the bank's like, why would I do that? You're

43:21

a competitor of mine now because I'm not

43:23

just the banker, I'm the partner. It's

43:26

incentives. It's a misinline and minute incentives

43:28

all the way down throughout this entire

43:30

story. It is the supporting character of

43:32

this story. And again, there's

43:34

some banks that two

43:36

other banks that he raised money from the past,

43:39

they made him settle their loans and return their money. And

43:42

they said, hey, you got to raise funds somewhere else. And

43:45

so he did just what Duveen did. He says, okay, where's the

43:47

money? America? Okay, cool. I'll hop on the boat and go over

43:49

there. And so then

43:52

we go back to Ivar being this

43:54

evil genius. Of course, he's selling securities

43:56

in America. Lee Higgin's in

43:58

his big bank. They're like, hey, we need to have

44:00

an auditor, so they hire a young

44:02

auditor at Ernst & Ernst. And this

44:04

entire story, this

44:07

guy is just completely mismatched against Ivar and

44:09

Ivar, manipulates him every time. But again, every

44:11

single time somebody looks at his books like

44:13

this doesn't make any sense, this guy's name

44:15

is Burning. A.D. Burning. Burning

44:17

was baffled by this arrangement. He couldn't

44:20

decipher the financial statements Ivar sent. Were

44:22

the measures of international matches profits accurate?

44:24

Did the company's balance sheet entries include

44:27

the assets and liabilities of Swedish matches

44:29

subsidiaries? There was no way to tell.

44:31

He had to rely entirely on Ivar's

44:33

numbers, which changed more frequently than a

44:36

careful accountant would hope or expect. Everything

44:39

he did was based solely on

44:42

information provided by Ivar. And

44:44

yet he never says anything. Why doesn't he say anything?

44:46

Again, it goes back to intent to social get to

44:48

in a minute. At the time,

44:50

there's no federal member. There's no federal security regulation.

44:52

So everything at this time in America was handled

44:54

by the states. You know, it's hilarious. This goes

44:56

back to this idea that anyone who bothers to

44:58

look closely is confused and suspicious. And

45:01

so there's like – he's able to shake

45:03

or like get away from almost every other

45:05

regulator except this one random regulator and security

45:07

regulator in Wisconsin. And so they keep sending

45:09

Burning because he's Ivar's auditor over and over

45:11

again. He's like, what's going on with this?

45:13

We need more information. Every time they get

45:15

more information, like this isn't good enough. And

45:18

then this is where Burning should have known. Burning knows

45:20

that Ivar's a liar. And it's not

45:23

even that sophisticated. It's sloppy and obvious. He

45:25

sends – he's like, hey, Wisconsin needs all

45:28

this information. I need more about International Match's

45:30

books. And so he sends

45:32

– Ivar sends Burning these

45:35

financial statements. Listen

45:37

to this. It was obvious that

45:40

the statements had been hastily and not very carefully

45:42

prepared. Why? Ivar sent balance

45:44

sheets for International Match for 1921 and

45:46

1922, showing that the company

45:50

had a 1 million shares

45:52

outstanding. But International

45:55

Match had not even existed during

45:57

those years. at

46:00

the numbers, right? He's just completely making everything

46:02

up. The company doesn't exist, okay? But he

46:04

said 1921, we made $1.9 million in profits.

46:06

1922, $2 million in profits. 1923,

46:14

$2.1 million in profits. And it goes on and on.

46:16

Every year, when he does, he literally just increases the

46:18

amount of profits by $100,000. So I made 1.9, then

46:20

the next year it's 2, then

46:24

2.1, then 2.2, then 2.3. That's not

46:26

a joke. That is literally what

46:28

he submitted to these regulators. And

46:31

the first sign that E-VAR could control burning

46:33

is, he's like, oh, you obviously made a

46:35

mistake. Don't worry, I will reconcile. He

46:37

fixes them to the best of his

46:39

ability on the very limited knowledge that

46:41

he has and then resubmits them to

46:43

the Wisconsin regulator. But the message was

46:45

very clear. His auditor

46:48

would easily change numbers for

46:50

him. And why he does

46:52

this will make perfect sense later on. Again,

46:54

I need to paint this picture here because

46:56

it sounds absolute. In the world that you

46:58

and I live in, remember, which is heavily

47:00

formed by the financial swindle that E-VAR is

47:02

perpetuating in the book. It sounds

47:04

ridiculous. How is this

47:06

possible? But it was

47:09

par for the course. This guy took it

47:11

to the extreme, but this lack of information, this lack

47:14

of regulation, it was just par for the course of

47:16

the time. And so it

47:18

says, few people seem to care that

47:20

the information was incomplete. Indeed, international matches,

47:22

cursory financial statements were typical of

47:24

corporate disclosures at the time. Even companies

47:27

with securities listed on the New York

47:29

Stock Exchange at the time would give

47:31

scant detail. Fewer than one third

47:34

of stock exchange companies even bothered to

47:36

publish quarterly reports. Another

47:39

third of stock exchange companies didn't

47:41

publish any reports at all. And

47:44

so it's this constant mix of legitimate business,

47:47

outright lies, this excessively

47:50

complicated company tree structure.

47:52

But again, this idea was not new. For

47:54

centuries, European governments had granted monopolies of all

47:57

kinds of production and trade. These were not

47:59

gifts. The government's required payment in return in the

48:01

form of cash, interest, or share of the profits. These

48:04

monopolies were an alternative to state control. Industry

48:07

remained in private hands, but government received a

48:09

steady stream of revenue. So

48:11

past examples, before Ivar did

48:14

this with matches, early monopolies

48:16

included cigarettes, gunpowder, liquor, petrol,

48:19

playing cards, salt, and tobacco. Even

48:22

the idea of a match monopoly was not new because

48:24

we're in the 1920s, right? The

48:26

first match monopoly in Europe was created back in

48:28

France in 1872. He's

48:30

just taking an old idea and bringing it

48:33

back to his modern day. And

48:35

so the first deal they do, which is a

48:37

legitimate deal, this is international's first deal, it's with

48:39

Poland, they say, okay, we'll

48:41

lend you a bunch of money in exchange for

48:43

this monopoly. This is just after the war, so

48:45

Poland needs, he says it has

48:48

a bunch of humanitarian fiscal needs and

48:50

the deal is structured like this. International match

48:52

would pay a royalty from its match

48:54

sales in Poland to the Polish state

48:57

and the proceeds of the royalty would

48:59

secure the loan to the government. As

49:02

a result, all existing match factories

49:04

were nationalized, combined, and then leased

49:07

to international match for the next 20 years. That

49:10

is a legitimate deal. That is real.

49:12

And then of course he does something

49:14

that he's always combining the legal with

49:16

the illegal. When he

49:18

received a copy of the signed documents, he did

49:20

something rather unusual. He thought it might

49:22

be useful to be able to replicate Dr.

49:25

Glówkwákki's signature in the future.

49:27

That is the senior finance

49:29

ministry of Poland who he's doing this

49:31

deal with. So he gets the documents, what did he do? He

49:34

makes a copy of the signature, what are you doing?

49:37

So he took a signed copy of the contract to

49:39

a stamp shop and ordered a rubber stamp that would

49:41

produce a exact replica.

49:44

He would obtain rubber stamps of official

49:46

signatures for nearly all of his match

49:49

deals. This

50:00

guy literally invented the B-Share, this dual-class

50:03

share system that's still used to this

50:05

day. He devised an elegant solution to

50:07

his problem. It

50:10

was an ingenious piece of financial engineering that would survive

50:12

the test of time. He introduced

50:14

a new type of security which he called a B-Share.

50:16

He divided its common shares into two classes. Each

50:18

class would have the same claim to dividends and

50:20

profits, but the B-Share would only carry one

50:23

one-thousandth of a vote compared to one

50:25

vote each for an A-Share. B-Shares could

50:28

be sold to investors without affecting control.

50:31

And go back to incentives. There's so many times

50:33

where Evar is kind of like – he's

50:35

just sloppy with his recordkeeping. He's kind of caught in

50:37

a lie. And Durant, the main guy

50:39

that's going out into the American community and saying,

50:42

hey, buy these securities, sometimes it pops up.

50:44

He's like, man, this is kind of weird. So then he goes

50:46

and talks to Burning and Ernst and Ernst. You're supposed to be

50:48

the auditor. Are you okay with these numbers? What's going on here?

50:51

But then what happened? It's incentives. It

50:53

says Durant was conflicted because Evar's

50:55

financial statements were sloppy and incomplete,

50:57

yet investors nevertheless clamored

50:59

to buy securities of international

51:01

match. So any kind of,

51:04

oh, I feel a little uneasy about

51:06

this. As soon as that money floods

51:08

in the door, Durant's concerns are eliminated.

51:11

And so when Durant tries to balance his suspicions

51:13

with what's actually happening, he's just like, oh, well,

51:15

the money's coming in. He says everything worked just

51:17

as Evar said it would. International

51:19

match began receiving quarterly interest payments of about

51:21

a million dollars each quarter, just as agreement

51:23

with Poland said. As more

51:25

cash flowed in, the director's

51:28

questions went away. And I

51:31

think that sentence, so I double underlined that

51:33

sentence. As more cash flowed in, the

51:35

director's questions went away. I think that

51:37

double underlined sentence is why these Ponzi-esque

51:39

deals last a long time, rather. I

51:44

remember Ed Dorf's autobiography, one of my favorite

51:46

books that I've ever read. It's episode 222.

51:48

It's called A Man for All Markets. You

51:51

should read the book or read it I think

51:53

two or three times by now. Ed Dorf just

51:55

lives a remarkable life. Listen to episode 222 if

51:58

you haven't listened. It's just remarkable. This guy's like…

52:00

the Financial History Force Gump. Started the

52:02

first quantitative hedge fund, created the world's first wearable

52:04

computer with Claude Shannon, figured out the accounting card

52:06

system to how to beat Blackjack, and wrote a

52:09

book about it, sold millions of copies, was the

52:11

first LP at Citadel, had dinner with the 38-year-old

52:13

Warren Buffett, goes out in the car, tells his

52:15

wife, hey, that guy one day is going to

52:17

be the richest person in America. He's just remarkable,

52:19

but in addition to that, back in

52:21

1991, Ed Dorp was doing research for a friend

52:24

of his and he discovered, he was one of the

52:26

first people to discover the Bernie Madoff Ponzi scheme. And

52:30

he warned his friend and client, I think at the time,

52:32

hey, get your money out of here, which he did. One

52:35

of the guys, and the reason I bring this up is

52:37

because it's like, okay, well, why

52:39

would Durant, Durant knows something's going on, but

52:41

he's not acting on it. So one of

52:43

the guys at this meeting where Ed

52:45

Dorp presents, he's like, no, this guy is clearly

52:47

a fraud, it's clearly a Ponzi scheme. You know,

52:50

this is 20 years, almost 20 years before Bernie

52:52

Madoff actually gets caught. And he

52:54

finds out when, after the, when

52:56

all the stuff came out, that the client, on

52:58

the client list is one of these guys that was

53:01

sitting at the table listening to Ed Dorp in 1991.

53:03

So he knew and refused to

53:06

take his money out. And

53:08

it says in the book, one of the reasons

53:10

he did it, because he made hundreds of millions

53:12

of dollars. And so if you're making hundreds of

53:14

millions of dollars over two or three or four

53:17

decades with Bernie Madoff, you don't want to believe

53:19

that it's a fraud or that there's a Ponzi

53:21

scheme. And there's a handful of things that clearly

53:23

point that Ivar knew what he was doing. So

53:25

he's setting up all these subsidiaries, he's got these

53:28

secret companies, he's got these Swiss companies, he's got,

53:30

you know, it's like the Russian dolls, like one

53:32

inside of another. And so he sets up

53:34

a new secret company he doesn't tell

53:36

anybody about, he needs a new auditor

53:38

for that company. And the auditor that

53:41

he selects for the new secret company

53:43

was fired, was previously fired from

53:45

a bank for giving himself a

53:48

secret loan. And Ivar knew that

53:50

because Ivar was a director of the

53:52

bank. And so he

53:54

knowingly, think about this, this is driving me

53:57

crazy. So he knowingly has, you

53:59

know, bad people around him and then you

54:01

realize like why is he doing that? He

54:04

wants people that are under complete control and

54:06

so this new secret company is called Garanta.

54:08

Listen to this. The man quickly got to

54:10

the business of Garanta's audit. Ivar

54:13

showed Lang a balance sheet for Garanta listing millions

54:15

of dollars of assets and liabilities and abruptly asked

54:17

him to sign a testing that the figures were

54:19

correct. That was it then he could go but then

54:22

he told Ivar. He's like well I need to look

54:24

over the balance sheet as huge sums

54:26

are involved. According to one account Ivar stared

54:28

at him stone faced in response. When

54:31

Lang mumbled that it would be nice to know

54:33

where all the money was going Ivar said it

54:35

was being spent secretly in Poland and this should

54:37

not be mentioned. Ivar then told Lang

54:39

if you don't believe me you can go to

54:41

Poland and see for yourself. Lang nodded and then

54:43

signed. And then we get to

54:45

the part where I've already been exposed to Ivar and

54:47

all the machinations this guy does and this is the

54:49

first time that I mentioned something that I've mentioned to

54:51

you over and over again. I go oh this guy's

54:53

an evil genius. And so it's not

54:56

like he just taps the American investors once. He

54:58

keeps going back and forth back

55:00

and back nine back and forth back

55:02

again and again and what he does

55:04

is like he'll raise money take the

55:06

money sign one legitimate deal then go

55:08

back exaggerate everything else to raise another

55:10

money is like almost like using every

55:13

little milestone it's like yeah he has

55:15

these little milestones that he then exaggerates

55:17

or in some cases lies about

55:19

completely then he uses that data to keep going back

55:21

to the markets. And so now this has been going

55:23

on for a while where his

55:25

main auditor of international match company that

55:27

guy burning is asking questions and still

55:30

not getting the right responses but he's

55:32

not like drawing this out or refusing

55:34

to do the audit or sign in

55:36

the documents. And so

55:39

there was an important fundraise happening. And

55:41

so what he does he's like oh

55:43

burning why don't you come you and

55:45

your wife come to Europe on an

55:47

all expense paid vacation and

55:49

you should go at this specific time and this is why

55:51

this is when I read this paragraph I'm like oh my

55:53

god this guy's an evil genius. The

55:56

money Ivar had spent on the burning's vacation was well

55:58

worth it as the details of the new. referred issue

56:00

were being finalized, Ivar's auditor, the one

56:02

man who might have asked penetrating questions

56:05

about the accounting details of the deal,

56:07

had been just where Ivar wanted

56:09

him, strolling the streets of London

56:11

and Paris with his wife. The

56:15

size and scale of what this guy did in the

56:17

1920s is incredible. From

56:19

1923 to 1929, Ivar tripled his funds raised

56:22

from American investors, persuaded the New York

56:24

Stock Exchange to list his securities, pulled

56:26

even with JP Morgan as a leading lender

56:28

to Europe by securing match monopolies in

56:30

several countries, built a 125-room match palace

56:34

in Stockholm, and in general got

56:36

really, really rich. By

56:38

1929, he has 400 companies. Now

56:44

I want to get into this idea of

56:46

these terrible incentives all the way down that

56:48

kind of produces these predictable human behaviors. The

56:51

next time, the last time

56:53

he tapped American investors, he's got his

56:55

auditor burning, walking around

56:57

Paris. The next year,

56:59

he has to sell another 450,000 shares. Burning

57:05

is in New York when this is happening, he's obviously

57:07

very important on this deal, and he's

57:09

noticing some odd things that he says nothing

57:11

about. Let's get into it. While

57:14

Burning was updating International Match's reports to

57:16

reflect this new share issue, he discovered

57:18

a reference to this thing called Garanta,

57:21

this Dutch hidden company. Burning

57:23

was surprised to see that Garanta owned,

57:25

that owed International Match $17 million. He

57:29

asked Ivar for some assurances about Garanta. What was

57:31

it? Did this company make any profits

57:33

or have any assets? Why hadn't he told him

57:35

about this existence? Ivar reassured

57:37

Burning that Garanta's income during 1925 was $46

57:40

million and that Garanta made

57:44

enough money in one year to repay

57:46

its entire debt. There was no reason

57:48

for concern. There's no evidence. There's

57:50

no evidence of what Ivar is saying. He's just saying, no,

57:52

I can write it down in a piece of paper, but

57:55

this is what it is, it's in my head. Now, you're

57:57

like, this is ridiculous. Why

57:59

isn't Burning doing anything? and the author asked the same question.

58:01

What was Burning supposed to do? Should he be

58:04

suspicious of Ivar? Should Burning

58:06

accuse his most important client

58:08

of hiding crucial information? Would

58:11

this accusation then destroy Burning's

58:13

relationship with Ivar? And

58:15

the destruction of that relationship would that

58:17

ruin Burning's chances of making partner? Ivar

58:20

paid all of his bills on time, his fees

58:22

to earn sinnerance were rising, the match

58:25

monopoly in Poland was real,

58:27

Ivar had a reputation that was unassailable,

58:30

every day in the newspaper

58:32

there's stories about Ivar negotiating

58:34

potential match monopolies in Ecuador,

58:36

Estonia, Greece, Hungary, Peru, Portugal,

58:38

those negotiations were undeniably real.

58:42

Ivar met regularly with government leaders. Given

58:45

these facts, Burning told

58:47

himself, Garanta wasn't important, it

58:49

couldn't be. In

58:52

other words, Burning is incentivized to

58:54

believe Ivar because if he's lying,

58:56

all the extra money, and

59:01

I forgot Ivar is also paying him for consulting fees and

59:03

paying him on the side and everything else, paying for trips

59:05

to his wife, all

59:08

of that, the trips, the extra money, the

59:10

prestige, all of that goes away. And

59:12

so at this point in the book where I

59:14

think about one of my favorite passages from Port

59:16

Charlie's Almanac, I'm going to pull up my highlights

59:18

now, the summary of

59:20

what Charlie's about to tell us. Number one,

59:23

we all underestimate the power of incentives. Number

59:25

two, never ever think about anything else before

59:27

the power of incentives. And number three, the

59:29

most important rule in management, get the incentives,

59:31

right? As usual, Charlie Munger describes it in

59:33

a beautiful way. Almost everyone thinks

59:36

he fully recognizes how important incentives are

59:38

in changing behavior, but this is not

59:40

often so. I think I've

59:42

been in the top 5% of my age

59:44

cohort almost all my adult life in understanding

59:46

the power of incentives, yet I've always underestimated

59:48

that power. Never a year passes that

59:51

I don't get some surprise that pushes

59:53

a little further my appreciation of incentive

59:55

superpower. One of my favorite cases about

59:58

the power of incentives is the... federal

1:00:00

is from a federal express. So

1:00:02

FedEx, the integrity of the FedEx

1:00:04

system requires that all packages be shifted rapidly

1:00:07

among airplanes in one central airport each night.

1:00:10

The system has no integrity for the customers

1:00:12

if the night work shift cannot accomplish its

1:00:14

assignment fast. FedEx had one hell of

1:00:16

a time getting the right the night shift to

1:00:18

do the right thing. They tried everything in the

1:00:20

world without luck. And finally somebody got the thought

1:00:23

that it was foolish to pay the night shift

1:00:25

by the hour when what the employer wanted was

1:00:27

not maximized billable hours of

1:00:30

employee service but fault-free rapid

1:00:32

performance of a particular task. If

1:00:35

they paid the employees per shift and let all

1:00:37

the night shift employees go home when all the

1:00:39

planes were loaded the system would work better. And

1:00:42

lo and behold they test this and that solution

1:00:44

worked. And then Charlie Munger tells us

1:00:46

another story from business history. Early in the

1:00:48

history of Xerox, Joe Wilson, the founder of

1:00:50

Xerox, had a similar experience. He couldn't understand

1:00:52

why its new machine was selling so poorly

1:00:54

in relation to its older and inferior machine.

1:00:57

He found out that the

1:00:59

Commission arrangement with the salesman gave

1:01:02

a large and perverse incentive to

1:01:04

push the inferior machine on customers.

1:01:06

This maxim is a wise guide

1:01:08

to a great and simple precaution

1:01:11

in life. Never ever

1:01:13

think about something else when you when

1:01:15

you should be thinking about the power

1:01:17

of incentives. The most important rule in

1:01:19

management is get the incentives right. And

1:01:23

so if you analyze the incentives in this story

1:01:25

the behavior makes perfect sense. So there's a many

1:01:27

many ways like he's constantly fighting off. Remember I

1:01:29

think I've said this multiple times. Over

1:01:31

a decade people are like this is weird the books

1:01:33

seem funny like there's no detail the numbers change what

1:01:36

the hell is going on here. And he's

1:01:38

got other ways you know he's an

1:01:40

evil genius he's got other ways to

1:01:43

get people off of his trail. He has an auditor ask

1:01:46

him for a bunch of paperwork that paperwork is

1:01:48

back in Sweden. And so he does

1:01:50

something here that I remember I was this

1:01:52

is probably 20 years ago I was reading

1:01:54

a bunch of biographies of very famous like

1:01:56

trial attorneys and I think it was the

1:01:59

biography of Roy If I'm not

1:02:01

mistaken. And they had a tactic that was

1:02:03

very interesting where let's say they were representing

1:02:05

their client. They knew their client did something

1:02:07

wrong. And during

1:02:09

discovery, the other side

1:02:11

is asking for all this information. You're compelled by

1:02:14

law to give them that information. So they're like,

1:02:16

okay, cool. We need to give this to you.

1:02:18

They would essentially bury them in a mountain of

1:02:20

paperwork. So I'd say you got six months to go

1:02:22

through discovery. They'd give you something that you couldn't read in

1:02:25

10 years. Now, you might have been to find that needle

1:02:27

in the haystack early. But their goal was to just bury

1:02:29

you and to lose you in a mountain of paperwork. And

1:02:31

so he does this exact same thing. He

1:02:33

sends the auditor. He says he was overwhelmed by

1:02:35

the mountain of new information that Ivar had sent.

1:02:38

He asked if they could meet to discuss how they

1:02:41

might filter what he really needed to see. There were

1:02:43

so many documents that it was impossible for

1:02:45

them to do more than simply scan to the

1:02:47

list of what was at the office. More

1:02:50

insane shenanigans. You're not going to believe what I'm about to

1:02:52

read to you. You're just not going to believe it. He

1:02:55

has this – he builds his match

1:02:58

palace in Stockholm. He sets up

1:03:00

at his office. So he's got

1:03:02

a desk. You have a visitor. It's like, oh,

1:03:04

this is great. I'm meeting one of the wealthiest,

1:03:06

the most famous businessman on the planet. And that's

1:03:08

what he was at this point, right? He's in

1:03:10

this giant mansion, this match palace. He's sitting on

1:03:12

the other side of the desk. And you notice

1:03:15

next to his desk is a little table. On

1:03:17

the table is three telephones. The

1:03:20

middle phone was fake. It

1:03:23

was a nonworking phone that Ivar could cause

1:03:25

to ring by stepping on a button under

1:03:27

the desk. He used

1:03:29

it for two purposes. One, if you're visiting him and

1:03:31

he wants to get you out of there, he'll

1:03:34

step on the button. It rings like, oh, sorry,

1:03:36

I have another visitor. I have to take this call.

1:03:39

The second thing that he would do is let's say

1:03:42

he had like Percy Rockefeller in his

1:03:44

office, right? He's got very famous –

1:03:46

like important people, impressive people he wants

1:03:48

to impress. He pressed the button. He's

1:03:50

literally taking fake phone calls. The

1:03:53

phone would ring, he'd pick up, and

1:03:55

he would pretend to receive calls from

1:03:57

various European government officials, including Benito Musilat.

1:04:00

Mussolini and Joseph Stalin. That's

1:04:02

not it. This is not over. Wait

1:04:04

until we get to what's next.

1:04:07

That evening, he threw a lavish

1:04:09

party and introduced Rockefeller to numerous

1:04:11

ambassadors and I put ambassadors in

1:04:13

quotation marks. Ambassadors from various countries

1:04:15

who actually were movie extras that

1:04:17

he had hired for the night.

1:04:19

This guy's got fake phone calls

1:04:21

and hired actors. What

1:04:23

is that? I don't think I've ever read a book like

1:04:25

this. And

1:04:28

so the longer this goes on, the more

1:04:30

questions happen, the more questions happen, the higher

1:04:32

the bills go. This is how and

1:04:35

why his auditor winds up becoming an accomplice

1:04:37

and he doesn't ever get in trouble for

1:04:39

this by the way. And the reason that

1:04:41

the auditor at Ernst and Ernst that AD

1:04:43

burning never said anything is exactly what happened.

1:04:45

The Ernst brothers who run the

1:04:48

firm that he worked for told burning

1:04:50

that they had an important matter to

1:04:52

discuss with him. After seven years, he's

1:04:54

already become one of the firm's biggest

1:04:56

clients and burning deserved the credit. You

1:04:58

are now resident partner. Mrs.

1:05:01

Burning certainly was proud of her husband. Now

1:05:03

they could afford a new apartment at 40th

1:05:05

5th Avenue in Greenwich Village.

1:05:07

They could afford a new social

1:05:09

circle as well. The Burnings joined

1:05:12

several of New York's most prestigious

1:05:14

societies. And so remember,

1:05:16

this only works if the companies keep growing

1:05:18

and if he can keep tapping the markets,

1:05:21

all this is going to fall apart. And

1:05:23

it is absolutely remarkable, the timing is remarkable

1:05:25

because he's going to do his biggest

1:05:28

deal ever. He's like, I'm going to loan, I'm going to

1:05:30

get a German match monopoly. I'm going to loan the German

1:05:32

government $125 million. He does not have $125 million to lend.

1:05:36

This is October 29th while he's doing this. This is the

1:05:38

crazy, one of the craziest things. I know he keeps saying

1:05:41

that because this is a crazy story. While

1:05:43

he's signing this deal, the stock market is closed

1:05:45

due to panic. This is going to be the

1:05:47

largest decline in stock and US stock market history.

1:05:49

At the same weekend, he's signing the biggest

1:05:52

deal of his life. And I

1:05:54

think this is just great writing. I'm going to

1:05:56

read this paragraph to you. On Saturday, Ivar met

1:05:58

again with the finance minister in Berlin. to

1:06:00

finalize terms. As he held the

1:06:02

pen about to sign the loan documents, he considered

1:06:04

the two paths his life might follow as a

1:06:06

result of his decision. This audacious

1:06:08

deal might be the miracle that

1:06:10

would reverse the darkening psychology of

1:06:12

investors everywhere. Think about how grandiose

1:06:14

you have to think about yourself if you think that's

1:06:17

even possible. Ivar imagined the

1:06:19

buzz spreading about his extraordinary weekend

1:06:21

feat. When the New York Stock

1:06:23

Exchange opened on Monday, his securities

1:06:25

would store in value. The rising

1:06:27

tide of optimism would make it

1:06:29

possible for him to raise more

1:06:31

cash and shift his personal loan

1:06:33

obligations to American investors. With

1:06:36

any luck by the close of trading Monday,

1:06:38

the worst would be over. That

1:06:40

was one possibility Ivar could imagine.

1:06:42

The alternative, that the crisis

1:06:45

would continue or even deepen,

1:06:47

was unthinkable. He couldn't

1:06:49

bear to consider what would happen

1:06:51

if the market freefall continued. What

1:06:55

a line this is. Ivar's greatest

1:06:57

triumph was immediately followed by the

1:06:59

most spectacular two-day decline in the

1:07:01

history of financial markets. This

1:07:04

time there would be no

1:07:06

recovery. Warren Buffett once

1:07:08

said that you don't know who's swimming naked until the

1:07:10

tide goes out. That's a great description of what's taking

1:07:12

place here. Now he's shut off from the capital markets.

1:07:15

His bankers are suspicious now.

1:07:17

Nothing's adding up. His auditor

1:07:20

is suspicious. Durant, his main

1:07:22

banker at Lee Higgison, is constantly requesting

1:07:24

meetings. He's like, look, there's just too

1:07:26

many coincidences here. And slowly but surely

1:07:28

all these financial institutions are cutting

1:07:31

him off. For some banks such as

1:07:33

National City, these coincidences were too much

1:07:35

and they stopped dealing in Ivar's securities

1:07:37

entirely. Another bank, Credit

1:07:39

Suisse, declared Ivar a very dangerous

1:07:41

person and said it would not

1:07:44

lend to any of his companies.

1:07:46

Ivar finally conceded that he could

1:07:48

not afford to pay shareholders of

1:07:50

Swedish Match. Ivar's companies would soon

1:07:52

be in default. If

1:07:55

Ivar goes down, so does the bank Lee

1:07:57

Higgison. So two of the partners go to

1:07:59

Ivar's apartment in New York to try to

1:08:01

see what's going on. He's in a full

1:08:03

collapse and breakdown. They're let in. He says

1:08:05

although it was midday, he was wearing yellow

1:08:07

silk pajamas. He's babbling. He's

1:08:10

acting like a madman. They call a doctor.

1:08:12

Dr. Wheelwright diagnosed cardiac fatigue. He prescribed some

1:08:14

sedatives. During the next three days, Ivar would

1:08:16

cycle through episodes of mania and depression. When

1:08:19

the drugs were working, he would simply sit

1:08:21

and stare into space. But when the medication

1:08:23

were off, he would stand and shout, I'm

1:08:25

losing my mind. I can't remember. I can't

1:08:27

think. He imagined knocks at the door. He

1:08:30

answered the phone even though it hadn't rung.

1:08:32

And then he collapsed. You know what I

1:08:34

thought of? By this time, I'm at the end

1:08:36

of the book. I think it's

1:08:38

more fakery. I think he's completely acting. No

1:08:40

doubt he's under stress. He's going to wind

1:08:43

up shooting himself. But this mania, this like,

1:08:45

I can't remember. I'm losing my mind being

1:08:47

in pajamas. I don't trust it for a

1:08:49

second. This is the same

1:08:51

guy that would sit in a room and

1:08:53

practice lines for supposed to be

1:08:55

casual conversations that has a

1:08:57

fake phone that carries on fake phone

1:08:59

conversations that hires actors and introduces you

1:09:02

to him at parties. Saying this is

1:09:04

an ambassador from Germany, the guy that

1:09:06

made rubber stamps of every single government

1:09:08

official signature that he ran across. The

1:09:10

guy that forged documents. The guy that

1:09:12

made up numbers on the fly. That's

1:09:15

the same guy that is babbling like an idiot

1:09:17

in the middle of the day sitting in his

1:09:19

pajamas. Now I think he's faking it. That

1:09:21

would be my guess. Shortly after

1:09:23

he's summoned, he's got to go to this meeting

1:09:25

with all these bankers and investors in Paris. As

1:09:27

soon as he gets back there from America, one

1:09:30

of his executives, one of the people that works

1:09:32

with him is like, hey, the Swedish government is

1:09:34

investigating you. They're investigating your personal and business finances.

1:09:36

They've already got search warrants. They collected many of

1:09:38

your important documents. Auditors

1:09:40

are already scouring our books. That

1:09:44

was the night before this very important meeting.

1:09:46

They are supposed to have a meeting at

1:09:48

this hotel with all these bankers at 11am

1:09:50

the next day. That guy leaves, Yvar at

1:09:52

six o'clock that night. Later that same night,

1:09:54

the night before he's supposed to meet these

1:09:57

bankers and investors at 11am, he

1:09:59

walks into a gun. shop in Paris and buys

1:10:01

a gun and a bunch of ammunition.

1:10:04

The next day in this hotel in Paris

1:10:06

a dozen anxious men are pacing the floor

1:10:08

while Ivar's employees are assuring that everyone that

1:10:10

Ivar would be there soon. But

1:10:12

Oscar Rideback and Donald Durant were concerned,

1:10:14

these are his two main bankers, because

1:10:16

it was the first time they could

1:10:19

remember Ivar being late. After

1:10:21

several hours a few of them go to Ivar's

1:10:23

Paris apartment. They enter the bedroom and they see

1:10:25

a man lying flat on his back. There

1:10:28

was blood on his left wrist and a red stain on

1:10:30

his shirt. They shouted, he is

1:10:32

not sleeping, he's dead. On

1:10:35

the bedside table were three sealed

1:10:37

personal notes. One of

1:10:39

them said, I made such a mess of

1:10:41

things that I believe this is the most

1:10:43

satisfactory solution for everybody concerned. They rushed

1:10:46

back to the hotel to tell the

1:10:48

bankers that Ivar Kroger had committed suicide.

1:10:50

Ivar's death confirmed everyone's worst fears about

1:10:52

the man and his finances. The

1:10:55

investment bankers from Lee Higginson, which

1:10:57

had sponsored Ivar for a decade,

1:10:59

were dismayed. Soon

1:11:01

Lee Higginson, one of the most prestigious

1:11:03

investment banks of the era, would file

1:11:05

bankruptcy and the partners would be ruined.

1:11:08

George Murname, the senior partner, later told

1:11:10

investigators what he thought when he heard

1:11:12

the news. I suddenly knew

1:11:14

that we had all been idiots. And

1:11:18

that is where I'll leave it for the full

1:11:20

story. I highly recommend reading the book. I've already

1:11:22

given the book as a gift to one friend

1:11:24

already. I think the story is incredible and very

1:11:26

unique. And if you buy the book, using the

1:11:28

link that's in the show notes on your podcast player

1:11:30

are available at founderspodcast.com. You'll be supporting

1:11:32

the podcast at the same time. That is 348

1:11:36

books down, 1,000 to go. And I'll talk

1:11:38

to you again soon. Okay, so I have three things

1:11:40

to tell you about real quick. Stick around if you can. I

1:11:42

think you'll find this interesting and there's some deals for you that

1:11:44

are not available anywhere else. And so the first one is, highly

1:11:46

going to recommend if you aren't doing

1:11:49

so already, to subscribe to Founders

1:11:51

Notes. Founders Notes is the personal

1:11:53

tool that I have built. It's what I use

1:11:55

to make the podcast. It contains all my every

1:11:57

single note, highlight, and all the transcripts for

1:11:59

every single book and episode that I've ever done. And

1:12:01

the way I would describe it, there's a bunch of

1:12:04

different ways to use it. But there's two ideas that

1:12:06

I think I actually have around this. And

1:12:08

so one, it actually came from something that Charlie

1:12:10

Munger said, the entire reason that Founders Notes exists,

1:12:12

is because he said that learning from history is

1:12:15

a form of leverage. And I think Founders Notes

1:12:17

is a tool that enables you to do so.

1:12:19

He said, I read Barron's magazine for 50 years.

1:12:21

In 50 years, I found one investment opportunity in

1:12:23

Barron's, out of which I made about 80 million

1:12:25

dollars, with almost no risk. I took the 80

1:12:27

million and gave it to Lee Liu, who turned

1:12:30

it into 400 or 500 million dollars.

1:12:32

So I have made 400 or 500 dollars,

1:12:34

400 or 500 million dollars, reading

1:12:38

Barron's for 50 years and following one idea.

1:12:40

And so if you subscribe to Founders Notes,

1:12:42

you can read my notes and highlights on

1:12:44

a different book every single day. And over

1:12:46

the lifetime of your career, the idea that

1:12:48

you're not going to find one idea in

1:12:50

there that's not additive and helpful, and actually

1:12:52

improves the odds of your success in business,

1:12:54

is the probability that as close as zero

1:12:56

as possible. And when I reread that note

1:12:58

about Charlie saying that he made four or

1:13:00

five million dollars from one idea of reading this magazine

1:13:02

for 50 years, I was thinking about a few weeks

1:13:04

ago when I did that Tarantino episode. If

1:13:07

you listen to that, and even if you didn't, I

1:13:09

guess I could tell you, Tarantino had this like historical

1:13:11

database in his head of the entire movie, the history

1:13:13

of the entire movie industry, because he was obsessed with

1:13:15

films. He says, he has a great line in that

1:13:17

book. He's like, I didn't go to film school, I

1:13:19

went to films. And the reason it was

1:13:22

important, because it was in his head, is one, he could

1:13:24

call on and use, he can

1:13:26

call on that information that's in his head, and

1:13:28

then use it in his work later on. And

1:13:30

so there's many examples in that episode, right, where

1:13:33

he's talking about, hey, I saw this movie, you

1:13:35

know, 1970s, and I took that exact scene or

1:13:37

a principle from that or an idea from that

1:13:39

scene. And for this movie, I made the 1990s

1:13:41

or in 2000, there's exact scenes in Kill

1:13:45

Bill that first appeared in a movie that he

1:13:47

saw 30 years ago. And so I use this

1:13:49

all the time. Let me give you an example.

1:13:51

It's from this episode that you just listened to.

1:13:53

There's multiple times where there's something happening in a book

1:13:55

that's like, wait, this is like something else. And so

1:13:57

I just got off the phone, I had to zoom

1:13:59

with the team at Readwise because I

1:14:01

built this product in partnership with Readwise. I've been

1:14:04

using Readwise since 2018. I mentioned that you can

1:14:06

go back and listen to past episodes and talk

1:14:08

about how great this app is. I had no

1:14:10

idea I'd be partnering with them. Go on other

1:14:12

people's podcasts and talk about it. But there was

1:14:14

a multiple time, so the reason I bring that

1:14:16

up is because there's a

1:14:18

lot of different ways to use Founders Notes.

1:14:20

There's a lot of different features in there. So I just

1:14:22

want to highlight one of them that I

1:14:25

don't think I talk about enough. Essentially, it's just

1:14:27

this giant database that you can search any time you

1:14:29

want for the collective knowledge of history, space, and

1:14:31

entrepreneurs. And it happened because

1:14:33

how many times did the importance

1:14:36

of incentives and understanding the superpower

1:14:38

that incentives are come up

1:14:40

on the podcast you just listen to? So I

1:14:43

just talked to the team at Readwise. They just updated the keyword

1:14:45

search in Founders Notes. It is super fast now, and so

1:14:48

we were talking about that yesterday. And

1:14:50

I noticed it because this week – so I type

1:14:53

in – let me give you an example, a real

1:14:55

world example. I would type in power of incentives. So

1:14:58

actually, I'm going to do this with you live.

1:15:00

So what you do is when you subscribe to

1:15:02

Founders Notes and

1:15:04

if you already have subscription, try this. So

1:15:06

once you log into Founders

1:15:08

Notes, you'll see search highlights. And

1:15:11

in that box, it's the very top

1:15:13

page, I put in power of

1:15:16

incentives. I press enter. Two

1:15:18

seconds later, it's showing me – it

1:15:21

shows you any time power of incentives

1:15:23

has been mentioned, either in a note, a highlight,

1:15:25

or on the podcast because it searches the transcripts

1:15:28

too. So within that two seconds, Founders Notes searched,

1:15:30

and in the left column, it'll show you every

1:15:32

single book or episode. It found

1:15:34

the word power of incentives from

1:15:37

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15,

1:15:39

16, 17, 18, 19, 20, 22, 22, 23, 24, 25, 26, 27 – if I'm counting right – 27 different instances. Inside

1:15:50

of those instances, it's sometimes

1:15:53

multiple times I mentioned it. So in

1:15:55

this – oh my God, I haven't done this episode in years. John

1:15:58

Bogle, it's mentioned twice. in

1:16:00

that book. Same thing happened when I

1:16:02

searched. Now this is the remarkable thing, right? This is

1:16:04

why I think it's a tool that if

1:16:07

you're going to invest many, many hours in listening

1:16:09

to founders, this allows you to like, there's going

1:16:11

to be something you hear in the podcast and

1:16:14

you're like, damn, David said that like, what

1:16:16

was that months from now? Well, if you have access to founders

1:16:18

notes, you just search it and you find it. That's

1:16:21

valued. That's worth a hundred

1:16:23

times the cost right there. But

1:16:25

I was blown away by just

1:16:27

this, the horrible position that

1:16:29

Yvar Kroger put himself in. So I just searched debt.

1:16:31

That is the one keyword I put in debt. The

1:16:34

first thing that pulls up, so again, it pulls up,

1:16:36

I can't even count. This is like 30 bucks.

1:16:38

I don't even know how many, but the first thing

1:16:40

it pulls up, it's Henry Ford in

1:16:43

this book today and tomorrow. And he's talking

1:16:45

about, it's a, the note I

1:16:47

left myself on the highlight is what a powerful warning

1:16:49

to be leery of debt from Henry Ford. And I'm

1:16:51

rereading this highlight. And then I'm like, wait a minute.

1:16:54

First of all, I didn't remember him saying that. When

1:16:56

did I do this? It's from the book today and tomorrow. You know

1:16:58

what this is from? It's from episode

1:17:01

80. I published episode 80 on

1:17:03

July 14th, 2019. That

1:17:07

is the superpower right there. I remember reading the

1:17:09

book. I made the podcast on it. I'm sure

1:17:11

I've reread the highlights, but I didn't remember this

1:17:13

exact thing and I wouldn't have if I didn't

1:17:15

have access to this tool. So if you were

1:17:17

interested in, if you're already running a successful company,

1:17:19

I would buy the lifetime version because that means

1:17:22

not only do you get access to every note,

1:17:24

highlight, every feature that I've done, everything I've done

1:17:26

in the past, you get every future

1:17:28

note, every future highlight, every ability to

1:17:30

search every future transcript, any additional features

1:17:32

I ever add. And this is a

1:17:35

living breathing tool for me. I'm building

1:17:37

the tool for myself. So

1:17:39

I'm always going to be constantly updating it. It's

1:17:42

embedded in my workflow. So to do that, you

1:17:44

go to foundersnotes.com. That is founders with a national

1:17:46

podcast founders.com. Second thing I want to tell you

1:17:48

about is I'm working on. So

1:17:50

think about it. I sit in between a bunch

1:17:53

of killer entrepreneurs, investors,

1:17:56

nerds, and then a bunch of people listening to

1:17:58

the podcast I've become friends with are also So building

1:18:00

products and services for

1:18:02

businesses. And so I'm building

1:18:05

this out. It'll eventually be on my website. I

1:18:07

will let you know when it's finished. But

1:18:09

essentially I'm going around. This is

1:18:11

also related to why I'm doing events and

1:18:14

this idea that comes up over again, that relationships

1:18:16

run the world. So I am going to friends

1:18:19

of mine, right, that I built relationships with, that

1:18:21

I talked to on the phone, that I text,

1:18:23

that I have dinner with, that I go on

1:18:26

walks for, all of them listen to

1:18:28

the podcast. And I'm going

1:18:30

to them and saying, hey, I want to build, I don't

1:18:32

think it's up there yet, but it'll be on my website.

1:18:34

It'll be probably under like deals or something like that. I'll

1:18:37

let you know the name when I do it.

1:18:39

But essentially I'm saying, hey, you're building a service,

1:18:41

like we have a good relationship. You love the

1:18:43

podcast. You're building a

1:18:45

service that is valuable to the people

1:18:47

that listen to founders. I want you,

1:18:49

I'm finagling them. I'm collaring

1:18:51

them in a as nicely

1:18:53

as possible way. I

1:18:55

want you, right, I will talk about your

1:18:57

product and service. In return, and I'm going to build this

1:19:00

directory of people that are doing this, and it's already been

1:19:02

like, I already have a ton of time when you talk to you about yet. And

1:19:05

in return, I want you to give them

1:19:07

a deal that is a discount that is

1:19:09

not available anywhere else. It

1:19:12

cannot be just your standard, you know, oh, like,

1:19:14

no, no, it cannot be centered has to be

1:19:16

special. And so there's only there's two I want

1:19:18

to talk about real quick. One is in direct

1:19:20

relation to a main theme of the

1:19:22

podcast you just listened to. So my friend Eric

1:19:25

Jorgensen is he how

1:19:27

I met him. In addition, he in

1:19:29

addition to being a fan of founders, he wrote one

1:19:32

of my favorite books was the almanac and aval robicon.

1:19:34

I think it's like Episode 191 or something like that.

1:19:37

When he wrote that book, he was a

1:19:39

customer of scribe, he used scribe media to

1:19:41

publish that book. He is now

1:19:43

CEO of that company and part owner of

1:19:45

that company. He sold well over a million

1:19:48

copies of that book. And

1:19:50

so the reason it relates to what we

1:19:52

just went over it's like I mentioned the

1:19:54

fact that Ivar did something really smart, which

1:19:56

is he made it a point to become

1:19:58

well known because He's becoming well known, helps

1:20:01

serve his business, like his needs in business. Now

1:20:03

obviously we don't want to run Ponzi schemes and

1:20:05

all other stuff, but the actual concept behind it's

1:20:07

really smart. In fact, when I sat down, so

1:20:09

that was one of the things when I had

1:20:11

lunch with Sam Zell shortly before he died, that's

1:20:13

one of the things he said to me because we were

1:20:15

talking about some of his business, he obviously

1:20:17

sold a company for $38 billion, but

1:20:20

he was talking about some of the best

1:20:22

investments he ever made, became because he was

1:20:24

writing op-eds and he was, well before he

1:20:26

was a national and world renowned entrepreneur figure,

1:20:28

he was relatively

1:20:31

well known and famous inside of

1:20:33

Chicago. And the way he built his audience

1:20:36

in Chicago was he would write op-eds in

1:20:38

newspapers. As a result of that, he was

1:20:40

invited to make an investment in the Chicago

1:20:42

Bulls. And so he was making the point

1:20:44

to me that the bigger your podcast gets,

1:20:47

the more well known you become, like you're

1:20:49

going to have opportunities presented to you that

1:20:51

wouldn't have come otherwise if you didn't have

1:20:53

the platform that you have. And

1:20:56

so recently I went to teach, I was invited to teach

1:20:58

at Harvard Business School, so if I

1:21:00

had to teach at Columbia Business School and Notre

1:21:02

Dame too. But at Harvard Business School, I was

1:21:04

like, listen, I implore you, I implore you rather,

1:21:06

please. Like you guys are doing so much research,

1:21:08

so much learning you have, not only your main

1:21:10

curriculum at Harvard Business School, but all the learning

1:21:13

you're doing, just organize that. It doesn't matter if

1:21:15

it's a newsletter, I do it in a podcast,

1:21:17

write a book, you need to be easy to

1:21:19

interface with. And so what Scribe Media

1:21:21

does and the reason I'm telling you about it is because

1:21:23

there's a, think

1:21:26

about all the founders, investors, executives,

1:21:28

consultants, all these other professionals that

1:21:30

are listening to founders, right? You

1:21:32

have domain specific knowledge, you

1:21:35

just haven't found a way to put it, to organize

1:21:37

it and then put it out there so you're easy

1:21:39

to interface with. Scribe Media essentially will do, what

1:21:41

they'll do is they have a bunch of different

1:21:43

services, anywhere from like, if you wanna write a

1:21:45

book and you want essentially like a co-writer, like

1:21:48

a guided author, they have three main things that

1:21:50

I think are, that you'd be interested in. And

1:21:52

you can go to scribemedia.com for such founders to

1:21:54

look at all this. Guided author, Scribe professional and

1:21:56

then Scribe elite ghost writing. Scribe was

1:21:58

already produced 20, New York Times

1:22:00

and Wall Street Journal bestsellers. Their programs are

1:22:03

designed for entrepreneurs, consultants, executives, and other professionals.

1:22:05

And so when I talk to Eric about

1:22:07

this idea, this is not like a high

1:22:09

margin business, but he gave you discounts that

1:22:11

are available nowhere else. And so I'll list

1:22:14

them down below, $1,000 off

1:22:16

of guided author, $1,000 off of

1:22:18

scribe professional, and $3,000 off

1:22:20

of scribe elite ghost writing. So

1:22:22

scribemedia.com/founders, the link will be in

1:22:25

the show notes as well. And

1:22:28

then the last thing is Vesto. I know

1:22:30

the founder of Vesto, it's vesto.com, V-E-S-T-O,

1:22:32

V as in Victor, E as in Egg,

1:22:35

S as in San, Sanra, T

1:22:37

as in Tom, O as in oprah.com. Ben

1:22:40

is giving founders listeners $500 off. And

1:22:43

this product was actually pulled out of

1:22:46

Ben, because Ben's main business was helping

1:22:48

businesses, whether you're bootstrapped or venture funded,

1:22:50

get a better return on their idle

1:22:52

cash. And then all these

1:22:54

listeners or founders were scheduling a demo, because

1:22:57

you actually talked to Ben. And a bunch

1:22:59

of these people had the same problem, which

1:23:01

is like, hey, I own a ton of

1:23:03

different companies. These companies have bank accounts at

1:23:05

different banks, sometimes in different countries. Can

1:23:08

you please make a dashboard so I can actually

1:23:10

see all of my company's financial accounts in one

1:23:12

view? So if you have that

1:23:14

problem, go to vesto.com, schedule a

1:23:16

demo, tell Ben, David from Founders sent you, and

1:23:18

he will give you $500 off. I

1:23:21

will have a lot more deals to announce in the future, and then

1:23:24

I'll put them all in, they're already in one organized place, it's just

1:23:26

not public yet. But once that is public, I will let

1:23:28

you know, thank you very much for listening, thank you very much for the support,

1:23:30

and I'll talk to you again soon.