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The Story of the Extravagant CEO

By Edwin Lefevre
Saturday, June 30, 2007

The wisest investor I ever knew was a man who began by being a Pennsylvania Dutchman and followed it up by coming to Wall Street and seeing a great deal of Russell Sage.

He was a great investigator, an indefatigable Missourian. He believed in asking his own questions and in doing his seeing with his own eyes. He had no use for another man's spectacles. This was years ago. It seems he held quite a little Atchison.

Presently he began to hear disquieting reports about the company and its management. He was told that Mr. Reinhart, the president, instead of being the marvel he was credited with being, in reality was a most extravagant manager whose recklessness was fast pushing the company into a mess. There would be the deuce to pay on the inevitable day of reckoning.

This was precisely the kind of news that was as the breath of life to the Pennsylvania Dutchman. He hurried over to Boston to interview Mr. Reinhart and ask him a few questions. The questions consisted of repeating the accusations he had heard and then asking the president of the Atchison, Topeka & Santa Fe Railroad if they were true.

Mr. Reinhart not only denied the allegations emphatically but said even more: He proceeded to prove by figures that the allegators were malicious liars. The Pennsylvania Dutchman had asked for exact information and the president gave it to him, showing him what the company was doing and how it stood financially, to a cent.

The Pennsylvania Dutchman thanked President Reinhart, returned to New York and promptly sold all his Atchison holdings. A week or so later he used his idle funds to buy a big lot of Delaware, Lackawanna & Western.

Years afterward we were talking of lucky swaps and he cited his own case. He explained what prompted him to make it.

"You see," he said, "I noticed that President Reinhart, when he wrote down figures, took sheets of letter paper from a pigeonhole in his mahogany roll-top desk. It was fine heavy linen paper with beautifully engraved letterheads in two colors. It was not only very expensive but worse – it was unnecessarily expensive. He would write a few figures on a sheet to show me exactly what the company was earning on certain divisions or to prove how they were cutting down expenses or reducing operating cost, and then he would crumple up the sheet of the expensive paper and throw it in the wastebasket.

"Pretty soon he would want to impress me with the economies they were introducing and he would reach for a fresh sheet of the beautiful notepaper with the engraved letterheads in two colors. A few figures – and bingo, into the wastebasket! More money wasted without a thought. It struck me that if the president was that kind of man he would scarcely be likely to insist upon having or rewarding economical assistants. I therefore decided to believe the people who had told me the management was extravagant instead of accepting the president's version and I sold what Atchison stock I held.

"It so happened that I had occasion to go to the offices of the Delaware, Lackawanna & Western a few days later. Old Sam Sloan was the president. His office was the nearest to the entrance and his door was wide open. It was always open. Nobody could walk into the general offices of the DL&W in those days and not see the president of the company seated at his desk. Any man could walk in and do business with him right off, if he had any business to do. The financial reporters used to tell me that they never had to beat about the bush with old Sam Sloan, but would ask their questions and get a straight yes or no from him, no matter what the stock-market exigencies of the other directors might be.

"When I walked in I saw the old man was busy. I thought at first that he was opening his mail, but after I got inside close to the desk I saw what he was doing. I learned afterwards that it was his daily custom to do it. After the mail was sorted and opened, instead of throwing away the empty envelopes he had them gathered up and taken to his office. In his leisure moments he would rip the envelope all around. That gave him two bits of paper, each with one clean blank side. He would pile these up and then he would have them distributed about to be used in lieu of scratch pads for such figuring as Reinhart had done for me on engraved notepaper. No waste of empty envelopes and no waste of the president's idle moments. Everything was utilised.

"It struck me that if that was the kind of man the DL&W had for president, the company was managed economically in all departments. The president would see to that! Of course, I knew the company was paying regular dividends and had a good property. I bought all the DL&W stock I could. Since that time the capital stock has been doubled and quadrupled. My annual dividends amount to as much as my original investment. I still have my DL&W. And Atchison went into the hands of a receiver a few months after I saw the president throwing sheet after sheet of linen paper with engraved letterheads in two colors into the wastebasket to prove to me with figures that he was not extravagant."

And the beauty of that story is that it is true and that no other stock that the Pennsylvania Dutchman could have bought would have proved to be so good an investment as DL&W.

Edwin Lefevre

Market Notes


In late 2006, homebuilders thought things couldn't get any worse. Surveys taken by the National Association of Home Builders registered their gloomiest outlook in 15 years.

Of course, we saw the pessimism as a buy signal… especially when subsequent surveys showed builders were getting "less gloomy."

As our chart this week shows, the rise in homebuilder sentiment early this year was just a "fake out." After rebounding from rock-bottom lows, the rout in subprime mortgages has helped turn builder sentiment to the south again… which now sits at a 16-year low.

Although we think a time will come to make a contrarian trade in homebuilders, until sentiment readings start to turn up, we're staying on the sidelines.

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