with Cornelius “ Commodore ” Vanderbilt . The end of the Erie Wars was fortuitous in that it helped to put Gould in a strong capital position , which he effectively maintained until a strategic opportunity presented itself . As one commentator observed , “ Getting out of Erie in a strong cash position on the eve of the Panic of 1873 , [ Gould ] was ready to attack the Union Pacific .”
Gould , of course , did not “ attack ” the UP . What he did do was make a distressed investment in that railroad at a favorable price or , as value investors would say , at a margin of safety that arose out of the volatility of the infamous panic . 135 years later , on September 23 , 2008 , Buffett would do something similar via a $ 5 billion distressed investment in Goldman Sachs during the 2007 – 08 financial crisis . However , Gould went a step further by assuming operational control of the UP , to personally direct its turnaround .
2 : Business Financing
In many ways , capital structure is one of the most misunderstood , and underappreciated , of all managerial responsibilities . Far from being “ irrelevant ” as some may wish to think , capital structure is , at times , the most relevant of all managerial considerations . This has certainly been the case during financial panics across history . Therefore , responsible executives across time have not put their firm ’ s balance sheets at risk during boom times to ensure that those balance sheets will not come under distress during periods of mass panic . And , as such executives knew in the past , and know today , there will always be a next panic .
As noted above , the Panic of 1873 caused the UP to go into financial distress , which is what enabled Gould ’ s distressed investment . However , if the railroad stayed in distress after his investment , he would be at risk of a capital loss . Therefore , one of the first things that Gould set out to rectify in his turnaround was a financial restructuring to restore the UP ’ s credit . Significantly , he stated this objective publicly , but his timing could not have been worse . After the aforementioned panic subsided , the economy slid into a deep recession that was so severe it was known as the “ Great Depression ” until the subsequent depression in the 1930s claimed that title .
Regardless of the depressed economy , Gould proceeded to successfully restore the
TABLE 1 : Value Investing-Based Corporate Management Considerations 1 . Unique value proposition and how the margin of safety will enable that proposition 2 . How will business activities be funded ?
3 . Balance : a ) across operations , finance and investment b ) of cyclical and countercyclical dynamics as reflected in mainstream and alternative information sources c ) between business-as-usual processes and the thick tails of extreme events to both the upside and downside
4 . Clarity of communication and transparency of expectations 5 . Humility 6 . Produce results that compound over time
UP ’ s credit , and “ much of it within a single year ,” through a combination of aggressive negotiation , innovative financing ( which included Gould assuming some of the UP ’ s debt himself ) and leveraging the relationships across his wide financial network . Needless to say , Gould ’ s example of personally securing financing on a super-attractive basis , during a depression , holds many lessons for modern historians and executives .
3 : Investment , Financing and Operational Balance
In contrast to Gould ’ s well-known investment and financing skills , his skills as a railroad operator have generally been ignored . This is unfortunate because , according to the UP ’ s official history , Gould “ provided the Union Pacific with its first taste of effective , cohesive management by giving closer attention to every aspect of its operations than any previous officer had done .” The history goes on to state that , “ Everyone knew of [ Gould ’ s ] genius for finance , but no one suspected his capacity for mastering every phase of railroad building . His alert eye caught every detail , grasped every possibility . He did his homework with a thoroughness that astounded less driven men .”
Gould ’ s operational efforts enabled him to discover new sources of revenue for the UP , to devise better ways to use the railroad ’ s vast landholdings and to keep a “ close monitoring of costs .” Needless to say , all of these activities contributed to a growing bottom line . More important , though , was Gould ’ s ability to deploy and integrate top-tier skills across three very different functions : investment , finance and operations . Such an ability is rare and has been observed in only the most accomplished executives across modern business history such as , for example , the late Henry Singleton of Teledyne , the late Larry Tisch of Loews , Carl Lindner of American Financial and John Malone of Liberty Media .
The need today for such an integrated skill set is increasingly being recognized , as the late Martin J . Whitman and Fernando Diz convincingly argued in their 2013 book , Modern Security Analysis : “ Unlike others who view managements solely as operators of businesses , we appraise managements in their competencies as operators , investors and financiers .”
4 : Clarity and Transparency
Clarity and transparency of communication have always been difficult to assess . One way that professional value investors have learned to assess managerial clarity and transparency is through the concept of rationality , which can be defined as behavior that reconciles to stated goals and objectives over time . For example , as shown in section two above , Gould restored the credit of the UP during a depression , much of it within one year , following statements he made to that effect beforehand .
This is not meant to imply that Gould was always clear and transparent . Then , as now , the world of finance can be inordinately complex . And then , as now , the most successful investors and executives selectively use complexity and obfuscation to enhance their strategic positions . According to historian Maury Klein , “ It is the genius of financiers and lawyers alike to transform the simplest of propositions into a labyrinth and profit from the bewildered groping that follows .”
www . MoAF . org | Winter 2021 | FINANCIAL HISTORY 25