Comment on William Tecumseh Sherman: Gold Rush Banker by D. E Clarke

A Credit Bubble Stocks correspondent writes in about our review of William Tecumseh Sherman: Gold Rush Banker by D. E Clarke.

If 1852 was the "Hubbert's Peak" for gold mining in California, the biggest asset for non-miners in California after that was the fading capital of ill-informed miners. Non-miners could transfer capital from the miners to more worthwhile investment projects by providing high-priced loans, goods and other services to miners and their suppliers.

Starting in 1853, John Mohler "Wheelbarrow Johnny" Studebaker did this by making and selling wheelbarrows to miners for an ounce of gold each. By 1858, he accumulated 500 ounces of gold, worth the price of two railroad locomotives, back East.

In 1858, he cleared out from California, traveling first by stagecoach to Sacramento, then by a succession of paddle-wheel steamers and railroads back to South Bend, Indiana, by way of Panama and New York City.

He invested in a wagon-building company that became the largest wagon maker in history, under his leadership. Latter he converted the wagon-building company into a car manufacturer, in a timely way. It was the only wagon maker to successfully convert to car manufacturing.

One of his sayings was, "Never try to beat a fellow at his own game." He learned this lesson in a rigged game of chance, in Council Bluffs, Iowa, on the way to California, when he lost all of his capital except fifty cents.

After that, he stuck with skills he had learned as a member of a family of wagon builders. He seems never to have made a bad business decision.

The corollary to never trying to beat a fellow at his own game is that you should have your own game.

We'll talk about this more in our upcoming review of The Missing Risk Premium: Why Low Volatility Investing Works by Eric Falkenstein, where he points out that "classic investors like J.P. Morgan and Benjamin Graham distinguished between gambling and investing, the former being simple exposure to randomness, the latter something amenable to special insight and intuition. A good investment has the odds decidedly stacked in its favor via some special insight."

Having special insight is the key. There's only so much one person, or company, can know or focus on. As Andy Redleaf wrote,

"The most productive way to define one’s business, as Leavitt argued, is by skill. Not 'what do you make?' nor even 'what do your customers want?' but 'what are you good at?' If you understand what you are good at, and understand it at the proper level of abstraction, the problem of change becomes the manageable one of applying your old skills to new opportunities."

Falkenstein says that "most valuable creativity is highly domain specific," so you need "a lot of persistent, specialized focus" to have competitive advantage. In investing I think that could mean either an industry niche specialization, or a process specialization, like bankruptcy or a type of arbitrage.

As a friend says "don't get bored with what works".