Chapter 31 - The Invisible Billionaire: Daniel Ludwig

Oct 19, 2023

Today’s Chapter is based on the book “The Invisible Billionaire: Daniel Ludwig” by Jerry Shields. It is a biography on Daniel Ludwig who was once considered one of the richest, if not the richest, person in America.

Buy it here:

https://www.amazon.com/Invisible-Billionaire-Daniel-Ludwig/dp/0395354021

Here’s what I learned about the book:

Float

“We love float, if it’s costless. We hate float, if it’s at a high price. And we do use a lot of float. So there’s no inconsistency on this subject.”
— Warren Buffett

Daniel “D.K.” Ludwig started his fortune in the shipbuilding and shipping industry. What is impressive about Ludwig was his ability for finding opportunities by using borrowed money to finance his lucrative projects. As a matter of fact, during the mid-1930s, he used a scheme of using other people’s credit to build his fortune in shipping oil.

He would first go to an oil company and obtain a long-term charter to haul their petroleum. Once that was done, he would go to a bank and, by using the charter as collateral, he would obtain a loan to obtain a ship to haul the petroleum. As such, instead of paying Ludwig directly, the oil company would make the charter payments directly to the bank which would deduct the loan payment and put the remainder in Ludwig’s bank account.

“The beauty of the scheme was that it allowed D.K. to build or renovate tankers without having to put up collateral or use his own credit. The oil companies were satisfied, because they were getting their petroleum hauled at bargain rates. The banks were satisfied, because oil companies were a much better credit risk than a small shipper like Ludwig. And D.K. was more than satisfied. As long as he took care to fulfill his charter contracts, he had a small but steady income, and, more important, by the time the contract expired he was the owner of a paid-up ship without having invested any of his own money.”
— Jerry Shields

Another incident when Ludwig was able to take advantage of borrowed money was right after World War I, when large numbers of vessels built during the war were considered surplus and were offered for sale at a bargain by the US Government to private investors at the condition that they were to be renovated and maintained in good condition for regular use and for future national emergencies.

As such, many smart shippers took this as an opportunity to purchase government-owned vessels, at a price that was much less than what it would have cost to build the vessels from scratch. Often, these speculators would do the minimum required renovation work and quickly sell the ships for a quick profit. But more importantly for Ludwig and his partners, the Shipping Board only required investors to put up 10% of the purchase price and the rest could be paid over time.

“Thus, by investing less than $50,000, Hall, Ludwig, and Leahy could buy three ships, remodel and sell them, use part of the proceeds to pay off the purchase price and renovation costs, and pocket the rest. If they managed to sell the three vessels for $1 million (a reasonable expectation at the time), they would reap over half a million dollars' profit on an investment of only $50,000.”
— Jerry Shield

This concept of using borrowed money or other people’s credit reminds me of how Warren Buffett built a fortune at Berkshire Hathaway by investing float money coming from his insurance businesses. As a matter of fact, Ludwig was quite familiar with the concept of float capital. As an expert himself at using other people’s money to get rich, he appreciated the abilities of a certain Morley Thompson who mastered the idea of profiting through float money by purchasing stamp stores. This is eerily similar to Warren Buffett’s thought process when purchasing Blue Chip Stamps.

Here’s how Buffett describes float in insurance businesses and how to take advantage of it: “To begin with, the float is money we hold but don’t own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money.”

“During the 1960s and early seventies, grocery chains and many other businesses went through the great trading-stamp war, vying with one another for customers by giving away with purchases little stamps that could be pasted in booklets and later redeemed for merchandise. After an extended flurry, the stamp craze eventually faded, and most merchants gave them up as a way of attracting trade. But for Morley Thompson they were still pure gold. The reason? They represented an enormous amount of "float" money.

Float capital is money you can use temporarily before you have to pay it out. A marketer would sell trading stamps directly to a merchant for a price. The merchant would then hand out the stamps over a period of time to his customers, who would paste them in books. Eventually many of the stamps would get turned in — redeemed — at a local stamp store for merchandise. But the average span between the time a merchant bought the stamps and the time they were redeemed at a stamp store was about eighteen months. The stamp marketer, in other words, had roughly a year and a half to play with the money before he gave anything back for it. A sharp investor with millions of dollars in available cash can turn a lot of profit over eighteen months.”
— Jerry Shields

“Beware of little expenses. A small leak will sink a great ship.”
— Benjamin Franklin

As we have learned previously from Benjamin Franklin, frugrality is an important virtue to live a successful life. As Franklin explained, frugality doesn’t necessarily means to not spend any money but to “make no expense but to do good to others or yourself.”

And, in the case of Ludwig, he made sure to make no expenses unless it was an investment to make additional income. As a matter of fact, he made quite a few moves during his business career that would make Benjamin Franklin proud in terms of being frugal.

Chapter 22 - Benjamin Franklin, Volume 1

August 17, 2023

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Firstly, once he learned that there were distinct benefits to incorporating corporations in Delaware relatively to other states, he made sure to register a majority of his US companies in Delaware, a known haven for corporate interests.

Secondly, Ludwig’s frugality became legendary in the shipping industry. In fact, Ludwig made sure to only spend the strict minimum expenses to keep his ships running. As such, his ships were well known among officers and crew members for not being comfortable. For example, captains on Ludwig’s ships were sleeping in a bunk instead of a bed and few of his ships had any air conditioning and none of them had swimming pools for crew members, which were quite common among ships owned by less frugal men at the time.

“It was necessary to spend money to keep his ships running. This was an investment which would produce additional income, but making the officers and crews of those ships more comfortable would not earn Ludwig an extra dime.”
— Jerry Shields

“D.K.'s ridding his ships of any feature that did not contribute to profits pleased his own obsessive sense of economy and kept him a step ahead of the competition. When someone asked why he didn't put a grand piano aboard his ships, as Stavros Niarchos did, Ludwig snapped, "You can't carry oil in a grand piano."”
— Jerry Shields

Finally, Ludwig enjoyed living anonymously and was against living a luxurious life. His house was comfortable but did not look like a place an exceedingly rich man would live in. As Jerry Shields mentions, Ludwig “was concerned with the wealth itself, not its trappings. Making money, not spending it, was his passion, and he could do that much better if most people didn’t give him a passing glance.”

In fact, the only concession Ludwig made to his principle of not spending excessively was to build a luxurious yacht, the Danginn, a 190-foot, 381-ton ship that cost him over $2 million. And yet, in truth, he only built this boat to impress celebrities and people with whom he did business with, rather than for his own pleasure. He was so focused on finding ways to make more money that he was rarely on his own yacht.

“Over the next decade, D.K. would use the Danginn frequently in this way, cruising the Mediterranean or the Atlantic with a boatload of wealthy guests, usually ones from whom he needed a business favor. For him, the yacht was as much a business craft as any of his tankers, and probably earned him more money than any of them. For example, he hosted Saudi Arabia's King Ibn Saud in the Persian Gulf as a way of procuring a charter to haul Saudi oil.”
— Jerry Shields

“According to one account, the Danginn logged an average of forty thousand miles a year, carrying business acquaintances and friends on tropical cruises and jaunts to exotic pleasure spots, but it usually sailed without Ludwig, who was in his Manhattan office, scheming up new ways to make money.”
— Jerry Shields

“Innovation is the specific instrument of entrepreneurship. The act that endows resources with a new capacity to create wealth.”
— Peter Drucker

As a penny pincher, Ludwig was surprisingly eager in trying out new innovations and was a pioneer in the shipbuilding industry. In reality, however, most of his innovations were aimed toward one single goal: increasing payload without increasing cost. In fact, he was always looking for ways to reduce his tanker designs to the bare minimum and to find ways of making his operations more cost-efficient.

As a matter of fact, in terms of construction, his ships were built with thinner decks compared to the industry standard, and this modification was made to lessen the weight and reduce the fuel bill in consequence. Another way he accomplished this was by eliminating all but a single stack on his vessels. Jerry Shields explains that “most ships at the time were equipped with two or three rakish stacks, which gave a pleasing symmetry but had little function once modern propulsion systems replaced the old steam engines. Ludwig was among the first builders to realize that a ship did not need more than one stack.” It is unsurprising that the majority of Ludwig’s innovative methods became the industry’s standard over the years.

“One technique he did not originate but did pioneer and help make standard in the industry was welding ship seams together rather than riveting them. All-welded ships were being produced in British yards during the mid-1930s, and Ludwig relied on a similar technique in his renovation work. His experience in 1926 on the Phoenix had convinced him of the wisdom of this method. And his naming the shipbuilding operation Welding Shipyard shows that he intended to set himself apart from other American yards, which were still riveting.”
— Jerry Shields

“One more Ludwig innovation was the launching of ships sideways off a dock rather than stern-first out of a building way. Necessity played a large role in this invention. When D.K. was forced to move out of his Little Branch shipyard to the Norfolk Army Base, he was hampered by the lack of a building way on the new site. Installing one would be time-consuming and expensive, and since he was only leasing the property, he was not eager to add a permanent facility he would have to leave behind on his next move.”
— Jerry Shields

Another of his most impressive innovation was the method known as Con-Tech which also came about due to Ludwig’s intention of finding ways that “would be simple, quick, and cheap, designed to eliminate waste and maximize profits.”As a matter of fact, the story of Con-Tech started when Ludwig had the intention of building a new shipyard in the Bahamas. However, considering the lack of experts in the Bahamas, he needed to bring in around 800 of his Japanese workers and their families from Kure to work in his newly-built shipyard. As such, he was in a hurry to build housing for his workers, but no cement were available, hence the creation of Con-Tech, a construction innovation that made Ludwig one of the world’s largest house builders.

“The cost of building most of these units was next to nothing. In 1974, Ludwig put up houses in Mexico, each of which-with three bedrooms, a large kitchen, and a fully equipped bathroom-was designed to sell for $2500 and still make money for the builder. But another beauty of the system was that by using more elaborate molds, D.K. could build larger houses, offices, and commercial buildings. Con-Tech could construct for princes and paupers. It could even create walls that, when painted, looked like brick or stone.”
— Jerry Shields

This concept of innovating in order to reduce operating expenses is eerily similar to the belief of Charles Schwab, founder of the Charles Schwab Corporation. As a matter of fact, he was adamant in adopting new technology in his quest of achieving zero commissions for his clients. He had to find ways to reduce operational costs to remain competitive and technology was one way of doing it.

“People often ask why Schwab got into technology so early and in such a big way to make it a defining part of who we are and how we operate to this day. In some ways, necessity is the mother of invention. We had to get more efficient or we were dead in the water. When I first started Schwab and slashed commissions by 75%, I had just a vague idea that I could make it work. I knew it would take volume. It was also a factor of where we were. San Francisco and neighbouring Silicon Valley were all about technology. I was surrounded by people who thought adopting technology was as natural as childbirth. It was the air we breathed.”
— Charles Schwab

Chapter 27 - Invested: Changing Forever the Way Americans Invest

September 21, 2023

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“The ones who are crazy enough to think they can change the world are the ones who do.”
— Steve Jobs

Extraordinary performance often comes from seeing things that other people can’t see. Similarly, Ludwig’s success as a businessman “was due to his willingness to venture where more timid entrepreneurs dared not go. If he needed to bring along men and equipment to carry out a project in a remote area, he had the ships to get them there. He could, if there was enough money in it, move the mountain to Mohammed, and he would.”

Charlie Munger once said that “Opportunities comes to the prepared mind.”; but, even more importantly, he mentions that it is important to position one-self in a situation to succeed. As a matter of fact, he once said that “the first rule of fishing is to fish where the fish are. The second rule is to never forget the first rule.”

In the case of Ludwig, he knew that opportunities would exist on the frontiers were his competitors would not dare to venture. As such, he was more than willing to carry projects in under-developed areas, even if he had to create a whole town to make it happen.

“The majority of men, even businessmen, are tied to cities, where the ingredients of development already exist-labor, energy supplies, building materials, transportation, and so on. Competition also exists there, and the way to escape it is either to do something no one else is doing or do it where no one else is doing it.”
— Jerry Shields

Another advantage Ludwig had by doing businesses in an under-developed countries was that with enough money, he was able to acquire “empire status”, meaning that he was able to obtain government help when he needed it and a policy of noninterference when he didn’t. As a matter of fact, it was a Ludwig standard to become friendly with the leaders of nations where he had business activities. As Allen Cameron, a National Bulk executive who often acted as Ludwig's emissary in foreign operations, once said, "We never play politics, but we always make a point of getting acquainted with the premier and finance minister."

“The autonomy of a feudal baron who was free to create his own country and make and enforce his own laws. To a degree, he had achieved this in Japan, much more so in Panama, Venezuela, Grand Bahama, Nicaragua, Mexico, Costa Rica, Honduras, the Caymans, Nigeria, and other areas into which his empire had spread. Acquiring such status was not difficult. If you had enough money, everything else was negotiable. And Ludwig had enough money.”
— Jerry Shields

This concept of going against conventional wisdom reminds me of Jeff Bezos from Amazon. He mentions that although it is often to be wrong when going against conventional wisdom, the times you are right will most certainly cover your losses in the long run. As such, when odds are favourable to you, you should be decisive and swing for the fences.

“Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a one hundred times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score one thousand runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.”
— Jeff Bezos