#330 Les Schwab Charlie Munger recommended this book



Speaker A, a staunch advocate of the Readwise app, collaborated with the app's creators to develop Founders Notes, a product that allows users to access over 20,000 of Speaker A's book highlights and notes, crucial for podcast preparation and valuable for founders seeking wisdom from historical entrepreneurs. Speaker A, also known as Tristan, highlights the importance of this tool for successful company founders, emphasizing its role as a searchable knowledge base to apply the insights of great founders to current business challenges. Additionally, Speaker A shares an excerpt from Les Schwab's autobiography, "Pride in Performance: Keep It Going," recounting Schwab's humble beginnings, his relentless work ethic, and his innovative approach to business, including his shrewd compensation systems, which caught the attention of Charlie Munger. Schwab's story serves as an inspiration for entrepreneurs, illustrating the power of perseverance, integrity, and strategic thinking in building a successful business empire.

Summary Notes

Introduction to Readwise and Founders Notes

  • Tristan, a co-founder of Readwise, contacted Speaker A in 2019.
  • Speaker A uses Readwise to manage over 20,000 highlights and notes from books for the podcast.
  • Readwise allows Speaker A to search through all the highlights and notes.
  • Founders Notes is a product created in partnership with Readwise.
  • Founders Notes provides access to Speaker A's highlights and notes, mirroring Speaker A's experience.
  • The service is targeted at successful company founders for referencing ideas from history's greatest founders.
  • Founders Notes is offered at a 50% discount before a price increase due to added features.

"I got a DM from Tristan in 2019, and he was the one that made me aware of Readwise."

This quote indicates the initial contact between Speaker A and Tristan, which led to Speaker A's discovery and use of Readwise.

"I've added over 20,000 highlights and notes for all the books that I read for the podcast to the Readwise app."

Speaker A uses Readwise extensively for managing a vast number of highlights and notes, which is critical for their podcast production.

"It really is the world's most valuable notebook for founders."

Speaker A asserts the value of Readwise and Founders Notes for founders, emphasizing its utility in accessing entrepreneurial wisdom.

Les Schwab's Autobiography and Business Insights

  • Speaker A revisited Les Schwab's autobiography, "Pride in Performance: Keep It Going," upon Charlie Munger's recommendation.
  • Charlie Munger highlighted Schwab's shrewd compensation systems at the Berkshire annual meeting.
  • Munger provided an analysis of Les Schwab's success during a talk in "Poor Charlie's Almanack."
  • Schwab's autobiography conveys his direct and clear communication style.
  • Schwab's challenging childhood and work ethic are detailed, demonstrating his determination to succeed.
  • Schwab's business acumen is evident from an early age, with parallels to Sam Zell's entrepreneurial spirit.
  • Schwab's initial business venture was a tire shop, which he grew from $32,000 to $150,000 in annual sales.
  • Schwab emphasized fair treatment of customers and employees but was ruthless with rubber companies due to unfair practices.
  • Schwab's adoption of Japanese tire supplies was a strategic move that contributed to his success.
  • Schwab's profit-sharing program was critical for the expansion and success of his business.

"I wanted to go into business for my own money was the main thing holding me up."

Les Schwab's ambition to start a business was hindered by a lack of capital, a common barrier for aspiring entrepreneurs.

"I thought the tire business had a future."

Schwab's decision to enter the tire business was based on his belief in the industry's potential and his own sales skills.

"Never take advantage of a customer, never take advantage of an employee, but take all the advantage you possibly could of a rubber company."

Schwab's business philosophy was to treat customers and employees fairly but to aggressively compete with rubber companies.

"I had the guts to fight hard enough to survive this period."

Schwab's tenacity and willingness to fight for his business's survival are highlighted as key factors in his eventual success.

"It serves them right. They earned their failure."

Schwab reflects on the downfall of American rubber companies, attributing it to their unfair treatment of dealers like himself.

"There wouldn't be the chain of Les Schwab Tire centers that we have today if we hadn't been successful in that second store."

The success of Schwab's second store was a pivotal moment that enabled the expansion of his tire center chain.

Charlie Munger's Analysis of Les Schwab

  • Munger emphasizes the importance of getting incentives right in management.
  • Schwab's autobiography showcases his deep understanding of human nature and his skill in sales, persuasion, and incentives.
  • Munger praises Schwab's shrewd systems for making a fortune in a difficult business.

"Never ever think about something else when you should be thinking about the power of incentives."

Charlie Munger's advice underscores the critical role of incentives in shaping business outcomes.

"The most important rule in management is get the incentives right."

Munger identifies the correct structuring of incentives as a fundamental rule in management, reflecting Schwab's success in this area.

Les Schwab's Early Career Struggles and Determination

  • Les Schwab faced significant challenges in the early days of his career, including threats from a franchise that wanted to cancel his membership and take away his equipment.
  • Schwab's response to the franchise's threats was to stand his ground and demand that any further communication be done through court.
  • Schwab experienced severe stress, which he referred to as "walking the floor nights," indicating the sleepless nights he spent worrying about the company.
  • The pressure of potentially going bankrupt due to his largest account being behind on payments was a constant worry.

"I lost my temper. And I told them hereafter I didn't want any more harassment from them. If they had anything more to say, say it in court."

This quote shows Schwab's assertive response to the franchise's threats, highlighting his determination to protect his business at all costs.

"Because if they took my equipment, it would have bankrupted me."

Schwab explains the dire financial consequences he would have faced if the franchise took his equipment, which was a significant source of stress.

Schwab's Business Philosophy and Growth Strategy

  • Les Schwab was shrewd in his approach to dealing with the franchise, understanding the broader implications of a legal battle on the franchise system.
  • Schwab's refusal to accept cancellation from the franchise and his persistence in sending registered letters back showed his tenacity.
  • Schwab recognized the potential for growth beyond his initial modest goals, aiming for six or seven stores and understanding the importance of finding better suppliers, advertising, and promoting effectively.
  • He believed in sharing success with store managers, which he saw as a key factor in his company's growth.
  • Schwab's business model involved each store operating as a separate entity, with employees sharing only in the profits of their own store, similar to Berkshire Hathaway's model.

"I think the reason that they didn't take me to court was due to the fact that if they lost, it would have messed up their franchise nationwide."

Schwab assesses the franchise's potential hesitation to take legal action, understanding the larger impact it could have had on their business model.

"I knew I could buy tires better if I had the time... And I wanted to share with the store managers and make them successful."

Schwab outlines his strategy for company growth, which included improving supply chains and incentivizing managers through profit-sharing.

Schwab and Sam Walton's Similarities

  • Les Schwab and Sam Walton shared similar business philosophies and practices, such as a focus on scale and fanaticism, which Charlie Munger described as powerful when combined.
  • Both Schwab and Walton would use trips to learn from other businesses, with Schwab visiting other tire dealers and Walton visiting retail stores.
  • Schwab was expansive by nature, always seeking to grow his business, and he was meticulous about his business contracts, ensuring options to buy property and including escape clauses to cap his downside.

"Fanaticism and scale combined can be very powerful. Think Sam Walton. Think Les Schwab."

Charlie Munger's quote emphasizes the potent combination of deep dedication and the pursuit of scale in business success, as exemplified by Walton and Schwab.

Schwab's Marketing and Advertising Innovation

  • Schwab was innovative in marketing and advertising, creating the first tire showroom and reversing the typical tire business model by displaying a wide range of tires to impress customers.
  • He was inspired by other successful advertising campaigns, such as Lucky Strike cigarettes, and adapted their strategies to his tire business.
  • Schwab's focus on customer service, such as offering free flat tire changes for lady drivers, leveraged the principle of reciprocity to grow his business.

"I had a lot more tires displayed in the showroom than any other tire dealer in the area. And customers were impressed."

Schwab's quote illustrates his innovative approach to tire retail, which involved making the showroom the focal point and impressing customers with a wide selection.

Schwab's Emphasis on Cleanliness and Detail

  • Schwab was obsessed with maintaining cleanliness in his stores, requiring daily cleaning of displayed tires.
  • He communicated his high standards and expectations through memos, emphasizing the importance of a clean and appealing store appearance to his employees.

"A supermarket tire store has tires displayed, a clean showroom, tires waxed, and an appealing appearance."

This quote from Schwab's memo highlights his commitment to a clean and professional store environment, which he saw as essential to his business model.

Schwab's Approach to Incentives and Internal Promotion

  • Schwab believed in promoting from within, never hiring managers or assistant managers from the outside.
  • He emphasized the importance of understanding one's circle of competence and learning from mistakes, such as his unsuccessful attempts at ranching.
  • Schwab's profit-sharing model with employees led to a culture of honesty and reduced theft, as employees were incentivized to protect their shared interests.

"Every single one of our more than 250 managers and assistant managers started at the bottom changing tires."

This quote demonstrates Schwab's commitment to internal promotion and ensuring that managers fully understand the business from the ground up.

Schwab's Personal Philosophy and Legacy

  • Schwab believed that sharing profits was not only beneficial for the business but also provided personal satisfaction in helping others succeed.
  • He valued being a good husband, father, and mentor more than accumulating wealth, as evidenced by his deep impact on the lives of his employees.
  • Schwab faced personal tragedies, including the death of his son and daughter, which he discussed openly, reflecting on his own actions and the impact on his family and business.

"Success in life is being a good husband. It's being a good father. And then you end up being a second father to hundreds of other men and women."

Schwab's quote encapsulates his belief that true success extends beyond business achievements to the positive influence one has on the lives of others.

Financial Decisions and Long-Term Impact

  • Tristan discusses the impact of immediate financial gain versus long-term wealth.
  • He uses the story of Les Schwab's partners, Norm Nelson and Don Miller, who chose to sell their shares for immediate cash.
  • Les Schwab later bought his partners out at book value, which at the time seemed beneficial for them, but in hindsight, was a poor financial decision.
  • Tristan compares this to the McDonald brothers who sold their shares to Ray Kroc and missed out on a potential fortune.
  • He also references Henry Ford's investor who sold his stake early and missed out on a much larger return.

"They each own 20% of this money... They're going to get $225,000... $300,000." "They'd be making over a million dollars per year just from that 5% bonus."

These quotes illustrate the immediate versus long-term financial decisions made by Les Schwab's partners and their significant impact on potential wealth.

Legacy and Succession Planning

  • Tristan reflects on the challenge of maintaining a business legacy and succession across generations.
  • He notes that despite Les Schwab's desire for the company to remain private and within the family, it was eventually sold for $3 billion.
  • The difficulty of sustaining a founder's vision across multiple generations is highlighted.

"I want my company to run this way or take my goddamn name off it... But this company is offering us $3 billion. Yeah, we're going to take it."

This quote emphasizes Les Schwab's intent for his company's legacy and the eventual sale that went against his wishes, showcasing the complexities of succession planning.

Incentive Structures and Employee Value

  • Tristan discusses Les Schwab's philosophy on employee compensation and the importance of incentivizing employees.
  • Schwab believed in paying high wages to attract quality employees, which in turn led to happier customers and better business performance.
  • Schwab's approach contrasted with competitors who paid low wages and consequently had less skilled employees.

"Our store managers make more than our office people... If it weren't for those men in these stores working their butts off... you wouldn't even have a job."

This quote underscores Les Schwab's belief in the value of front-line employees and his commitment to compensating them well, which was a key part of his business success.

The Importance of Customer and Store Focus

  • Les Schwab emphasized the importance of focusing on customers and store operations over office tasks.
  • He advocated for store managers to spend more time on the sales floor rather than in the office reviewing reports.
  • Schwab's philosophy was that if the stores were taken care of, the office would naturally be taken care of as well.

"The office serves only one purpose, and that is to serve the stores... If the store manager runs his store right, he doesn't have to spend hours and hours looking at the office reports."

This quote encapsulates Schwab's business philosophy that prioritizes customer service and operational efficiency in stores over administrative work.

Learning from Biographies and Historical Business Figures

  • Tristan expresses his appreciation for the lessons learned from biographies and the experiences of historical business figures.
  • He draws parallels between Les Schwab and other entrepreneurs like Sam Walton, highlighting their common focus on customer service and employee empowerment.
  • Tristan sees biographies as a means to gain insight into successful business practices and the mindset of accomplished entrepreneurs.

"This is why I love biographies. There's just so many lessons... it really makes it resonate much more than just a list of facts."

This quote reflects Tristan's belief in the value of studying the lives of successful individuals to extract lessons that can be applied in business and personal growth.

Analysis by Charlie Munger

  • Charlie Munger analyzes the success of Les Schwab's tire store chain.
  • Munger discusses Schwab's ability to succeed against big tire companies and discounters through effective incentive structures and customer service.
  • He provides a framework for understanding extreme success in business, which includes maximization or minimization of variables, nonlinear success factors, and riding waves of opportunity.

"Extreme success is likely to be caused by some combination of the following factors... adding success factors so that a bigger combination drives success, often in a nonlinear fashion."

This quote from Charlie Munger provides a theoretical framework for analyzing the extraordinary success of businesses like Les Schwab's, attributing it to a combination of strategic factors and the effective harnessing of incentives.

Importance of Hiring in Startups

  • Hiring is critical for startups; the first few hires can determine the success of the company.
  • Each new hire in a startup can be seen as a significant percentage of the company.
  • Quality of hires is more important than the speed of hiring.
  • A small company depends more on great people than a big company does.

"When you're in a startup, the first ten people will determine whether the company succeeds or not. Each is 10% of the company. So why wouldn't you take as much time as necessary to find all A players."

This quote emphasizes the significance of early hires in a startup, equating each new employee to a substantial portion of the company's potential success.

Strategies for Hiring

  • Identify and pursue individuals responsible for great work.
  • Prioritize hiring people with social skills.
  • Hire talented individuals as they are found, not as needed.
  • Use a high standard in the hiring process to maintain quality.

"If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But if each of us hires people who are bigger than we are, we shall become a company of giants."

This quote, attributed to David Ogilvy and echoed by Warren Buffett, illustrates the philosophy of hiring individuals who are more capable than oneself to create a strong and talented team.

Creative Hiring Processes

  • Unconventional interview techniques can reveal a candidate's problem-solving skills and creativity.
  • Assessing a candidate's reading habits can be indicative of their creativity and passion.
  • Hiring individuals with confidence can shape the company's culture.

"I've never met a creative person in my life that didn't respond with enthusiasm to a question about reading habits."

Nolan Bushnell's observation about creative individuals' reading habits suggests that a love for reading may correlate with creativity, which can be a desirable trait in potential hires.

Hiring for Cultural Fit

  • Hiring individuals who align with the founder's values and thinking can contribute to a cohesive company culture.
  • The founder's personality often defines the company's culture.
  • Recruiting should be tailored to differentiate from other companies and attract the right talent.

"Hire people who think as you do and treat them well. In our business, they are top priority."

Estée Lauder's advice highlights the importance of hiring individuals who share the founder's values and vision, ensuring alignment and commitment within the team.

Overcoming Hiring Challenges

  • Founders need to be problem-solvers, even in the hiring process.
  • Addressing personal circumstances of candidates can be crucial to securing top talent.
  • Promoting from within can ensure cultural continuity and reward loyalty.

"Musk, therefore, came into his job interview prepared. About halfway through, Musk told the guy that he wants to hire. So I heard you don't want to move to LA, and one of the reasons is that your wife works for Google. Well, I just talked to Larry, and they're going to transfer your wife down to LA."

Elon Musk's proactive approach to solving a potential hire's personal obstacle demonstrates the lengths to which founders may go to secure top talent.

Founder's Role in Hiring

  • Founders should be deeply involved in the hiring process, especially in the early stages.
  • The ability to assess fit and talent is crucial for a founder.
  • Building an environment that values talent and vision is key after hiring.

"He personally met with every single person the company hired through the first 3000 employees. It required late nights and weekends, but he felt it was important to get the right people for his company."

Elon Musk's dedication to meeting with each new hire underscores the importance of the founder's involvement in building a team that aligns with the company's goals and culture.

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