#336 How To Lose A Few Billion Dollars Samuel Insull

Summary Notes


In this episode, the host delves into the remarkable yet ultimately tragic story of Sam Insull, a pioneering figure in the electricity business, as chronicled in Forrest McDonald's book "Insull: The Rise and Fall of a Billionaire Utility Tycoon." Insull's career began as Thomas Edison's private secretary and he played a pivotal role in shaping the electric industry, founding the Edison General Electric Company (now GE), and innovating in mass production and marketing. Despite his successes, including creating the open-ended mortgage and championing government regulation of utilities, Insull's empire crumbled due to over-leverage and risky financial decisions during the Great Depression. His fall from a billionaire to bankrupt serves as a cautionary tale about the perils of debt and the unpredictable nature of financial crises.

Summary Notes

Sam Insull's Early Career and Influence on the Electric Industry

  • Sam Insull was Thomas Edison's private secretary and a key figure in the founding of centralized electric supply.
  • He organized the Edison General Electric Company, which evolved into GE.
  • Insull developed a model for nationwide product distribution that influenced American industry.
  • He was a pioneer of mass production and selling at the lowest cost, predating Henry Ford's association with these concepts.
  • Insull applied the concepts of load and diversity factors to utility rates.
  • He introduced the natural monopoly principle for utility companies.
  • Insull was instrumental in creating the open-end mortgage for business expansion.
  • He is recognized as the father of effective government regulation of public utilities and the creator of rural electrification.
  • Insull developed early welfare programs and modern public relations techniques.
  • He devised marketing methods for securities that supported the growth of large corporations.

"That he, more than any other man, was responsible for founding the business of centralized electric supply. That he organized the Edison General Electric Company, now known as GE, and that he worked out a model of nationwide product distribution that virtually all other American industry copied."

This quote emphasizes Insull's foundational role in the electric supply business and his influence on American industry through the creation of a distribution model.

Insull's Downfall and Comparison to Other Industry Giants

  • Insull was compared to Rockefeller (oil), Ford (automobile), Morgan (finance), and Carnegie (steel) as an industry builder.
  • Unlike his contemporaries, Insull made critical mistakes leading to the collapse of his empire and his eventual death in poverty.
  • The book discussed is "Insull: The Rise and Fall of a Billionaire Utility Tycoon" by Forrest McDonald, first published in 1962.

"But unlike Rockefeller, Ford, Morgan, and Carnegie, Insull made terrible, drastic mistakes at the end of his career, and he dies broke."

This quote highlights the stark contrast between Insull's ultimate failure and the enduring legacies of his contemporaries.

Insull's Relationship with His Father and Work Ethic

  • Insull inherited his father's positive traits such as imagination and cleverness, but not the negative ones like lack of energy and practical sense.
  • Insull was pragmatic, energetic, and had a workaholic nature, often working 16-hour days.
  • His "near demonic energy" and work ethic were critical to his success.

"What his dad did not have was energy, practical sense, and fortitude. Sam's father was idealistic, impractical, and intellectual. That is not how you would describe Sam."

The quote contrasts Insull's practical and energetic nature with his father's more idealistic and impractical disposition.

Insull's Deductive Mind and Learning Approach

  • Insull consumed large amounts of reading material, assimilating details and generalizations.
  • He applied deductive reasoning from particulars to generalizations.
  • Insull was inspired by self-help books and biographies, adopting maxims like "idle hands are the devil's workshop" and "time is money."
  • He started working full-time at age 14 and acquired valuable skills such as stenography.

"Sam's most obvious attribute was a capacity for racing through large quantities of reading material, effortlessly perceiving its important assumptions and generalizations, and thoroughly assimilating its salient details."

This quote describes Insull's ability to quickly understand and integrate information, which was fundamental to his business approach.

Insull's Early Career Development and Skill Acquisition

  • Insull became an expert stenographer by practicing tirelessly at night.
  • His stenography skills led to a job with Thomas G. Bowles, the founder and editor of Vanity Fair.
  • Insull's work ethic and skill acquisition positioned him to build relationships with influential people.
  • He learned bookkeeping and accounting, and he taught himself to focus and systematize his work.

"He worked long into the night every night until he had become an expert stenographer."

The quote illustrates Insull's commitment to mastering skills that would later be crucial in his career advancement.

Insull's Connection with Thomas Edison

  • Insull was fascinated by Thomas Edison and dedicated himself to learning about Edison's work.
  • He was fired from his job but soon found employment with Colonel George, Edison's European representative.
  • Insull's knowledge and service to Edison's chief engineer, Edward Johnson, led to an opportunity to work closely with Edison in America.

"When Edison's chief engineer came from America to London to supervise the installation of the first European telephone exchange, he found that Sam Insul, who again, is 19 at the time, he found that Sam Insul knew more about Edison's business affairs in Europe than Colonel George did."

This quote underscores Insull's proactive approach to learning and his strategic positioning to work with Edison's team.

Insull's Ambition and Lack of Self-Doubt

  • Insull's confidence in his abilities was unwavering, and he did not entertain the possibility of failure.
  • His determination and lack of self-doubt propelled him to take risks, such as moving to America without a clear job description or salary.

"One of his most deep-rooted traits was that he was absolutely unable to imagine the possibility of his own failure."

The quote captures Insull's mindset and his bold approach to pursuing opportunities without fear of failure.

Early Days of Thomas Edison and Sam Insull

  • Thomas Edison was only 34 years old, already famous with several inventions.
  • Sam Insull was brought to Edison by Johnson at 21 years old, appearing even younger.
  • Edison and Insull's partnership began with Insull's admiration for Edison's achievements.
  • Insull's family and friends were concerned about his move to work with Edison without clear job details or salary.
  • Edison's resume at 34 included significant inventions such as the stock ticker, multiplex telegraph, mimeograph machine, phonograph, and improvements to the telephone.
  • Insull saw the opportunity to work with Edison as a genius and low-risk decision, despite the concerns of his peers.

"Here was the man who had invented the stock ticker, the multiplex telegraph, the mimeograph machine, the phonograph, and the transmitter that made the telephone practical."

The quote highlights Edison's accomplishments that inspired Insull to work with him, showcasing Edison's reputation as an innovator.

Insull's First Tasks and Edison's Work Ethic

  • Insull's first job involved assessing Edison's resources and advising on patent and license sales to finance new undertakings.
  • Edison, despite his fame, was struggling with financiers like Morgan to secure funding.
  • Insull worked tirelessly through his first night, proving his value to Edison.
  • Edison's work style was chaotic, with no set schedule or system, focusing on what he found most interesting or important.
  • Insull organized Edison's business operations without attempting to change Edison's personal work habits.

"Edison tells him, he goes, I got $78,000. I need to finance my new undertakings, and I'm ready to sell everything that I own."

This quote illustrates the financial challenges Edison faced and his trust in Insull to manage his assets effectively.

Insull as an Industry Builder

  • Insull and Edison had to invent every component of an electric generating and distribution system.
  • The industry required the creation of numerous minor parts, from switches to filaments.
  • Insull's role expanded beyond company building to industry building.
  • Insull's ability to solve problems independently was highly valued by Edison.

"Insul had first to invent every component of an electric generating and distribution system, and then to create the manufacturing industry, to make them, an engineering organization to install them, and a central station industry to buy them."

This quote highlights the scale of the challenge Insull and Edison faced in creating a new industry from scratch.

Insull's Accumulation of Experience and Network

  • Insull rapidly gained experience and built a network in the electric business.
  • He developed an understanding of urban politics, manufacturing, selling, promoting, administration, and organizing.
  • Insull adopted the habit of borrowing, preferring notes over cash payments.
  • The book detailing Insull's life is dense with information about his complex business structures and the rise and fall of his empire.

"He had accumulated a bunch of experiences which would ultimately prove very useful in the business that he's going to set up and run for the next 40 years."

The quote underlines the importance of Insull's early experiences in shaping his future business ventures.

The Dangers of Leverage

  • Insull's downfall was attributed to excessive borrowing and leverage.
  • The Great Depression exposed the risks of leverage, as Insull faced financial ruin.
  • Quotes from Charlie Munger and Warren Buffett warn about the dangers of leverage.
  • Insull's intelligence and talent were not enough to protect him from the consequences of over-leveraging.

"He would say, never pay cash when you could give a note."

This quote reflects Insull's borrowing habit, which ultimately contributed to his financial downfall.

Insull's Management and Business Principles

  • Insull expanded the business through capital raising, reinvestment, and borrowing.
  • He treated his workers well, understanding that discontent could lead to inefficiencies.
  • Insull focused on spreading fixed costs by diversifying operations.
  • Lowering prices to increase volume and profits was a core belief of Insull's business strategy.
  • Insull had to learn to be a financier and magician due to the rapid growth and cash constraints of the company.

"The first was to expand. Expand by raising new capital whenever possible. Expand by plowing profits back into the business. Expand by borrowing every nickel he could lay his hands on."

This quote summarizes Insull's aggressive expansion strategy, which relied heavily on leveraging debt.

Insull's Move to Chicago and Ambition

  • Insull was offered the presidency of the Chicago Edison company, a much smaller company than General Electric.
  • He accepted the role with the condition of being able to run the company as he saw fit.
  • Insull's ambition was to make Chicago Edison bigger than General Electric, a goal he believed in despite others' doubt.
  • To buy stock in the Chicago Edison company, Insull borrowed money from Marshall Field, an investor in young entrepreneurs.

"The job opportunity, if he took it, would be bound only by the limits of his own ability and ambition."

This quote encapsulates the opportunity that Insull saw in the Chicago Edison company, which aligned with his limitless ambition and ability.

Sam Insull's Vision and Strategy for Electricity Monopoly

  • Sam Insull aimed to make electricity cheaper and more accessible by creating a monopoly.
  • He believed that a larger customer base would allow for lower prices.
  • Insull's approach inverted traditional thinking, which saw electricity as a luxury product.
  • He sought to buy out competitors to build the largest possible electric power station.
  • Insull's focus was solely on the electric industry, avoiding diversification.

"And so he comes to Chicago, and he's like, hey, we're going to invert the way other people think about electricity. We're going to try to make electricity cheaper, not more expensive."

This quote highlights Insull's innovative approach to the electricity market, aiming to make it affordable for the masses, contrasting with the prevailing notion of electricity as a luxury.

Insull's Acquisition Strategy and Focus on the Electric Industry

  • Insull immediately sought to acquire his largest competitors after taking over Chicago Edison.
  • He followed Rockefeller's strategy of targeting top competitors to consolidate his position.
  • Insull maintained focus on the electric industry, recognizing its potential.
  • He believed in the importance of focus for entrepreneurial success.

"The very first meeting he has with the executive committee for this new company, Chicago Edison, that he's taking over, he's like, all right, we need to buy our second largest competitor."

This quote illustrates Insull's aggressive and strategic approach to gaining market dominance by quickly acquiring major competitors.

Vertical Integration and Building a Monopoly

  • Insull pursued vertical integration by buying companies that manufactured electrical equipment.
  • His policy of acquiring smaller competitors and paying generously to avoid making enemies was similar to Rockefeller's.
  • Insull's vision was to serve the entire population of Chicago, far exceeding the most optimistic estimates of potential customers.

"This policy quickly paid off, caught between bad times and difficulty even in buying replacement light bulbs. Six of the small central stations in Chicago gave up in 1894."

This quote explains how Insull's strategy of vertical integration and his ability to capitalize on difficult economic times allowed him to quickly consolidate his monopoly.

Insull's Public Relations and Regulatory Strategy

  • Insull understood the importance of public relations and crafted a positive image in the community.
  • He advocated for government-regulated monopolies, which he saw as necessary for spreading fixed costs over a larger customer base.
  • Insull's push for legalized monopoly allowed him to further expand his customer base.

"More profound than his organizational ability was Insul's sense of public relations. To him, the moment of applause was the moment for action."

This quote underscores Insull's recognition of the power of public opinion and his strategic use of public relations to support his business goals.

Financing Expansion and the Invention of the Open-Ended Mortgage

  • Insull's expansion required large amounts of debt capital.
  • He is credited with inventing the open-ended mortgage to secure financing for his ventures.
  • His ability to reframe financial requests led to the acceptance of an unlimited mortgage, which allowed for greater expansion.

"Insol proposed to them a mortgage of no limit, and they accepted."

The quote details how Insull cleverly persuaded his board to approve an unconventional financing method to support his expansion plans.

Insull's Concept of Mass Production and Talent Acquisition

  • Insull is associated with the term "mass production" before it was attributed to Henry Ford.
  • He realized the value of acquiring talent through company acquisitions.
  • Insull's strategy included selling electricity at the lowest possible price to win over customers.

"Insol soon began describing what he was doing as massing production."

This quote reveals how Insull's approach to scaling his operations and reducing costs was a precursor to the concept of mass production.

Advanced Public Relations and Rate Cuts

  • Insull had a sophisticated understanding of public relations and educated his customers.
  • He used rate cuts as a tool for both economic efficiency and public relations.
  • Insull's publications and public appearances helped inform the public about the electric industry.

"The cuts were simply good economics, but they also created immense publicity value."

This quote explains that Insull's strategy of reducing electricity rates served both to enhance public perception and to make sound economic sense.

Insull's Downfall and the Great Depression

  • Insull's companies were significantly leveraged with debt.
  • The Great Depression exposed the risks of high debt levels when refinancing became impossible.
  • Insull and many stockholders lost everything as a result of the company's financial collapse.

"When that happens to Insul, he doesn't have any of the cash, and so he loses everything."

The quote reflects on the critical moment when Insull's empire crumbled due to a lack of liquidity during the Great Depression.

Sam Insull's Reaction to the Great Crash

  • Sam Insull supported his employees with personal funds after the stock market crash.
  • He continued with planned investments, including opening a new opera house and a gas pipeline project.
  • Insull's confidence led to overexpansion and excessive debt financing.
  • He invested $200 million in capital during 1930, mostly through debt.

"The first thing he did was go to the rescue of his employees, who were caught with margin brokerage accounts by supplying him from his personal portfolio, whatever additional collateral they needed."

This quote highlights Insull's initial response to the crash, which was to use his own resources to aid his employees with their financial issues.

"He undertook a huge new venture of a construction on a natural gas pipeline that he was running from Texas to Chicago."

The quote indicates Insull's continued investments in large projects despite the economic downturn, showing his disregard for the potential risks.

"What he did next would suggest that he was possessed of delusions of grandeur."

This quote suggests that Insull's actions were driven by an overinflated sense of confidence and ambition, which led to imprudent financial decisions.

Insull's Financial Decisions Post-Crash

  • Insull returned to debt financing post-crash, buying out a corporate raider's holdings.
  • His company's capital investment in 1930 was largely debt-based.
  • The market's decline required increased collateral against bank loans, risking Insull's control over his empire.

"He's usually dealing with Chicago banks at the time. Then he has to go to New York because Chicago can't fulfill this."

The quote explains Insull's need to seek financial support outside of his usual network due to the scale of his borrowing, indicating financial strain.

"Each drop in the market would force the investment trust to put up more collateral against their bank loans."

This quote shows how the falling market exacerbated Insull's financial issues, as it increased the collateral required for his loans.

Insull's Downfall and Legacy

  • Insull's attempts to buy his own stocks to support the market were unsustainable.
  • False rumors and market reactions led to a significant drop in the value of Insull's companies.
  • By mid-December 1931, Insull's companies' assets were entirely in the hands of creditors.
  • Insull resigned from all his positions and fled, but was eventually extradited and acquitted of fraud.

"In spite of everything he knew, Insull could not, as late as midsummer 1931, bring himself to believe that he was in serious danger."

This quote reflects Insull's denial of the severity of his financial situation until it was too late to recover.

"By middecember, the well had run dry. Every nickel of the combined portfolios of the two investment trusts were in the hands of bank creditors."

The quote describes the complete financial collapse of Insull's empire, with all assets lost to creditors.

"After 40 years, a man without a job, he eventually flees and is extradited back to the United States put on trial multiple times beats every single trial."

This quote summarizes the end of Insull's career, his escape and extradition, and his legal trials, emphasizing his fall from a position of power.

Founders Only Conference and Founders Notes

  • An in-person conference for founders and CEOs is being organized in Austin, Texas.
  • Founders Notes is a subscription service offering access to a valuable collection of book highlights and notes.

"If you have not yet applied to go to foundersonly.com, that's founders with an s."

The quote promotes the upcoming conference, emphasizing the exclusivity and the application process for interested founders and CEOs.

"So what founders notes is, in case you don't know, is for years I have been adding every single highlight and every single note on all the books that I read for this podcast into this app called readwise."

This quote explains the essence of Founders Notes, which is a comprehensive collection of insights and knowledge curated from various books, serving as a valuable resource for founders.

Personal Use of Founders Notes

  • Founders Notes is used daily for searching topics and prompts for thinking.
  • The highlights feed feature provides a curated stream of entrepreneurial wisdom.
  • The service is positioned as a high-value tool for successful company owners.

"I search this thing every day, multiple times a day."

The quote demonstrates the speaker's personal and frequent use of Founders Notes, highlighting its practicality and importance in their daily routine.

"It's like history's greatest entrepreneurs speaking directly to you."

This quote describes the immersive experience provided by the highlights feed, likening it to receiving direct advice from historical business figures.

"This is only for people that have already successful companies because those are the people that are going to get the most value out of it."

The quote clarifies the target audience for Founders Notes, indicating that it is designed for those who already have a track record of success and can leverage the insights for further growth.

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