“It was worth it,” he says.2 He was thirteen, and he had learned a lesson about high demand and short supply.
The way Bruce fi gured, rich people
were probably no
smarter than he was, they just had knowledge he lacked.
Looking at how he went after the knowledge he sought will illustrate some of the learning differences that matter. One, of course, is taking charge of your own education, a habit with Bruce from age two that he has exhibited through the years with remarkable per sis tence. There are other signal behaviors. As he throws himself into one scheme after another, he draws lessons that improve his focus and judgment.
He knits what he learns into mental models of investing, which he then uses to size up more complex opportunities and fi nd his way through the weeds, plucking the telling details from masses of irrelevant information to reach the payoff at the end. These behaviors are what psychologists call “rule learning” and “structure building.” People who as a matter of habit extract underlying principles or rules from new experiences are more successful learners than those who take their experiences at face value, failing to infer lessons that can be applied later in similar situations. Likewise, people who single out salient concepts from the less important information they encounter in new material and who link these key ideas into a mental structure are more successful learners than those who cannot separate wheat from chaff and understand how the wheat is made into fl our.
When he was barely a teenager, Bruce saw a fl yer advertising wooded lots on a lake in central Minnesota. Advised that no one ever lost money on real estate, he bought one. Over four subsequent summers, with occasional help from his dad, he built a house on it, confronting each step in the pro cess one at
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a time, fi guring it out for himself or fi nding someone to show him how. To dig the basement, he borrowed a trailer and hooked it up to his ’49 Hudson. He paid 50 cents for every load his friends excavated, shovel by shovel, and then charged the own er of a nearby lot that needed fi ll a dollar for it. He learned how to lay block from a friend whose father was in the cement business and then laid himself a foundation. He learned how to frame the walls from the salesman at the lumber yard. He plumbed the house and wired it the same way, a wide- eyed kid asking around how you do that sort of thing.
“The electrical inspector disapproved it,” Bruce recalls. “At the time, I fi gured it was because they wanted a union guy to do it, so I popped for a union guy to come up from the Cities and redo all my wiring. Looking back, I’m sure what I had done was totally dangerous.”
He was nineteen and a university student the summer he traded the house for the down payment on a fourplex in Minneapolis. It was a simple premise: four apartments would generate four checks in the mail, month in and month out. Soon, besides his studies at university, he was managing the rental property, paying on the mortgage, answering midnight calls over broken plumbing, raising rents and losing tenants, trying to fi ll vacant units, and pouring in more money. He had learned how to parlay a vacant lot into a house, and a house into an apartment complex, but in the end the lesson proved a sour one, yielding more headache than reward. He sold the fourplex and swore off real estate for the next two de cades.
Out of college, Bruce went to work for Kodak as a micro-fi lm salesman. In his third year, he was one of fi ve top sales-men in the country. That was the year he found out how much his branch manager was making: less than Bruce made as a salesman, if he factored in his company car and expense account. It pays better to be a rainmaker than a manager:
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another lesson learned, another step up Bruce’s winding stair.
He quit to join a brokerage fi rm and sell stocks.
From this new vantage point, more lessons: “If I brought a dollar into the fi rm in trading commissions, half went to the fi rm and half of the remaining half went to the IRS. To make real money, I had to focus more on investing my own money and less on making sales commissions.” Oops, another lesson: investing in stocks is risky. He lost as much investing his own money as he earned in commissions selling investments to his clients. “You have no control of the down side. If a stock drops 50 percent, it has to go up by 100 percent just to break even. A hundred percent is a lot harder to make than fi fty is to lose!” More knowledge banked. He bided his time, casting his eyes about for the insight he was after.
Enter Sam Leppla.
As Bruce tells it, Leppla was just a guy who roamed the Minneapolis skyways in those days, from one investment fi rm to another, talking deals and giving advice. One day he told Bruce about some bonds in a distressed company that were selling for 22 cents on the dollar. “There were twenty- two points of unpaid back interest on these bonds,” Bruce recalls,
“so when the company came out of bankruptcy, you’d collect the back interest— in other words, 100 percent of your investment cost— and you’d still own a paying bond.” It amounted to free money. “I didn’t buy any,” Bruce says. “But I watched it, and it worked out exactly like Sam predicted. So, I called him up and said, ‘Can you come down and tell me what you’re doing?’ ”
Leppla taught Bruce a more complex understanding of the relationships between price, supply, demand, and value than he’d learned from a suitcase full of fi reworks. Leppla’s modus operandi was drawn from the following precept. When a company runs into trouble, the fi rst claim on its assets belongs not
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to its own ers, the shareholders, but to its creditors: the suppli-ers and bondholders. There’s a pecking order to bonds. Those bonds paid fi rst are called se nior bonds. Any residual assets after the se nior bonds are paid go to pay off the ju nior bonds.
Ju nior bonds in a troubled company get cheap if investors fear there won’t be enough assets left over to cover their value, but investors’ fear, laziness, and ignorance can depress bond prices far below the worth of the underlying assets. If you can ascertain that actual worth and you know the price of the bonds, you can invest with very little risk.
Here was the kind of knowledge Bruce had been seeking.
Florida real estate investment trusts were distressed at the time, so Sam and Bruce started looking into those, buying where they could see that the fi re- sale prices signifi cantly discounted the underlying values. “We’d buy these for 5 dollars and sell them for 50. Everything we bought made money.”
They had a good run, but market prices caught up with values, and soon they were in need of another idea.
At the time, eastern railroads were going bankrupt, and the federal government was buying their assets to form Conrail and Amtrak. As Bruce tells it, “One day Sam said, ‘Railroads go bankrupt every fi fty years and no one knows anything about them. They are real complicated and they take years to work out.’ So we found a guy who knew about railroads. Barney Donahue. Barney was an ex– IRS agent and a railroad buff. If you’ve ever met a real railroad buff, they think it, they breathe it, they can tell you the weight of the track and they can tell you the numbers on the engines. He was one of those guys.”
A central tenet of their investment model was to discover more than other investors knew about residual assets and the order in which the bonds were to be honored. Armed with the right knowledge, they could cherry- pick the underpriced ju-nior bonds most likely to be paid off. Donahue checked out
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the different railroads and decided that the best one to invest in was the Erie Lackawanna, because it had the most modern equipment when it fi led for bankruptcy. Hendry, Leppla, and Donahue dived in for a closer look. They traveled the entire length of the Erie’s track to check its condition. They counted the equipment that remained, looked at its condition, and checked in Moody’s transportation manuals to calculate values. “You just do the arithmetic: What’s an engine worth?
A boxcar? A mile of track?” The Erie had issued fi fteen different bonds over its 150 years in operation, and the value of each bond was dependent in part on where it stood in se niority compared to the others. Bruce’s research turned up a little document in which the fi nancial institutions had agreed to the sequence in which bonds were to be paid off when the assets were liquidated. With a fi x on the value of the company’s assets, liabilities, and the bond structure, they knew what each class of bonds was worth. Bondholders who hadn’t done this homework were in the dark. Ju nior bonds were selling at steeply discounted prices because they were so far down the food chain that investors doubted they would ever see their money. Bruce’s calculations suggested otherwise, and he was buying.
It’s a longer story than we have space to tell. A railroad bankruptcy is an astonishingly convoluted affair. Bruce committed himself to understanding the entirety of the pro cess better than anybody else. Then he knocked on doors, challenged the good- old- boys’ power structure that was managing the proceedings, and eventually succeeded in getting appointed by the courts to chair the committee that represented the bondholders’ interests in the bankruptcy pro cess. When the Erie came out of bankruptcy two years later, he was made chairman and CEO of the company. He hired Barney Donahue to run it. Hendry, Donahue, and the board guided the
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surviving corporation through the remaining lawsuits, and when the dust settled, Bruce’s bonds paid twice face value, twenty times what he paid for some of the ju nior bonds he had purchased.
The Erie Lackawanna, with all its complexity and David versus Goliath qualities, was just the kind of mess that became Bruce Hendry’s bread and butter: fi nding a company in trouble, burrowing into its assets and liabilities, reading the fi ne print on credit obligations, looking at its industry and where things are headed, understanding the litigation pro cess, and wading into it armed with a pretty good idea of how things were going to play out.
There are stories of other remarkable conquests. He took control of Kaiser Steel, staved off its liquidation, guided it out of bankruptcy as CEO, and was awarded 2 percent own-ership of the new corporation. He interceded in the failure of First RepublicBank of Texas and came out the other side with a 600 percent return on some of his fi rst investments in the company. When manufacturers stopped making railroad boxcars because they were in oversupply, Bruce bought a thousand of the last ones built, collected 20 percent on his investment from lease contracts that the railroads were bound to honor, and then sold the cars a year later when they were in short supply and fetching a handsome price. The story of Hendry’s rise is both familiar and par tic u lar; familiar in the nature of the quest and par tic u lar in the ways Bruce has “gone to school” on his ventures, building his own set of rules for what makes an investment opportunity attractive, stitching the rules into a template, and then fi nding new and different ways to apply it.
When he is asked how he accounts for his success, the lessons he cites are deceptively simple: go where the competition isn’t, dig deep, ask the right questions, see the big picture, take
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risks, be honest. But these explanations aren’t very satisfying.
Behind them is a more interesting story, the one we infer from reading between the lines: how he fi gured out what knowledge he needed and how he then went after it; how early setbacks helped seed the skills of shrewder judgment; and how he developed a nose for value where others can only smell trouble. His gift for detecting value seems uncanny. His stories bring to mind the kid who, waking up on his fourth birthday to fi nd a big pile of manure in the yard, dances around it crying, “I’m pretty sure there’s a pony in there somewhere!”
All people are different, a truism we quickly discern as children, comparing ourselves to siblings. It’s evident in grade school, on the sports fi eld, in the boardroom. Even if we shared Bruce Hendry’s desire and determination, even if we took his pointers to heart, how many of us would learn the art of knowing which pile had a pony in it? As the story of Bruce makes clear, some learning differences matter more than others. But which differences? That’s what we’ll explore in the rest of this chapter.
One difference that appears to matter a lot is how you see yourself and your abilities.
As the maxim goes, “Whether you think you can or you think you can’t , you’re right.” The work of Carol Dweck, described in Chapter 7, goes a long way toward validating this sentiment. So does a Fortune article of a few years ago that tells of a seeming contradiction, the stories of people with dyslexia who have become high achievers in business and other fi elds despite their learning disabilities. Richard Branson, of Virgin Rec ords and Virgin Atlantic Airways, quit school at sixteen to start and run businesses now worth billions; Diane Swonk is one of the top economic forecasters in the United States; Craig
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McCaw is a pioneer of the cellular phone industry; Paul Orfalea founded Kinko’s. These achievers and others, when asked, told their stories of overcoming adversity. All had trouble in school and with the accepted methods of learning, most were mislabeled low IQ, some
were held back or shunted into
classes for the mentally retarded, and nearly all were supported by parents, tutors, and mentors who believed in them.
Branson recalled, “At some point, I think I decided that being dyslexic was better than being stupid.” There, in a phrase, Branson’s personal narrative of exceptionalism.3
The stories we create to understand ourselves become the narratives of our lives, explaining the accidents and choices that have brought us where we are: what I’m good at, what I care about most, and where I’m headed. If you’re among the last kids standing on the sidelines as the softball teams are chosen up, the way you understand your place in the world likely changes a little, shaping your sense of ability and the subsequent paths you take.
What you tell yourself about your ability plays a part in shaping the ways you learn and perform– how hard you apply yourself, for example, or your tolerance for risk- taking and your willingness to persevere in the face of diffi culty. But differences in skills, and your ability to convert new knowledge into building blocks for further learning, also shape your routes to success. Your fi nesse at softball, for example, depends on a constellation of different skills, like your ability to hit the ball, run the bases, and fi eld and throw the ball. Moreover, skill on the playing fi eld is not a prerequisite for becoming a star in the sport in a different capacity. Many of the best managers and coaches in pro sports were mediocre or poor players but happen to be exceptional students of their games. Although Tony LaRussa’s career as a baseball player was short and un-distinguished, he went on to manage ball teams with remark-
