Over the years, Buffett has referred to the epic battle between James J. Hill and Edward Harriman over the Northern Pacific Railroad (precursor to Buffet’s beloved BNSF) as being one of the foundations of his understanding of investment and a fundamental lesson for all about the vagaries of the stock market. During a recent CNBC interview, Buffett said, “I like history. I like financial history particularly,” and mentioned the Northern Pacific battle, remarking that Alan Greenspan knew all about it but newly minted MBA from the Ivy Leagues did not. He goes on about the Northern Pacific case to say: “It's useful to realize how extraordinary things can happen occasionally … You should know financial history.”
Another recent quote:
“I first read about the Northern Pacific Corner when I was ten years old. When I opened my office on January 1, 1962, I put on the wall a framed copy of the New York Times of May 10, 1901, describing the fateful prior day…” -- Warren BuffettWhat is this story and why does Buffett seem to believe it is such an important lesson? Here is a link to the actual May 10, 1901 New York Times editorial. A fascinating and very short read (editorials today are dull and dry by comparison), it outlines the sense of panic and confusion that the Northern Pacific “Corner” caused as it whipsawed the markets and caused all sorts of follow-on effects. In fact, the trading in a single stock (i.e. the Northern Pacific) around the battle for control nearly brought the entire market to its knees and, along with it, the entire country when the shorts were trapped, panicked and were forced into indiscriminate selling. Confidence was rattled and stocks were selling for irrational prices. Money tightened, markets froze and the trust of the investing public went out the window. Sound familiar?
If you enjoyed the editorial, you will love this book: "Harriman vs. Hill: Wall Street’s Great Railroad War." It was written by a former Wells Fargo executive vice president of corporate communications and thus someone who has first-hand knowledge of a financial panic and irrational selling in a chaotic market (recall that Wells Fargo hit an intra-day low of $8.01 on March 6, 2009).
I was fortunate enough to get a hold of a copy (it has just been released) and devoured it like a non-fiction equivalent of a Dan Brown suspense-thriller. The writing is truly superb but the real benefit for readers of GuruFocus is the poignant lessons the story’s details provide us. Key among them: Despite the chaos and ruin delivered unto many, those few with a proper investing framework, strong convictions and good risk management ended up making a sizable amount of money. SEC oversight and regulations now offer us some protections not available in 1901 (particularly with respect to mandated disclosures of both listed companies and investors taking significant positions therein), but those protections were useless to us in 2009 unless we had the same framework, convictions and risk management as those who made money in May 1901.
I recommend the book and wish you as much enjoyment as I had. Below are details.
Harriman vs. Hill: Wall Street’s Great Railroad War
Author: Larry Haeg
Univ Of Minnesota Press (October 1, 2013)