Investment Theme: The podcast discusses the book "Railroader," focusing on Hunter Harrison's transformative impact on the railroad industry through precision scheduled railroading, which significantly improved operational efficiency.
Market Insights: The consolidation trend in the railroad industry is highlighted, with potential mergers like Union Pacific and Norfolk Southern, and the strategic maneuvers by major players such as Warren Buffett's BNSF.
Company Discussions: Hunter Harrison's leadership at multiple railroads, including CN and CSX, is examined, showcasing his ability to drastically improve operating ratios and shareholder value, despite his controversial management style.
Opportunities and Risks: The podcast explores the balance between operational efficiency and customer satisfaction, noting Harrison's approach often led to customer and employee dissatisfaction due to his aggressive cost-cutting measures.
Activist Investing: Bill Ackman's involvement through Pershing Square and Mantle Ridge in railroad investments is discussed, illustrating the role of activist investors in driving corporate change and the financial strategies they employ.
Leadership and Management: Insights into board dynamics and CEO succession highlight the challenges and strategies involved in managing large corporations, particularly in capital-intensive industries like railroads.
Key Takeaways: The discussion underscores the importance of strategic leadership and innovation in transforming traditional industries, with Hunter Harrison's legacy serving as a case study in effective, albeit contentious, corporate management.
Transcript
You're about to listen to the yet another value podcast with your host me, Andrew Walker. Today is my monthly book club with my my friend Burn Hobart. He writes the diff. He's one of my favorite people to read. I think his newsletter has a higher open rate than any other thing that hits my inbox. So, I I really enjoy talking to Burn. We talk about the Railroader. The reason we're talking about it, as we'll discuss, is there's been a lot of railroad activity. So, we kind of thought we'd read something topical. Really interesting book. I think both of us were surprised by kind of our takeaways and how we thought about it and the takeaways from the book, but really interesting book. I'll include a link in the show notes if you want to go check out the book or anything, but I I'm excited to get to the monthly Finchwood book club. But first, a word from our sponsors. Today's podcast is sponsored by well, kind of Alpha Sense, but also kind of me. Look, I I've been talking about it on the blog for a while, but podcast number 333. I'd encourage you to go listen to it. It's me and Ardan Faulen talking about the how to kind of improve and perfect the craft of investing. I think it's a fantastic podcast. I had so much fun. We got great reviews on it. And then alongside that podcast, we did a webinar with AlphaSense talking about using two tools that I think have kind of revolutionized investing for especially small investors over the past 10 years. Expert networks and AI. Alpha has a burgeoning set of AI tools and obviously one of the reasons I got involved with Alphus is because of the expert calls. So it I I think you're really going to enjoy that podcast. I think you're going to learn a lot from that. I think you're going to learn a lot from the webinar. I'd encourage you to go the podcast is always free. So encourage you to go listen to episode 33. But the webinar is free. All you have to do is follow the link in the show notes. Go sign up and you can listen to us talking about a tool that I think will really improve anyone as a fundamental investor. So that is the sponsor of this podcast. And thank you for listening. And we'll get to the full episode now. All right. Hello. Welcome to the another value podcast. I'm your host Andrew Walker. With me today, it's my co-host for our monthly book club, Burn Hubert from The Diff and Capital Gains. Burn, how's it going? >> Going great. >> Awesome. Well, today I'm excited to talk to you about we we read the Railroader. That's the name of the book, right? I can't even remember the name of our own book. >> It's just Railroader. Yeah. >> Yeah. Railroader the it's cleaner. >> Railroader. This is the history of Hunter, the CEO who ran four. Like there are only seven class one railroads and he runs four of them. He gets involved with Acman in the book. He's basically the railroad goat, right? I think people widely regarded them and we decided to read that because railroads have been in the news. You know, when we started doing this, uh, there were lots of rumors that Buffett's Railroad, BNSF, and CS CSX would merge because Union Pacific and Norfolk Southern announced the merger about a a year ago, so about a month ago. So, we're seeing the railroads kind of start consolidating again and we were like, hey, this will be a really interesting book to talk about with that backdrop. And you know, just as we were getting ready to record the I think it was Bloomberg who reported that Buffett is >> Buffett's not bidding. >> Say again, >> he's not bidding, right? >> He's not bidding on CSX, but they announced a partnership at like three different pl places or something and there should be synergies there. So everything's all the chess pieces are still kind of rearranging. Anyway, that's the overarching theme of the book and what we thought. I've got tons of questions. I thought this was very interesting, but I'd love to just start overall. Burn, what were your takes on the book? The railroad course you want to go. >> So, it was one of the things about the book is that I feel like he was either born in the exact ideal generation or the wrong generation. Because when you read about Harrison and his management style, he is extremely blunt. He's very first principles driven. not in the sense of he just imagines there's a way the business could work and he makes it work that way but he's he's clearly someone who spent a lot of time looking at the spreadsheets but also looking at the physical infrastructure and just asking himself is there a better faster way to do this and I feel like he was actually really born to be a very like a staff software engineer at AWS or um Eddie or at Google or some hyperscaler because he just has this very linear way of thinking about things but he's also able to just abst abstract away the way things are done and ask if there's a better way to rearchitect the whole system. So, um it's kind of a spoiler alert for the book, but the historical way that the railroads worked as it's portrayed in the book is train arrives, it gets filled up with stuff, when it's full, it departs, and it's kind of the customer deciding when it fills up. And the railroad is trying to get trains to where there is demand. And you know, obviously they're scheduling this stuff, but the schedule is kind of a work of art and they are always willing to delay things in order for someone to add one more car load worth of stuff. And that of course encourages the customer to take their time. They don't have a really strong incentive to optimize around the train schedule because the train schedule is whatever they need it to be. And Harrison's idea is no, let's actually just set a schedule and if the train's not full, we will leave. And then you know exactly how many trains you have and you have a much better sense of where they are, how many of them you need, how many backups you need, all of that stuff. So suddenly the network actually becomes more tractable. And what's weird about that is there are all these anecdotes in the book where it's clear that he just has insane working memory specifically around managing railroad networks. So there's the anecdote at the beginning where he um I think does it say explicitly he likes to get hotel rooms when he's traveling for business? He likes to get a hotel room with a view of the railroad yard. >> That he'll get He'll call up the rail manager and be like, "Hey, I see like the black engine over there isn't moving. Why is that engine not moving?" >> And then there's another point later in the book where he actually pulls an allnighter just being the dispatcher remotely for um for a different location. He just spends the entire night doing that even though he is the CEO. >> Not he's the CEO. He's 60. I think he's in his late 60s at that point. he's having some health problems and he just casually pulls in all night as a dispatcher and he s says like dispatcher listen up I'm gonna make this work. Yeah. >> Yeah. So he's he's really good at just the the granular day-to-day details. And you feel like people like that they end up doing very well for themselves and they hit some level where the the thing they're managing it's at their maximum working memory and if they try to do a little bit more things would start to break. and he just seems to be able to toggle back and forth between here's what's happening over the next 15 minutes in this physical place versus here's what's happening over the next 50 years in the railroad business. And he does talk about how with railroads um he talks about the capital intensity and how um railroad capital just depreciates more slowly than trucking. Um there's like one of the threads in this book is just how much he hates and resents the truckers because they clearly have what is in many ways a better business or certainly a much easier to manage business. And then he realizes that railroads do have this unbeatable competitive advantage of if you want to move a ton mile of cargo over land and you have train tracks between where it is and where you want it to be, there is no cheaper way to do it. So you have that cost advantage and then you have all this capital and he has some line about how you are the capital investments the capital allocation decisions you make now are the ones you live with over the next half century. So you have to be really confident that you know what you're doing. And but that's also what he's trying to do in with his management approach is make that a more tractable problem. And if you have more of a sense of what utilization really looks like and where it trends and where it peaks, then you actually can afford to buy more equipment and buy more trains or repair the ones that you already have and so on. You you're not flying blind as much. So, it's in some ways it's also a book about just the the um uh the capital asset pricing model and how you get much like you can really lever up if you actually know more about what your returns are and how bad they how good or bad they'll be. >> Let me let me go high level, right? There there's lots of themes in this book. I found this book fascinating. In particular, I was really surprised by this and I want to talk about this in a second with you. I thought this was the best book I've read in a long time for it just had these casual throwaways about how CEOs and boards work together and everything and how activists it would just have these casual throwaways. I was like I read entire activist books and I never hear insight like that. So I want to put a pin in that for a second. But if I just high level back up to you I'd say I read this book and the whole book is about Hunter Harrison is the railroad goat. When Aman wants to buy and Aman in the back half of the book his presence is huge. When Ame wants to buy a railroad, he goes and gets Hunter Harrison. He gets his railroad to basically pay uh I think this is CN pays CP $50 million to get him out of his non. >> Yeah. And then when C when Hal spins out Aman and wants to go get a railroad, he guarantees Harrison like, you know, over a hundred million. I think he guarantees Harrison $100 million and they pay CP in this case $100 million to get him out of his contract. So people are throwing around, you know, forget AI researchers. These are huge sums of money to get this one man and the whole book is he's got this photographing. I want to ask you is he that good? Because the whole book is dedicated to him but throughout the whole book you'll see stuff like hey he takes their operating ratio down from 90 to 65 but you know I keep seeing every other peer out the corner of your eye is at 70 and I keep seeing oh the stock went up 4x in this time period. I went and looked at the stock price of all the other peers in the time period. They're better. Harrison's better, but it's not like, you know, you're not screaming better. So, I just want to do you think that this is a case of this one man's brilliance, or do you think this is a case of, hey, he had a lot of tailwinds. The railroad industry for a lot of reasons was getting better from the early 90s to the 2010s and he was really riding that. >> Yeah, it's a when I mentioned earlier, you know, I wasn't sure if he was born in the exact right generation or the wrong one. There's some line where he gets his first job at the Frisco and he's something like the second person to be added to the team and I don't remember how absurdly long it was. I want to I'm gonna go back and look underlined this. Um maybe I did. Hopefully I did. Um >> well you look I I'll just throw out a random at the beginning he like he gets married to his wife and he's married to her for about 50 years but they get divorced for a few years in the middle and it's like oh yeah he would go to a bar and get on like threeon-one fights and wake up in a hospital room. You're like what? this man would become the CEO. This is crazy. It >> is railroad business and apparently there are all these anecdotes in that business about just it it seems like the last gasp of a certain kind of bluecollar culture of just not just like you you should act as if you could throw hands if you're mad at someone, but no, you you will probably get into periodic fist fights at the office. I love he joins CSX and this is completely different than throwing hands. But he joins CSX like wait our rule book has policies on napping during the day for our workers. We're not taking naps during the day and it's just like that is just true old blood. We are monopoly. We have railroad tracks. People will go on them. >> Yes. So here we go. Um he joins at the end of 1963 and he says he is the first or second person hired in his department at Frisco since the end of the Second World War. Yes. Yes. >> So, so there's some industries go through that, especially industries where they were growing fast and then they're in decline where the last class of like the last large class of people who got hired into that industry. Those are the people who end up running it. And once growth slows down, average age goes up. Everyone's really cautious. The people who move up in that business are the ones who were more cautious, the ones who did not want to spend and did not want to change things and could kind of manage the decline well. And yeah, you you eventually reach this point where all the bad trends are exhausted. Um like coal was such a big part of the railroad business for a very long time. Railroads are great for transporting coal, but we just don't want to be transporting as much coal as we used to. So that number always ticks down and you have competition from trucking. And then he did seem to get into the industry probably before it reached equilibrium, but he got into the industry at a point where they were very close to equilibrium with trucking. And you know, maybe things like the oil shock where it does affect trucking more than railroads. Maybe that kind of thing helps out early in his career where he can actually, you know, that's that that might have been the first time in many decades that suddenly the phones are ringing again with customers they haven't talked to in a very long time saying we just we can't afford to be paying people, you know, with gas expensive. We can't afford to be paying people to truck this stuff around. Let's let's put some of it back on trains again. So, he he had some of those advantages. Um, like I'm sure there's some level of, you know, PR and there's there's some amount like he has to present himself as a smart guy. And I'm sure you know he surely after the first time that he realizes that people are going to pay to cash him out of his non-compete, he realizes this is a lot of his net worth comes down to how much can he convince forwards that he is just the railroad messiah versus being a good you know maybe the best of the rail and CEOs but best among a pretty comparable pure set. There's an interesting anecdote when sorry which one was the one he did with the ACman act was CP right or was it CN I can't remember which the Canadian Railroad >> I think yeah I forget I I think it's CP yeah >> so there's an interesting he comes in Aman runs this campaign in 2011 they get Harrison installed in 2012 Aman retires from the CP board in 2016 and when Aman's getting ready to retire that before anything even happens the CP board while Harrison is still the CEO sends Harrison sent a letter that's like, "Hey, we just want to remind you of your fiduciary duty and obligations to CP, right?" So, and when you read the book, you it does not say anything on tour has happened then. But I read that and I was like, "Oh, like a I'm sure the board has in back their mind this has happened before." But at this point, Harrison's like in his early 70s, mid70s. His health is declining. And I I was just, you know, when I read that, I was like, "Oh, this is a board who there there had to be a little smoke here for them to send the the CEO a letter being like, hey, you can't go talk to competitors and stuff." So, I I do think it kind of underplays how much Harrison was like, "Hey, I am looking for the next payday. I am looking to level up. I am always looking for someone." And the the biggest through theme of the book, customer complaints, employee complaints, and Harrison looking to get paid. So it very much matches up personality. >> Yeah. Like I think there's sometimes the way that someone makes a lot of money is realizing that an industry's net promoter score is actually higher than it needs to be. And especially if it's a monopoly, high net promoter score is just the raw material that you turn into high free cash flow by spending less on whatever it is that makes customers so happy because they have nowhere else to go. And you know that's that's quite cynical, but it's also quite true. And um it is it is just the case that the railroads have this really valuable asset route network. It's very hard to build new railroads in the United States today. So we pretty much are stuck with whatever rights of way we have. In fact, it's it's hard enough to build stuff that um you there there are cases where people used railroads um like they acquired railroads just to get the rights of way in order to build fiber and things like that. So um that >> you know something I learned recently because of cogent sprint. I did not realize this. a sprint stands for Southern Pacific Railroad internal network transmission or something, but it's because all of their rightsways that form the network were built along the railroad. I did not realize that. So, you are Yeah, exactly correct. >> Yeah. So, so just the ability to move something in a straight line across the United States is this incredibly valuable asset. The the railroads have ended up owning that asset. Um, and you know, you can you can almost say that depending on your discount rate, maybe they're actually getting what they really deserve for the fact that the US has a really good freight network and that railroad investors did very badly for a couple generations in there. Like even going back to the late 19th century, you have these periods where a quarter of US track miles are in bankruptcy or um, you know, passenger traffic, I think, peaking in 1913 and just declining forever after that and fre traffic also having its ups and downs. So, um, in some ways the railroads were kind of subsidizing the rest of the economy for a very long time and now they're they're taxing it again and we'll we'll see where things equilibriate after that. Um, you could you can imagine a lot of different directions for for things to go after that. But, um, yeah, so he's he's very much out for himself. He does realize that uh there you can you can be a little bit relaxed on safety. There was one bit where they talk about the safety numbers and actually the book presents it in an interesting way because it says that I think it's something like per worker hour accidents went up a little but per cargo ton mile accidents went way down. So getting more productivity out of each worker and then the workers are facing you know a very slightly elevated increased risk but there's more money to go around. It is a job where you kind of expect there to be physical risks and he he certainly is out there, you know, getting getting grease on his his shirt and, you know, actually moving stuff around out there. So, he's, you know, I'm sure the CEO um has has fewer on the job accidents that the average worker just on the line, but he's he he was also that average worker when he started. He he did work his way up from the very bottom. >> Forget about from when he started. I mean, there are multiple stories in here. And again, I'm sure part of this is building road. And I think the interesting thing when you read this is uh how he's setting the culture, right? Like C CSX, he does he's not traveling that much anymore, but he's still setting the culture. But there's multiple stories. Hey, one of the tracks is underwater and everybody says it's not safe to run a train over. So he says, "Okay, cool. I'm going to hop in that train and I'll go take it over myself and we'll get this network back on track." There's a story of a railroad crew. This is towards the end, a railroad crew that's trapped somewhere. and he like shimies over a bridge hanging onto the bridge to go tell them, "Hey, help is on the way and stuff." So, this man is like literally putting himself in harm's way and it's just an interesting way of thinking about setting the culture and everything there. But, let me go back to the unless you have a thought on the uh culture. I want to go back to the customer point. >> Yeah. Like on on the culture stuff and you know on how he presents himself versus how good he is. Like I think I think in a lot of cases what people do if they are a celebrity CEO and I think within the context of railroads he definitely counts. Although I like I I had not really I hadn't read much more than you know occasional references to his name before I picked up the book. >> Um >> I knew Railroads had done well. I didn't realize there was a guy who kind of symbolizes this. But one of the things I was thinking about when I was reading it is um there's this book by Connie Brookke about um uh what's his name? Steve Ross of Time Warner. And um it's it's a really good investigative journalism type book. and she talks about how um he had this whole persona of he's always always happy, always friendly, and always really lucky. And that um is he talks about how he would take his friends to Vegas and he would just tell them, "Hey, I'm going to go gamble for a while. See you later." And then he'd come back with a huge stack of chips. And I forget if she says that someone caught him doing this or just they had this realization of he's not actually playing blackjack for a couple hours and making $50,000. like he's just buying a bunch of chips and he's going to return those chips later. And it it actually seemed like, you know, a really clever way that you could make yourself, you know, you could just be you could produce good vibes if people always have these stories of he goes to Vegas and he's just a really lucky guy. He gamles a lot and he always comes out ahead. And if he's running a really levered media conglomerate that sometimes does very strategically messy deals, it makes sense to have someone who's just very lucky in charge of that. So, I think for Harrison, he he might have looked at those situations where he's like, you know, he could use the walkie-talkie probably or he could yell. But if he actually crawls over there, that's the story that people will remember and that's the story they will tell and that means that that's that's who he's got to be. So, he's kind of, you know, maybe this is a story about someone creating a kind of exaggerated brand and then actually living up to it and actually pulling it off. >> I I I love your point though. The difference would be like with uh the Warner Brother guy you mentioned, he has to or sorry, Time Warner, he all he has to do is pull 50,000 out of his bank account and he takes he runs the risk that he's mugged and he lose $50,000. Right. Where with Harrison when he goes on that under that train and the tracks underwater. He even says, "Oh, I did the whole thing standing outside the engine because if the train derailed, I was going to jump off it." So he literally is putting his life like a little bit more risk. But I I love that point on culture. Let me just go back to the customer complaints and the complaint complaints really quick. You know, you read this book and I wish it had dove more into them instead of more just like reporting like here's what they said. Do you think they were real or not? Because here's the fact. If you lay off, he's laying off 20% of the workforce at all the places he goes. You're going to have some complaints, right? And when you're dealing with the unions, you're generally going to have some complaints. And when he's increasing prices on customers, you're generally going to have some complaints. But do you think these were anything more than just like every as you said every monopoly is going to have some complaints and maybe the service was he he would argue his service was above average right there's the thing is littered with reports of customers emailing him and him getting customers to improving service levels to customers. Do you think like there was actual statistical significance? Hey, this railroad was materially worse for employees, customers, whatever it is. Or do you think this was just kind of, you know, hey, he's the top guy and every top guy people are going to take shots at. >> Yeah. Like I I just feel like a lot of this is just people doing their jobs. You know, the union the union collects dues and your your job if you're representing the union is tell the boss we need more money, we need more job protections and we need the job to be safer and you know, whatever else is on the wish list. Like that is that is your job. And um so you know and then for the customer like the customer's job is periodically call up suppliers and try to beat them down on pricing or get them to throw in some extra service. So everyone's kind of doing what you expect them to do. Um and it could be I I think some of it was that the railroads were sort of enabling bad habits on the part of their customers. Yes. Um less so for the employees. I think it's just like it is the nature of a capital inensive network-based logistics business that the individual workers have a lot of responsibility to do their job right but it's really tough for them to figure out how their whole job would be rearranged and so um like that it's just a more hierarchical organization you do want that kind of thinking happening at particular levels of the orc chart so um yeah I don't I I don't think that they they would really be in a position to um to push back on that and they can certainly feel salty about if um if accident rates go up on on a per worker hour basis and of course that's how the workers the workers are not thinking well I I am slightly more likely to you know have a broken bone or or potentially die on the other hand I am responsible for you know for shipping more more cargo tons more miles than I otherwise would have been so it's all fine um there is room to pay people a little bit better if there's more throughput especially in a business with lots of fixed costs and you know of course a lot of those returns acrew to the shareholders and a lot of those returns also acrew to um Hunter himself, but I'm sure some of that it it at least makes it less likely that someone gets laid off because there just is not enough money to support them if there is in fact plenty of money to support them. So, um that part, you know, it's you just have to figure out what the trade-offs are. And I think that given that people like Andre Harrison exist and given that they do rise to the top of different organizations, what it probably means is just you want to make sure that laws on workplace safety are written very clearly and set exactly what we as a society think is an acceptable level of physical harm in order to enjoy all of our material abundance. Um, so that that part I I wouldn't I wasn't super surprised by the the worker complaints. I think with the customer complaints though, a lot of it is just that if you were used to this idea that the railroad is going to be your logistics backs stop and if you messed up something earlier in the week and you know one shift was not as productive at the factory as you expected and therefore the shipment you thought was ready on Thursday is not going to be ready until Friday. Um you know if that if that becomes your problem because the railroad is now insisting on sticking to a timetable that just complicates your life. But what it means is that he's basically taking his approach to running a railroad and making it contagious. And this is like this is kind of the story of globalization. Um it like a lot of US business norms and then US cultural norms just get accidentally imposed on other countries because we need our counterparties to understand things in the same way that we do. And so we need a lot of standardization in terms of the rules that people follow and the expectations they have. So, um, and because the US is that economic center of gravity, the US just ends up deacto writing a lot of those rules. And it doesn't feel like that because it feels like if you're an American company and you order something from a different American company and then you order something from a Chinese company and you don't get what you were expecting, you know, you had the same parameters and they just interpreted it differently. To you, that just feels like bad customer experience. To them, it probably feels like these customers are really needy and they also don't know what they're asking for. And um it's really whoever whoever has the most financial stake in getting the transaction to happen is going to be the one who adapts. And in the case of the companies that were using the railroads because that uh cost gap was so big between the railroads and the trucking companies. I think the railroads basically got to write the rules. But I also think like you can so you can tell this whole story which I think is consistent with the kind of generational story. It's consistent with your observation that hey all the other railroads did fine too. You could just have made a sector bet. It's not just about this one guy. Um I think that you probably um it was it was probably the case that just the industry was at this kind of inefficient equilibrium where railroads were somewhat over capitalized and therefore they always had some spare capacity and so it wasn't they didn't have a sense of urgency around maximizing efficiency at all times and maximizing utilization. But once you have someone who actually thinks they can make it happen, it does happen and happens pretty much everywhere. There was that note um there's a footnote that talks about two of the other um railroads adopting precision scheduled railroading and one of them does it in September of 2018 and then the other one does it in October of 2018. So once once people realize that that's the way things are going to go that's just the way they have to go. You >> you jumped on my next point. You know I was wondering if one of the reasons that other stocks other road stocks and again his is the best but it's not like screaming higher like you would kind of think just based on the reputation everything. I was wondering if one of the other reasons was, hey, he gets in there and he does it at two railroads and then everybody starts saying, uh, look, he you've got to get on board with what he's doing or else we're going to fire we're going to fire you and literally replace you with him. And like it's not lost on me. The only one that kind of doesn't really start improving is CN where everybody starts everybody has said for years and I remember this from when I was at in a consulting firm before he took over. Every said, "Oh, the reason it doesn't work there is they're going through the Canadian mountains and it's really steep and everything. So, they have a structural disadvantage that explains why they're O." So, everyone else like kind of has to get on the program because he in the same way Roger Bannister, I've been using this all the time, Roger Banister proves you can run a 4-minute mile and then the 4-minute mile starts falling like crazy. He proves you can take your O from the '9s to literally the 60s and then everyone else might not quite get to where he is, but everyone else is kind of getting to the high 60s, low7s on their own once they follow this path. So that's it. I want to switch gears completely. I have some other stuff I want to talk to you about, but the back half of this book is where most of the meat is and it's really interesting and Bill Aman, Persian Square, and Manel Ridge are huge players in that. And I I just want to ask, you know, when you read this book, Aman's obviously still in the news all the time. When you read this book, how do you feel Aman, Persian Square, and uh Mantel Ridge come out out of this book looking? >> I mean, they they look kind of like the generation of value investors who spent a lot of time reading 10Ks and buying cheap stuff, realized they had to do a little bit more than that to make a high return and got into various flavors of activism. Um, so and I think there's, you know, there's some level of pretty mercenary behavior and that's what you expect. Like it's it would be very very odd to expect the hedge fund to be the the participant in this drama who's kind of best behaved, most friendly. Um, but I think they also just saw that there was this opportunity. They saw that there's there's this set of assets that can be used more efficiently and there's a way to make that happen really effectively. And you I think sometimes you to your point on Zuckerberg and how much he pays for AI researchers sometimes that's the actual insight you have to have is you can if you think that there is a billion dollar opportunity then the difference between paying someone $10 million a year or $50 million a year to make that opportunity happen is actually pretty immaterial. But it is weird to be the first person saying we will just literally pay you five times as much as you were making before when you thought that what you were making before was absurd. So, um, that's just sometimes how things go, especially if you have there's a fixed asset and every in every uptick in utilization is a lot closer to pure profit um than than just what the average of average performance of that business is. Like it does make sense that if you that you can transform these companies and that if you want to do that and you want to do it in a d-risk way, you probably want someone who has successfully derisked it before. I think it was also just impressive that they I mean in some ways the the person who comes out of this book looking the most impressive might actually be Buffett because he figured out he's he'd been presumably he's been reading railroad annual reports since you know he's been reading the reports for half a century before he decided that BNSF is finally cheap enough that we could actually buy some of this thing and eventually bought all of it. Um, so he he figured that out early and but but I think people still had to like you could still look at that deal and say he picked a specific network, he bought a specific railroad and we can't just assume that the same thing works for every other railroad. And I guess Aman Aman had the view that yeah, it probably does work for every other railroad. And that view worked. But I'm I'm curious about what you thought of just all Yeah. all the boardroom drama, all the 13Ds, all that stuff. So the one the one story that really jumped out to me was there's uh so it after they've taken over uh CP they make a bid for Northfor Southern and Aman comes on he says look the bid for Northfor Southern has to make sense to my eight-year-old daughter and then he launches into like this crazy complicated bid where Harrison they'll throw CP into a blind trust Harrison will go become the CEO of Northfor Southern there's a CVR that pays out Northfor Southern if the stock goes down and all this type of stuff. And I was just like just classic Acman. Say something's going to be simple and then launch into things and they say uh the IR firm had never been inundated with as many calls as with a CVR, which I love CVRs, but I that was my personal favorite. I I'm with you. I I hadn't thought about the Buffett thing, but the Buffett thing looks absolutely incredible in hindsight, right? Because And also, it might be because I I was literally mapping Harrison's at each of these companies for about five years. So, I was matching railroad returns over over five year periods. I was like, "Oh, railroads start really taking off right around when Muffin starts mine." I'm kid there. There he is. He has none of the drama of Yeah, I I think Aman and Hill come out I think they come out incredible in this, right? Like they a the investment in the railroad is great. They generally uh they generally win on the strength of their arguments and the logic. I think they generally checkmate the board despite a lot of uh you know they talk about Canadian pride versus Americans coming in a lot Hal comes out great you know a lot of his concerns when him and Harrison take out CSX as kind of Harrison's last dance a lot of the concerns Halal expresses actually come to be real concerns and I'm particularly thinking about Harrison just says get me in there and I'll start turning the railroad around and hal's like no man we we need control of this board so you've got the backing to do what you want to do Harrison ignores him and that comes to bite him a few times. Hal has a very I I mean you tell me how many times has a hedge fund said I'm going to write an insurance policy for the CEO. I'll get I'll pay $100 million to buy him out. We'll be on the hook for that if we can't get him installed at the CEO. By the way, the new company, you know, the first thing they're going to have to do is pay the hund00 million buyout and they might try not to pay it because it's not going to him, it's going to us because we make them all. They have to pay that plus the new CEO. I I think he comes out looking incredible in terms of um creativity investment. I I think >> he really turns it into a trade, you know, he turns it into a trade. He says, "Okay, there's there's a piece of this risk that everyone is reluctant to take. Everyone no one really wants to underwrite it, but we think it's underwritable and we'll just we'll be on the hook for it in order to make this next thing happen." So it is in that sense it is just the liquidity provision function of um the financial system in general that you look for cases where the reason something isn't getting done is that there's some risk that nobody really wants to quantify and where the bid ass spread is too wide for anyone to really transact. You find a way to shrink that bit ass spread that often means taking on the most unloved piece of the transaction and just making that yours at at whatever price makes it make sense. And it is it is also evidence that it's it's great to have a large balance sheet. Like it's great to be able to put just a lot of money into the equity of something if you think that you're going to be pushing um if you think you're going to be driving a lot of the upside. So um and I guess like you could you could definitely imagine the the you know feeling a little bit salty that they were mostly riding along with regular shareholders. Someone could have just seen the same 8K that is the result of their many months of effort and bought the stock and gotten most of the returns from >> there. There are a lot of people who there there's a lot of stories of people see in the industry see oh Hunter is going to take over that railroad and they buy they buy the stock and they make you know basically the same returns as Aman and them. So pretty interesting. Let's go to some of the I I'd love to build on that with some of the stories through the book about board dynamics and activism. You know, I thought the most interesting one that jumped out to me was early in the book, I think it's the early 90s, there's a CEO who's about to leave, and he goes and he just says, "Hey, our long-term targets are," I'm making numbers up because I didn't write the specific, but he's like, "Hey, our long-term targets, we're going to get down to a 65 and we're going to be growing 5% per year." And then he leaves and all his lieutenants are looking around like, "What? There's no chance on earth we can do that." And there's lots of stories like that with director and board dynamics and stuff. I just like did this give you any insight into and obviously a railroad is different than a tech company, but did did this give you any kind of new or unique insight into the dynamics between CEOs, their lieutenants, their board, all that type of stuff? >> Yeah, I it it felt like it was a kind of uniquely weird sort of internally really hostile industry sometimes. Um, so I wasn't sure how much to read into that and but I think just general questions on CEO succession and what what should a CEO what should a lame duck CEO do? What should a former CEO say or not say? You know, a lot of these norms, you hear about the norms and they do seem kind of weird and specific and constraining like former CEO should not talk about the person who took over afterwards other than to be kind of blandly generically positive about their protege, etc. But then you you definitely see in this like here's here are all the frictions that can show up if someone decides that his last act as CEO is to put out some impossible target or you know say something weird to the media or whatever. So, um, yeah, you can you can definitely see why. And and I think what that blows back into is actually some of the comp stuff where, um, people get outraged about golden parachutes and things, but a CEO who doesn't really want to be running the company or who wants to be running it in a way that the board doesn't like is a huge liability from the perspective of the board. And the board's job is to steward the company. And so just like Aman and Hilal are willing to take these big risks on getting the deal done where they will be liable for a lot of the shortfall if it doesn't happen. Um sometimes when boards give someone a very large bonus in order to get them to leave. It's basically paying them just not to blow up a deal or not to blow up a CEO transition that uh that is actually important for the company. So you Yeah, it uh it made me feel, you know, slightly slightly better about overpaying incompetent CEOs because you're often paying them specifically to make them go away and be incompetent in in running someone else's company instead. >> The the one that really jumps out to me is uh Hunter's first diance with I I guess this would have been CN Canadian National where he leaves in 2010 and he he's taken them up. You know, he's done a great job. Everyone says he's done a great job and he he's ready to stay and the board's like, "Actually, Hunter, it's time for you to go. We need to get get you out of here." Which, you know, how many times do you see a star a rockstar CEO who's taking the company further than anyone thought it could get in terms of operating margin, stock prices, stocks screaming higher? How many times do you see the board say, "Nah, we're good. Let's move along here." And it reminded me in many ways of uh sports coaches. You know, there are these coaches who are so grinding. Tom Tibido with the Knicks who got fired this season after taking the Knicks to the Eastern Conference championship. Remind me they're so grinding they win and everybody loves him for a year or two and then after three years every's like I'm kind of done with this guy man. Let's it'd be more fun to not win and like not be around this guy. And I feel like Hunter is kind of like that. And it it was just an insight for me into I think of these boards as honestly kind of uh like out for themselves just trying to cash a paycheck for a lot of them. But these guys in this case were just like this guy's so unpleasant. We need someone in here. And that's not kind of what I would have expected from a board trying to keep their jobs. And the Canadian National Board was a political animal. >> Yeah. I So maybe that is part of the Hunter Harrison production function is he irritates a lot of people, ruins a lot of people's days. Um, and you know, when he does things like doing the job of someone five levels down the org chart and just insisting to them that he's going to do their job and then doing it better, like that's got to be humiliating, right? So, um, he probably is a really it was a really unpleasant person to work with in many ways. I I assume he paid his people well enough that some of them were willing to stick around and maybe, you know, people also just vary in how much they tolerate different kinds of unpleasant personalities. But if he if his sticktick is you look very carefully at the existing network you have. You look at all the ways that you could drive more efficiency by just telling customers here's the new way things are and you know if you don't like it just go ahead and pay two and a half times as much per ton mile um to our competitor you know to the trucking companies instead. um you you only need that once. And maybe it's actually more valuable to have one person show up, lay down the law, lay off a ton of people, and then have someone else who just doesn't have that track record and who is not the guy who did that and not the guy who said that or humiliated people. And maybe that guy produces, you know, 5% less operating income growth per year than Hunter Harrison would, but if everyone likes him, then uh it probably means there's less executive attrition. and um the board can spend more time thinking about actual business problems and not just gossiping about how noxious their CEO is. So it might be that this is actually another case of efficient markets at work is that yeah sometimes he does get uh gently gently removed from from the company and then sometimes there's u there's some friction in getting him out depending on how close he is to finishing whatever transformation it is. Like I I think if you if you had the same person and he just was at the same railroad for his entire career, I think one he would probably go crazy and two it would be an interesting piece of trivia if you were able to say, "Hey, did you know that the best performing US railroad over the last, you know, x number of years is this small cap railroad that never consolidated?" But I think the story makes a lot more sense if he is going from one to another to another to another. And by the time a critical mass of North American railroad infrastructure is already on this precision scheduled model, everyone else just has to comply. And then he's kind of, you know, that that's I I always feel a little bit depressed reading comprehensive biographies of someone who died because the last chapter or the last couple chapters are about things like and then he started forgetting the names of his grandkids and, you know, he got moved into a home or, you know, the last bit is just it's really unpleasant. Um but then in his case he kind of he actually seems to have done exactly what he feels he was put on this earth to do and then he died. Um so he kind of got the the full the full thing and um I'm sure if if someone had interviewed him on his deathbed that one he would have wanted to talk about trains and two he would have said yeah I think that uh the railroad industry is never going back and it's always going to be profitable more profitable than it otherwise would have been. is always going to deliver more more service at a lower cost than otherwise would have and um that's good job Hunter. I I don't know why this one I there is a tinge of sadness reading I think it's because the author genuinely likes Hunter and he develops a relationship with him and uh but I I was sad and you know the ending like he he dies suddenly he goes on medical leave of absence and two days later passes away but I was sad but yeah it was sad hearing him like he's orchestrating this last great turnaround and he's doing it multiple times they mentioned he can't travel as much he's doing it from his bathrobe in in his home one other story I was interesting and I just love your take on it. And then I want to compare him to one other figure we've read about recently. Uh so he every time he switches jobs he is getting paid and when he's talking to people he lets them know I get paid. The two stories that I thought were really interesting were uh and he you know he buys CSX shares on the open market when he's about to take over and he says that's a huge motivating factor for him. The two stories I thought were really interesting I'd love to share your world view. Number one, he gets paid on operating targets and he has a meeting with his management team and this is at CSX so his last railroad and they're trying to plan everything and he's like look here are the operating m operating metrics that are in my bonus target that is what we hit and it sounds great coming from a guy who's driving turnarounds all this sort of stuff but you know what else it sounds like that sounds like fraud to me like a fraudster says hey we hit my EPS metrics so I just want to hold on that one the other one that just I don't think there's much to I don't know if there's anything to read on but he goes on tangents fighting tooth and nail for every last dollar of compensation to the point where you know Persian Square and Polal get this man $400 million all in probably right they get them all and when he's about to take over CSX he yells at Paul and says hey for four months I was consulting for Persian Square and trying to get the CEO role at uh Canadian National Pacific whichever it was and I wasn't getting fully paid on that on that time and the reason that struck me was because when he starts posting people for his last job at CSX there are all these stories where the people are talking and he's like, "You're going to get well compensated." They're like, "Hey man, I've been working here for a month. I don't even have an employment agreement or compensation or anything yet." And it it was just so funny because that's also another thing that's kind of reminiscent in the back of my head of bad actors where it's like they bring everyone over on promises and then nobody get made but them. So, I just wanted to ask those two things from this go. I'm not accusing anyone of anything. Just like if you gave me these in a a black envelope, be like, "Oh, yeah. I'd be very hesitant around that guy." I mean, that's that's part of what makes fraud so hard to spot is that sometimes I mean, sometimes they're just really obvious, but sometimes they're they're hard to spot because the fraudster is doing what everyone else is trying to do and they're able to hit the numbers that everyone else tries to hit. It's like the the observation that people in um when when people when um long distance um bike racers were doing lots of blood doping and things, it wasn't like the 200th fastest person who is turning himself into a guinea pig in order to become the 150th fastest person. It's the top people. It's the people who they would be number 11 and forgotten, but they could be they could be on the top 10 list if they make this one little decision. and it makes them 1% better, but it's in a domain where 1% is the difference between world famous and nobody outside like only the sport fans actually know this person's name. So um so sometimes something you can execute well enough that it does look like fraud. I think the other thing is that when he is doing these weird self-centered negotiations, but he's also paid very much on performance, what has to be in the back of people's minds is he's going to fight about this hard every time he's talking to the unions, every time he's talking to suppliers, every time he's talking to customers. And so maybe he is actually worth whatever that incremental extra amount of money is because he just does not give up until he's gotten everything he possibly can. So, and you also and then you can think about that one step further and be like, if he spends the next two weeks just full-time negotiating comp, that's two weeks he's not going to spend running the railroad, and that's two weeks that we have to wait before things start improving. So, maybe it's actually worth paying him just to shut him up and get him to focus on other things. um the other stuff. Yeah, he he seemed, you know, very very organized when it came to moving large uh large vehicles around on tracks and maybe a little bit less organized in terms of moving paper to the appropriate um HR person and getting getting an actual number on someone's employment contract. Um, and I I don't know, maybe maybe some of that is that he's just doing a little bit of working capital management and trying to rope people in and then, you know, they they they're getting paid very well, but maybe 15% less than they thought they were getting paid and they but it's not quite enough that they want to quit because that would also look bad. People would wonder if they just can't handle working under Hunter and maybe they're just not not quite as good as they think. And so like all this stuff, it's it's a pretty effective bundle where if you are really abrasive and you set incredibly high standards, it does actually allow you to get away with a lot of otherwise abusive behavior that people would call you on because they know that if they just quit it, people will wonder if you're just not the kind of person who can deliver the right operating ratio. >> It's all great points. Uh let me let me ask my last point. I I can't believe I'm not going to mention Piss and Bill, but we're we're going to have to pass them for for time. But let me do my last one. The last book you and I read, if I remember correctly, and there's always a chance time's fine for was Larry Ellison. And I was interested in the similarities and contrast between the two, right? Like similarities both of them. Ellison gets into sailing, Hunter gets into equestrian. They've got side bit projects that they're having their company sponsor and especially at CN it becomes an issue for Hunter, but the expensive side projects. They've got great lifestyles. I mean, Larry is a different magnitude than Hunter, but Hunter's 100 millionaire. Larry's a billionaire at some point, minimal type. Uh, you know, the real things I was thinking about though was uh Hary Ellison has no problem taking vacations, right? It actually becomes a point of concern with the board and investors. He's going six weeks sailing everywhere. Hunter Harrison does not vacation, right? He's cutting vacations left and right. That there are all these stories of his family being like he works Christmas morning. His chief of staff's like Saturday morning we called it hunter time because the chief of staff. So I was just interested in the difference in different industries and everything. But do you compare and contrast when you read these two? Do you see anything in the management styles or anything that that blends or is it just hey two different people exceptional different paths to reach similar results? you kind of read just the huge convergence between these books we just read. Yeah, I think I think the the kind of e lack of self-awareness or total comfort in one's own skin depending on whether you like them or not like that's that's definitely a commonality and I don't know if people like that just have some moment in their life where you know I I don't know if Barry Ellison just had some moment where he said okay I have you know I have made everyone around me so much money because Oracle is all me and therefore if I feel like taking a vacation that's the best thing for Oracle because when I'm running Oracle I always do what's best for Oracle. You know, by definition, this is what's best. Or um I think the other way is that it's just a a pretty natural thing that Thunder Harrison wakes up on Saturday morning and he's been dreaming about the railroad and he wants to start talking to people about the railroad and that's what he's going to do. Um, so yeah, it might be just like a slightly different wiring where if it is fun and gratifying and it just it feels like a lot of this book, it actually feels like this is really the first biography of an esports star where he you're reading about someone who is just making a ton of complicated decisions based on some very complex thing where you have limited controls, limited inputs. there a bunch of external things that are happening, but if you are able to make lots of reasonably good decisions really really quickly, you just automatically win. And he seems like that kind of guy at at multiple levels. But also, if you look at competitive esports, a lot to get good, you have to just have lots of actions per minute and incredible reaction time and you have to put a lot of hours in. But to get really good, you also have to come up with a new meta. You have to figure out some strategy that other people did not figure out. And then you have to be very adaptive whenever the circumstances change and figure out what is the new strategy that didn't work before and will be the dominant one now. And he did some of that too. So it's it is the same kind of um the same kind of epicycles like cycles and epicycles of you've got to get everything to where it's supposed to go today but you also have to get the business to where it needs to be over the next 10 years. Um, and Ellison, I guess maybe there's there's also some kind of compatibility where if Harrison's big thing was we're actually going to stick to a schedule and everything flows from that. If that's the case, it means that everything that everything else has to vary in response to how much effort is needed to keep that schedule. And that means that's just not a a good system. It's not a system that's very compatible with long vacations. It's not a system that's compatible with being asleep during normal business hours, um, US time. Whereas with Ellison, like part of Ellison's attitude was there was that really interesting parallel where Ellison talks about how customers will tell him, you need to change your e-business suite around our business. And he would say, "No, you just need to change your business around the EB business suite." And in one sense, that is what Harrison was doing. But in another sense, I think Ellison was just he was more okay with downtime. And if Harrison's big idea was downtime is the problem. And downtime and unpredictability are completely unacceptable, then that just leads to very divergent attitudes towards how much intensity, how much your work intensity should be coming from you, coming from the fact that you're pretty interested, pretty jazzed right now versus how much of it is just there is a problem and you are the the person with whom the buck stops. So you're working until the problem's gone. >> If I could just ask a point you made ear the esports one is great cuz and I I compared Harrison to a coach. He reminds me of one of those hard church and coach esports great. Like to me when I read the Harrison biography I I I kind of got it right. Like this is a man who was all consumed by railroads. And not that he wasn't smart, but he wasn't like there's no hint of like Harvard Business School or this man was a natural genius or anything, right? But he literally has a photographic memory when it comes to one thing, railroads. And he's obsessed. And he's not obs I I think the book makes tonight point. He's not obsessed to the point where he's got like railroads on it. He's not a >> He loves the business of railroading. Go ahead. >> The the specific point they made there was that the railroad industry does attract people who are just really nostalgic for when railroads were a lot more important and silly and so on. >> Joe Biden would have been a perfect railroader. >> Yeah. Yeah. But then yeah, the I think the line is something like Hunter Harrison is really interested in the railroad industry today and the railroad industry in the future. And from a financial perspective, you could say he is he has no interest in what the stock chart looks like, but he has a lot of interest in what the net present value of the business is. And that is uh that's something you really want in a CEO. You want someone who can show up at a company that's doing incredibly well and not feel really nervous like if they change anything, they ruin everything. And also can show up in a company where the stock price is down 90% from the peak. or in the case of railroads where they used to be something like 70% of US equity market cap and now we've had to create new categories like transportation just so that there is a sector that is big enough that isn't just like here are the three names. Um so he if you can be completely indifferent to what happened before but you can be very responsive to what's going on right now then you can do quite well in a space like that. It's I guess maybe that that's something um on the Ellison versus Harrison point with tech. It is more of an active business like you have to decide what the future looks like and either >> makes multiple bets right and I think both of us are impressed if he makes seven big bets five of them turn out correctly which in tech I mean because the bets can be grand slams that it's an unparalleled track record. >> Yeah. Yeah. Like it's it's so funny to read that book and and he's basically you know he doesn't have the vocabulary for it but he's basically like you'll be doing a lot of your work on your iPad and on your iPhone and you you know everything's going to be on a server somewhere and you won't actually have files that are on some physical device in your home except as just a temporary working cash or something like he he knew that stuff was coming and he got it right. um with Harrison, you know, he does have that one big bet, but in a sense that one big bet is just it it's not some kind of cosmic macro bet really. It's just a way that you could recut the spreadsheet. you know, he I I think the timing is wrong for this to have literally been the output of a pivot table where he just tries to look at, okay, what what do margins look like if we just sometimes move these trains partially filled and what does it look like if we assume that by the end of this, you know, within a year or two, everyone's just going to adapt to that and how much can we lower our costs if they get a little salty about that? like he it's the timing doesn't quite work for that, but it is the kind of thing where you when you make a bunch of incremental progress, you realize that's actually what you're progressing towards and that you could make progress a lot faster by just going straight there. So, in that that that model of you're going to constantly make incremental progress like you're you're sending trains that would be recognizable to u to Cornelius Vanderbilt on routes that Cornelius Vanderbilt may have personally owned and it's going to haul things where he could look at it. he could say, "Oh, that one's full of coal. That one's full of gravel." You know, he would be able to understand. He'd be able to read the 10K pretty straightforwardly. Um, so in that sense, you you don't want to be super imaginative. You you actually just want to be very literal and linear and um and so you also don't need to take a lot of time off to dream big dreams about railroads. Like the big dream is we could grow revenue 2% faster annually and that really compounds over time and it's very very accreative. we could buy back a lot of stock as we get rid of some of our excess capital equipment. Like it doesn't doesn't require insanely bold dreaming, but it does require just this relentless grind of making everyone step up their game a little bit. >> The the only other point and I think we have to wrap here because I I have to stop, but the only other point was there's so many differences and I think I lean a little bit more the Harrison model where like the price of greatness, right? Harrison to me has the price of greatness whereas Larry Ellison I'm not saying he's not great because he's clearly great. He's just like out there like two weeks in Australia. Two months in Australia, guys, and then we'll make the bet of the century when I come back. Uh, but the the one thing that jumped out to me is both of them are obsessed obsessed with how Wall Street reacts to their quarterly earnings numbers. Like they're really obsessed with it. A lot of uh like I told you in the Oracle book so much of it is you they take out an ad to promote the earnings and tell people why there's no SC and with uh Hunter like so much especially in the latter years is around oh my god we're about to report earnings we've got to make sure people understand it the stock price reaction and I would have guessed like these guys in my mind are business builders I would have guessed they're thinking beyond that I don't know if this is just N of2 but I I was just really surprised by how how much obsession they put on the quarterly earnings results, the analyst interpretation, all that sort of stuff. I'll let you have the last word there if you have anything to add on to that. >> No, I think it's it's nice to have internal motivation and you it's very hard to accomplish things without some external reference. And Wall Street is very good at being cynical. You know, people love to be the first person to figure out that somebody is lying or that some trend that looks invincible is actually completely unsustainable. So, um, it's, you know, it's a great way to stress test yourself and figure out to to what extent did you actually pull off something amazing and to what extent did you really manage to shift some costs and shift some business uncertainty onto the next person. But, you know, so far railroads, they they haven't had some complete collapse. It's uh, so it's clear that Underre Harrison was not single-handedly holding the industry together. And also that he didn't just, you know, he probably did identify a lot of the low hanging fruit, like maybe there's an alternate version of the railroad story where it takes 10 or 20 years longer to have valuations reset where they are today, but it does end up happening. Um, so but it it does look like he he did he made necessary changes. They actually worked out really well. He did reset the standard of the industry. missed out on some vacation time. But I think I think he'd be very like I'm I I suspect he was very happy looking back at his career >> at at Oh, I think the book even says it at the end of the book. So, he passed away and he was talking about CSX, which is his last business, getting them to a mid50s O and they were kind of in the mid the mid uh 65s when he takes over and they were stuck right there. And I I thought it was interesting right now CSX, I looked it up, they're in the mid60s as we speak today, almost, let's just call it 10 years later, right? And you do wonder like, hey, if he was still alive, would all the railroads be pushing into the mid-50s? Or if we lived in an alternative universe with no Hunter Harrison, would all the railroads today kind of be in the high 70s and there would be the new Hunter Harrison be coming along and be like, we can get to the mid60s and by 2035. Why don't we end it there, Bern? This has been great. Uh, I'm looking forward. I'm about to go on the baby moon tomorrow. So, you and I are gonna have to pick a book for next month so I can read it on the the flight there because you've got four kids. I'm about to have two. You know, the best time to read is when the grandparents have the kids. >> But, uh, >> absolutely. >> Burn Hobart from the DI, this has been awesome and looking forward to chatting next month. >> Likewise. All right. >> A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.
Railroader (August 2025 fintwit book club)
Summary
Transcript
You're about to listen to the yet another value podcast with your host me, Andrew Walker. Today is my monthly book club with my my friend Burn Hobart. He writes the diff. He's one of my favorite people to read. I think his newsletter has a higher open rate than any other thing that hits my inbox. So, I I really enjoy talking to Burn. We talk about the Railroader. The reason we're talking about it, as we'll discuss, is there's been a lot of railroad activity. So, we kind of thought we'd read something topical. Really interesting book. I think both of us were surprised by kind of our takeaways and how we thought about it and the takeaways from the book, but really interesting book. I'll include a link in the show notes if you want to go check out the book or anything, but I I'm excited to get to the monthly Finchwood book club. But first, a word from our sponsors. Today's podcast is sponsored by well, kind of Alpha Sense, but also kind of me. Look, I I've been talking about it on the blog for a while, but podcast number 333. I'd encourage you to go listen to it. It's me and Ardan Faulen talking about the how to kind of improve and perfect the craft of investing. I think it's a fantastic podcast. I had so much fun. We got great reviews on it. And then alongside that podcast, we did a webinar with AlphaSense talking about using two tools that I think have kind of revolutionized investing for especially small investors over the past 10 years. Expert networks and AI. Alpha has a burgeoning set of AI tools and obviously one of the reasons I got involved with Alphus is because of the expert calls. So it I I think you're really going to enjoy that podcast. I think you're going to learn a lot from that. I think you're going to learn a lot from the webinar. I'd encourage you to go the podcast is always free. So encourage you to go listen to episode 33. But the webinar is free. All you have to do is follow the link in the show notes. Go sign up and you can listen to us talking about a tool that I think will really improve anyone as a fundamental investor. So that is the sponsor of this podcast. And thank you for listening. And we'll get to the full episode now. All right. Hello. Welcome to the another value podcast. I'm your host Andrew Walker. With me today, it's my co-host for our monthly book club, Burn Hubert from The Diff and Capital Gains. Burn, how's it going? >> Going great. >> Awesome. Well, today I'm excited to talk to you about we we read the Railroader. That's the name of the book, right? I can't even remember the name of our own book. >> It's just Railroader. Yeah. >> Yeah. Railroader the it's cleaner. >> Railroader. This is the history of Hunter, the CEO who ran four. Like there are only seven class one railroads and he runs four of them. He gets involved with Acman in the book. He's basically the railroad goat, right? I think people widely regarded them and we decided to read that because railroads have been in the news. You know, when we started doing this, uh, there were lots of rumors that Buffett's Railroad, BNSF, and CS CSX would merge because Union Pacific and Norfolk Southern announced the merger about a a year ago, so about a month ago. So, we're seeing the railroads kind of start consolidating again and we were like, hey, this will be a really interesting book to talk about with that backdrop. And you know, just as we were getting ready to record the I think it was Bloomberg who reported that Buffett is >> Buffett's not bidding. >> Say again, >> he's not bidding, right? >> He's not bidding on CSX, but they announced a partnership at like three different pl places or something and there should be synergies there. So everything's all the chess pieces are still kind of rearranging. Anyway, that's the overarching theme of the book and what we thought. I've got tons of questions. I thought this was very interesting, but I'd love to just start overall. Burn, what were your takes on the book? The railroad course you want to go. >> So, it was one of the things about the book is that I feel like he was either born in the exact ideal generation or the wrong generation. Because when you read about Harrison and his management style, he is extremely blunt. He's very first principles driven. not in the sense of he just imagines there's a way the business could work and he makes it work that way but he's he's clearly someone who spent a lot of time looking at the spreadsheets but also looking at the physical infrastructure and just asking himself is there a better faster way to do this and I feel like he was actually really born to be a very like a staff software engineer at AWS or um Eddie or at Google or some hyperscaler because he just has this very linear way of thinking about things but he's also able to just abst abstract away the way things are done and ask if there's a better way to rearchitect the whole system. So, um it's kind of a spoiler alert for the book, but the historical way that the railroads worked as it's portrayed in the book is train arrives, it gets filled up with stuff, when it's full, it departs, and it's kind of the customer deciding when it fills up. And the railroad is trying to get trains to where there is demand. And you know, obviously they're scheduling this stuff, but the schedule is kind of a work of art and they are always willing to delay things in order for someone to add one more car load worth of stuff. And that of course encourages the customer to take their time. They don't have a really strong incentive to optimize around the train schedule because the train schedule is whatever they need it to be. And Harrison's idea is no, let's actually just set a schedule and if the train's not full, we will leave. And then you know exactly how many trains you have and you have a much better sense of where they are, how many of them you need, how many backups you need, all of that stuff. So suddenly the network actually becomes more tractable. And what's weird about that is there are all these anecdotes in the book where it's clear that he just has insane working memory specifically around managing railroad networks. So there's the anecdote at the beginning where he um I think does it say explicitly he likes to get hotel rooms when he's traveling for business? He likes to get a hotel room with a view of the railroad yard. >> That he'll get He'll call up the rail manager and be like, "Hey, I see like the black engine over there isn't moving. Why is that engine not moving?" >> And then there's another point later in the book where he actually pulls an allnighter just being the dispatcher remotely for um for a different location. He just spends the entire night doing that even though he is the CEO. >> Not he's the CEO. He's 60. I think he's in his late 60s at that point. he's having some health problems and he just casually pulls in all night as a dispatcher and he s says like dispatcher listen up I'm gonna make this work. Yeah. >> Yeah. So he's he's really good at just the the granular day-to-day details. And you feel like people like that they end up doing very well for themselves and they hit some level where the the thing they're managing it's at their maximum working memory and if they try to do a little bit more things would start to break. and he just seems to be able to toggle back and forth between here's what's happening over the next 15 minutes in this physical place versus here's what's happening over the next 50 years in the railroad business. And he does talk about how with railroads um he talks about the capital intensity and how um railroad capital just depreciates more slowly than trucking. Um there's like one of the threads in this book is just how much he hates and resents the truckers because they clearly have what is in many ways a better business or certainly a much easier to manage business. And then he realizes that railroads do have this unbeatable competitive advantage of if you want to move a ton mile of cargo over land and you have train tracks between where it is and where you want it to be, there is no cheaper way to do it. So you have that cost advantage and then you have all this capital and he has some line about how you are the capital investments the capital allocation decisions you make now are the ones you live with over the next half century. So you have to be really confident that you know what you're doing. And but that's also what he's trying to do in with his management approach is make that a more tractable problem. And if you have more of a sense of what utilization really looks like and where it trends and where it peaks, then you actually can afford to buy more equipment and buy more trains or repair the ones that you already have and so on. You you're not flying blind as much. So, it's in some ways it's also a book about just the the um uh the capital asset pricing model and how you get much like you can really lever up if you actually know more about what your returns are and how bad they how good or bad they'll be. >> Let me let me go high level, right? There there's lots of themes in this book. I found this book fascinating. In particular, I was really surprised by this and I want to talk about this in a second with you. I thought this was the best book I've read in a long time for it just had these casual throwaways about how CEOs and boards work together and everything and how activists it would just have these casual throwaways. I was like I read entire activist books and I never hear insight like that. So I want to put a pin in that for a second. But if I just high level back up to you I'd say I read this book and the whole book is about Hunter Harrison is the railroad goat. When Aman wants to buy and Aman in the back half of the book his presence is huge. When Ame wants to buy a railroad, he goes and gets Hunter Harrison. He gets his railroad to basically pay uh I think this is CN pays CP $50 million to get him out of his non. >> Yeah. And then when C when Hal spins out Aman and wants to go get a railroad, he guarantees Harrison like, you know, over a hundred million. I think he guarantees Harrison $100 million and they pay CP in this case $100 million to get him out of his contract. So people are throwing around, you know, forget AI researchers. These are huge sums of money to get this one man and the whole book is he's got this photographing. I want to ask you is he that good? Because the whole book is dedicated to him but throughout the whole book you'll see stuff like hey he takes their operating ratio down from 90 to 65 but you know I keep seeing every other peer out the corner of your eye is at 70 and I keep seeing oh the stock went up 4x in this time period. I went and looked at the stock price of all the other peers in the time period. They're better. Harrison's better, but it's not like, you know, you're not screaming better. So, I just want to do you think that this is a case of this one man's brilliance, or do you think this is a case of, hey, he had a lot of tailwinds. The railroad industry for a lot of reasons was getting better from the early 90s to the 2010s and he was really riding that. >> Yeah, it's a when I mentioned earlier, you know, I wasn't sure if he was born in the exact right generation or the wrong one. There's some line where he gets his first job at the Frisco and he's something like the second person to be added to the team and I don't remember how absurdly long it was. I want to I'm gonna go back and look underlined this. Um maybe I did. Hopefully I did. Um >> well you look I I'll just throw out a random at the beginning he like he gets married to his wife and he's married to her for about 50 years but they get divorced for a few years in the middle and it's like oh yeah he would go to a bar and get on like threeon-one fights and wake up in a hospital room. You're like what? this man would become the CEO. This is crazy. It >> is railroad business and apparently there are all these anecdotes in that business about just it it seems like the last gasp of a certain kind of bluecollar culture of just not just like you you should act as if you could throw hands if you're mad at someone, but no, you you will probably get into periodic fist fights at the office. I love he joins CSX and this is completely different than throwing hands. But he joins CSX like wait our rule book has policies on napping during the day for our workers. We're not taking naps during the day and it's just like that is just true old blood. We are monopoly. We have railroad tracks. People will go on them. >> Yes. So here we go. Um he joins at the end of 1963 and he says he is the first or second person hired in his department at Frisco since the end of the Second World War. Yes. Yes. >> So, so there's some industries go through that, especially industries where they were growing fast and then they're in decline where the last class of like the last large class of people who got hired into that industry. Those are the people who end up running it. And once growth slows down, average age goes up. Everyone's really cautious. The people who move up in that business are the ones who were more cautious, the ones who did not want to spend and did not want to change things and could kind of manage the decline well. And yeah, you you eventually reach this point where all the bad trends are exhausted. Um like coal was such a big part of the railroad business for a very long time. Railroads are great for transporting coal, but we just don't want to be transporting as much coal as we used to. So that number always ticks down and you have competition from trucking. And then he did seem to get into the industry probably before it reached equilibrium, but he got into the industry at a point where they were very close to equilibrium with trucking. And you know, maybe things like the oil shock where it does affect trucking more than railroads. Maybe that kind of thing helps out early in his career where he can actually, you know, that's that that might have been the first time in many decades that suddenly the phones are ringing again with customers they haven't talked to in a very long time saying we just we can't afford to be paying people, you know, with gas expensive. We can't afford to be paying people to truck this stuff around. Let's let's put some of it back on trains again. So, he he had some of those advantages. Um, like I'm sure there's some level of, you know, PR and there's there's some amount like he has to present himself as a smart guy. And I'm sure you know he surely after the first time that he realizes that people are going to pay to cash him out of his non-compete, he realizes this is a lot of his net worth comes down to how much can he convince forwards that he is just the railroad messiah versus being a good you know maybe the best of the rail and CEOs but best among a pretty comparable pure set. There's an interesting anecdote when sorry which one was the one he did with the ACman act was CP right or was it CN I can't remember which the Canadian Railroad >> I think yeah I forget I I think it's CP yeah >> so there's an interesting he comes in Aman runs this campaign in 2011 they get Harrison installed in 2012 Aman retires from the CP board in 2016 and when Aman's getting ready to retire that before anything even happens the CP board while Harrison is still the CEO sends Harrison sent a letter that's like, "Hey, we just want to remind you of your fiduciary duty and obligations to CP, right?" So, and when you read the book, you it does not say anything on tour has happened then. But I read that and I was like, "Oh, like a I'm sure the board has in back their mind this has happened before." But at this point, Harrison's like in his early 70s, mid70s. His health is declining. And I I was just, you know, when I read that, I was like, "Oh, this is a board who there there had to be a little smoke here for them to send the the CEO a letter being like, hey, you can't go talk to competitors and stuff." So, I I do think it kind of underplays how much Harrison was like, "Hey, I am looking for the next payday. I am looking to level up. I am always looking for someone." And the the biggest through theme of the book, customer complaints, employee complaints, and Harrison looking to get paid. So it very much matches up personality. >> Yeah. Like I think there's sometimes the way that someone makes a lot of money is realizing that an industry's net promoter score is actually higher than it needs to be. And especially if it's a monopoly, high net promoter score is just the raw material that you turn into high free cash flow by spending less on whatever it is that makes customers so happy because they have nowhere else to go. And you know that's that's quite cynical, but it's also quite true. And um it is it is just the case that the railroads have this really valuable asset route network. It's very hard to build new railroads in the United States today. So we pretty much are stuck with whatever rights of way we have. In fact, it's it's hard enough to build stuff that um you there there are cases where people used railroads um like they acquired railroads just to get the rights of way in order to build fiber and things like that. So um that >> you know something I learned recently because of cogent sprint. I did not realize this. a sprint stands for Southern Pacific Railroad internal network transmission or something, but it's because all of their rightsways that form the network were built along the railroad. I did not realize that. So, you are Yeah, exactly correct. >> Yeah. So, so just the ability to move something in a straight line across the United States is this incredibly valuable asset. The the railroads have ended up owning that asset. Um, and you know, you can you can almost say that depending on your discount rate, maybe they're actually getting what they really deserve for the fact that the US has a really good freight network and that railroad investors did very badly for a couple generations in there. Like even going back to the late 19th century, you have these periods where a quarter of US track miles are in bankruptcy or um, you know, passenger traffic, I think, peaking in 1913 and just declining forever after that and fre traffic also having its ups and downs. So, um, in some ways the railroads were kind of subsidizing the rest of the economy for a very long time and now they're they're taxing it again and we'll we'll see where things equilibriate after that. Um, you could you can imagine a lot of different directions for for things to go after that. But, um, yeah, so he's he's very much out for himself. He does realize that uh there you can you can be a little bit relaxed on safety. There was one bit where they talk about the safety numbers and actually the book presents it in an interesting way because it says that I think it's something like per worker hour accidents went up a little but per cargo ton mile accidents went way down. So getting more productivity out of each worker and then the workers are facing you know a very slightly elevated increased risk but there's more money to go around. It is a job where you kind of expect there to be physical risks and he he certainly is out there, you know, getting getting grease on his his shirt and, you know, actually moving stuff around out there. So, he's, you know, I'm sure the CEO um has has fewer on the job accidents that the average worker just on the line, but he's he he was also that average worker when he started. He he did work his way up from the very bottom. >> Forget about from when he started. I mean, there are multiple stories in here. And again, I'm sure part of this is building road. And I think the interesting thing when you read this is uh how he's setting the culture, right? Like C CSX, he does he's not traveling that much anymore, but he's still setting the culture. But there's multiple stories. Hey, one of the tracks is underwater and everybody says it's not safe to run a train over. So he says, "Okay, cool. I'm going to hop in that train and I'll go take it over myself and we'll get this network back on track." There's a story of a railroad crew. This is towards the end, a railroad crew that's trapped somewhere. and he like shimies over a bridge hanging onto the bridge to go tell them, "Hey, help is on the way and stuff." So, this man is like literally putting himself in harm's way and it's just an interesting way of thinking about setting the culture and everything there. But, let me go back to the unless you have a thought on the uh culture. I want to go back to the customer point. >> Yeah. Like on on the culture stuff and you know on how he presents himself versus how good he is. Like I think I think in a lot of cases what people do if they are a celebrity CEO and I think within the context of railroads he definitely counts. Although I like I I had not really I hadn't read much more than you know occasional references to his name before I picked up the book. >> Um >> I knew Railroads had done well. I didn't realize there was a guy who kind of symbolizes this. But one of the things I was thinking about when I was reading it is um there's this book by Connie Brookke about um uh what's his name? Steve Ross of Time Warner. And um it's it's a really good investigative journalism type book. and she talks about how um he had this whole persona of he's always always happy, always friendly, and always really lucky. And that um is he talks about how he would take his friends to Vegas and he would just tell them, "Hey, I'm going to go gamble for a while. See you later." And then he'd come back with a huge stack of chips. And I forget if she says that someone caught him doing this or just they had this realization of he's not actually playing blackjack for a couple hours and making $50,000. like he's just buying a bunch of chips and he's going to return those chips later. And it it actually seemed like, you know, a really clever way that you could make yourself, you know, you could just be you could produce good vibes if people always have these stories of he goes to Vegas and he's just a really lucky guy. He gamles a lot and he always comes out ahead. And if he's running a really levered media conglomerate that sometimes does very strategically messy deals, it makes sense to have someone who's just very lucky in charge of that. So, I think for Harrison, he he might have looked at those situations where he's like, you know, he could use the walkie-talkie probably or he could yell. But if he actually crawls over there, that's the story that people will remember and that's the story they will tell and that means that that's that's who he's got to be. So, he's kind of, you know, maybe this is a story about someone creating a kind of exaggerated brand and then actually living up to it and actually pulling it off. >> I I I love your point though. The difference would be like with uh the Warner Brother guy you mentioned, he has to or sorry, Time Warner, he all he has to do is pull 50,000 out of his bank account and he takes he runs the risk that he's mugged and he lose $50,000. Right. Where with Harrison when he goes on that under that train and the tracks underwater. He even says, "Oh, I did the whole thing standing outside the engine because if the train derailed, I was going to jump off it." So he literally is putting his life like a little bit more risk. But I I love that point on culture. Let me just go back to the customer complaints and the complaint complaints really quick. You know, you read this book and I wish it had dove more into them instead of more just like reporting like here's what they said. Do you think they were real or not? Because here's the fact. If you lay off, he's laying off 20% of the workforce at all the places he goes. You're going to have some complaints, right? And when you're dealing with the unions, you're generally going to have some complaints. And when he's increasing prices on customers, you're generally going to have some complaints. But do you think these were anything more than just like every as you said every monopoly is going to have some complaints and maybe the service was he he would argue his service was above average right there's the thing is littered with reports of customers emailing him and him getting customers to improving service levels to customers. Do you think like there was actual statistical significance? Hey, this railroad was materially worse for employees, customers, whatever it is. Or do you think this was just kind of, you know, hey, he's the top guy and every top guy people are going to take shots at. >> Yeah. Like I I just feel like a lot of this is just people doing their jobs. You know, the union the union collects dues and your your job if you're representing the union is tell the boss we need more money, we need more job protections and we need the job to be safer and you know, whatever else is on the wish list. Like that is that is your job. And um so you know and then for the customer like the customer's job is periodically call up suppliers and try to beat them down on pricing or get them to throw in some extra service. So everyone's kind of doing what you expect them to do. Um and it could be I I think some of it was that the railroads were sort of enabling bad habits on the part of their customers. Yes. Um less so for the employees. I think it's just like it is the nature of a capital inensive network-based logistics business that the individual workers have a lot of responsibility to do their job right but it's really tough for them to figure out how their whole job would be rearranged and so um like that it's just a more hierarchical organization you do want that kind of thinking happening at particular levels of the orc chart so um yeah I don't I I don't think that they they would really be in a position to um to push back on that and they can certainly feel salty about if um if accident rates go up on on a per worker hour basis and of course that's how the workers the workers are not thinking well I I am slightly more likely to you know have a broken bone or or potentially die on the other hand I am responsible for you know for shipping more more cargo tons more miles than I otherwise would have been so it's all fine um there is room to pay people a little bit better if there's more throughput especially in a business with lots of fixed costs and you know of course a lot of those returns acrew to the shareholders and a lot of those returns also acrew to um Hunter himself, but I'm sure some of that it it at least makes it less likely that someone gets laid off because there just is not enough money to support them if there is in fact plenty of money to support them. So, um that part, you know, it's you just have to figure out what the trade-offs are. And I think that given that people like Andre Harrison exist and given that they do rise to the top of different organizations, what it probably means is just you want to make sure that laws on workplace safety are written very clearly and set exactly what we as a society think is an acceptable level of physical harm in order to enjoy all of our material abundance. Um, so that that part I I wouldn't I wasn't super surprised by the the worker complaints. I think with the customer complaints though, a lot of it is just that if you were used to this idea that the railroad is going to be your logistics backs stop and if you messed up something earlier in the week and you know one shift was not as productive at the factory as you expected and therefore the shipment you thought was ready on Thursday is not going to be ready until Friday. Um you know if that if that becomes your problem because the railroad is now insisting on sticking to a timetable that just complicates your life. But what it means is that he's basically taking his approach to running a railroad and making it contagious. And this is like this is kind of the story of globalization. Um it like a lot of US business norms and then US cultural norms just get accidentally imposed on other countries because we need our counterparties to understand things in the same way that we do. And so we need a lot of standardization in terms of the rules that people follow and the expectations they have. So, um, and because the US is that economic center of gravity, the US just ends up deacto writing a lot of those rules. And it doesn't feel like that because it feels like if you're an American company and you order something from a different American company and then you order something from a Chinese company and you don't get what you were expecting, you know, you had the same parameters and they just interpreted it differently. To you, that just feels like bad customer experience. To them, it probably feels like these customers are really needy and they also don't know what they're asking for. And um it's really whoever whoever has the most financial stake in getting the transaction to happen is going to be the one who adapts. And in the case of the companies that were using the railroads because that uh cost gap was so big between the railroads and the trucking companies. I think the railroads basically got to write the rules. But I also think like you can so you can tell this whole story which I think is consistent with the kind of generational story. It's consistent with your observation that hey all the other railroads did fine too. You could just have made a sector bet. It's not just about this one guy. Um I think that you probably um it was it was probably the case that just the industry was at this kind of inefficient equilibrium where railroads were somewhat over capitalized and therefore they always had some spare capacity and so it wasn't they didn't have a sense of urgency around maximizing efficiency at all times and maximizing utilization. But once you have someone who actually thinks they can make it happen, it does happen and happens pretty much everywhere. There was that note um there's a footnote that talks about two of the other um railroads adopting precision scheduled railroading and one of them does it in September of 2018 and then the other one does it in October of 2018. So once once people realize that that's the way things are going to go that's just the way they have to go. You >> you jumped on my next point. You know I was wondering if one of the reasons that other stocks other road stocks and again his is the best but it's not like screaming higher like you would kind of think just based on the reputation everything. I was wondering if one of the other reasons was, hey, he gets in there and he does it at two railroads and then everybody starts saying, uh, look, he you've got to get on board with what he's doing or else we're going to fire we're going to fire you and literally replace you with him. And like it's not lost on me. The only one that kind of doesn't really start improving is CN where everybody starts everybody has said for years and I remember this from when I was at in a consulting firm before he took over. Every said, "Oh, the reason it doesn't work there is they're going through the Canadian mountains and it's really steep and everything. So, they have a structural disadvantage that explains why they're O." So, everyone else like kind of has to get on the program because he in the same way Roger Bannister, I've been using this all the time, Roger Banister proves you can run a 4-minute mile and then the 4-minute mile starts falling like crazy. He proves you can take your O from the '9s to literally the 60s and then everyone else might not quite get to where he is, but everyone else is kind of getting to the high 60s, low7s on their own once they follow this path. So that's it. I want to switch gears completely. I have some other stuff I want to talk to you about, but the back half of this book is where most of the meat is and it's really interesting and Bill Aman, Persian Square, and Manel Ridge are huge players in that. And I I just want to ask, you know, when you read this book, Aman's obviously still in the news all the time. When you read this book, how do you feel Aman, Persian Square, and uh Mantel Ridge come out out of this book looking? >> I mean, they they look kind of like the generation of value investors who spent a lot of time reading 10Ks and buying cheap stuff, realized they had to do a little bit more than that to make a high return and got into various flavors of activism. Um, so and I think there's, you know, there's some level of pretty mercenary behavior and that's what you expect. Like it's it would be very very odd to expect the hedge fund to be the the participant in this drama who's kind of best behaved, most friendly. Um, but I think they also just saw that there was this opportunity. They saw that there's there's this set of assets that can be used more efficiently and there's a way to make that happen really effectively. And you I think sometimes you to your point on Zuckerberg and how much he pays for AI researchers sometimes that's the actual insight you have to have is you can if you think that there is a billion dollar opportunity then the difference between paying someone $10 million a year or $50 million a year to make that opportunity happen is actually pretty immaterial. But it is weird to be the first person saying we will just literally pay you five times as much as you were making before when you thought that what you were making before was absurd. So, um, that's just sometimes how things go, especially if you have there's a fixed asset and every in every uptick in utilization is a lot closer to pure profit um than than just what the average of average performance of that business is. Like it does make sense that if you that you can transform these companies and that if you want to do that and you want to do it in a d-risk way, you probably want someone who has successfully derisked it before. I think it was also just impressive that they I mean in some ways the the person who comes out of this book looking the most impressive might actually be Buffett because he figured out he's he'd been presumably he's been reading railroad annual reports since you know he's been reading the reports for half a century before he decided that BNSF is finally cheap enough that we could actually buy some of this thing and eventually bought all of it. Um, so he he figured that out early and but but I think people still had to like you could still look at that deal and say he picked a specific network, he bought a specific railroad and we can't just assume that the same thing works for every other railroad. And I guess Aman Aman had the view that yeah, it probably does work for every other railroad. And that view worked. But I'm I'm curious about what you thought of just all Yeah. all the boardroom drama, all the 13Ds, all that stuff. So the one the one story that really jumped out to me was there's uh so it after they've taken over uh CP they make a bid for Northfor Southern and Aman comes on he says look the bid for Northfor Southern has to make sense to my eight-year-old daughter and then he launches into like this crazy complicated bid where Harrison they'll throw CP into a blind trust Harrison will go become the CEO of Northfor Southern there's a CVR that pays out Northfor Southern if the stock goes down and all this type of stuff. And I was just like just classic Acman. Say something's going to be simple and then launch into things and they say uh the IR firm had never been inundated with as many calls as with a CVR, which I love CVRs, but I that was my personal favorite. I I'm with you. I I hadn't thought about the Buffett thing, but the Buffett thing looks absolutely incredible in hindsight, right? Because And also, it might be because I I was literally mapping Harrison's at each of these companies for about five years. So, I was matching railroad returns over over five year periods. I was like, "Oh, railroads start really taking off right around when Muffin starts mine." I'm kid there. There he is. He has none of the drama of Yeah, I I think Aman and Hill come out I think they come out incredible in this, right? Like they a the investment in the railroad is great. They generally uh they generally win on the strength of their arguments and the logic. I think they generally checkmate the board despite a lot of uh you know they talk about Canadian pride versus Americans coming in a lot Hal comes out great you know a lot of his concerns when him and Harrison take out CSX as kind of Harrison's last dance a lot of the concerns Halal expresses actually come to be real concerns and I'm particularly thinking about Harrison just says get me in there and I'll start turning the railroad around and hal's like no man we we need control of this board so you've got the backing to do what you want to do Harrison ignores him and that comes to bite him a few times. Hal has a very I I mean you tell me how many times has a hedge fund said I'm going to write an insurance policy for the CEO. I'll get I'll pay $100 million to buy him out. We'll be on the hook for that if we can't get him installed at the CEO. By the way, the new company, you know, the first thing they're going to have to do is pay the hund00 million buyout and they might try not to pay it because it's not going to him, it's going to us because we make them all. They have to pay that plus the new CEO. I I think he comes out looking incredible in terms of um creativity investment. I I think >> he really turns it into a trade, you know, he turns it into a trade. He says, "Okay, there's there's a piece of this risk that everyone is reluctant to take. Everyone no one really wants to underwrite it, but we think it's underwritable and we'll just we'll be on the hook for it in order to make this next thing happen." So it is in that sense it is just the liquidity provision function of um the financial system in general that you look for cases where the reason something isn't getting done is that there's some risk that nobody really wants to quantify and where the bid ass spread is too wide for anyone to really transact. You find a way to shrink that bit ass spread that often means taking on the most unloved piece of the transaction and just making that yours at at whatever price makes it make sense. And it is it is also evidence that it's it's great to have a large balance sheet. Like it's great to be able to put just a lot of money into the equity of something if you think that you're going to be pushing um if you think you're going to be driving a lot of the upside. So um and I guess like you could you could definitely imagine the the you know feeling a little bit salty that they were mostly riding along with regular shareholders. Someone could have just seen the same 8K that is the result of their many months of effort and bought the stock and gotten most of the returns from >> there. There are a lot of people who there there's a lot of stories of people see in the industry see oh Hunter is going to take over that railroad and they buy they buy the stock and they make you know basically the same returns as Aman and them. So pretty interesting. Let's go to some of the I I'd love to build on that with some of the stories through the book about board dynamics and activism. You know, I thought the most interesting one that jumped out to me was early in the book, I think it's the early 90s, there's a CEO who's about to leave, and he goes and he just says, "Hey, our long-term targets are," I'm making numbers up because I didn't write the specific, but he's like, "Hey, our long-term targets, we're going to get down to a 65 and we're going to be growing 5% per year." And then he leaves and all his lieutenants are looking around like, "What? There's no chance on earth we can do that." And there's lots of stories like that with director and board dynamics and stuff. I just like did this give you any insight into and obviously a railroad is different than a tech company, but did did this give you any kind of new or unique insight into the dynamics between CEOs, their lieutenants, their board, all that type of stuff? >> Yeah, I it it felt like it was a kind of uniquely weird sort of internally really hostile industry sometimes. Um, so I wasn't sure how much to read into that and but I think just general questions on CEO succession and what what should a CEO what should a lame duck CEO do? What should a former CEO say or not say? You know, a lot of these norms, you hear about the norms and they do seem kind of weird and specific and constraining like former CEO should not talk about the person who took over afterwards other than to be kind of blandly generically positive about their protege, etc. But then you you definitely see in this like here's here are all the frictions that can show up if someone decides that his last act as CEO is to put out some impossible target or you know say something weird to the media or whatever. So, um, yeah, you can you can definitely see why. And and I think what that blows back into is actually some of the comp stuff where, um, people get outraged about golden parachutes and things, but a CEO who doesn't really want to be running the company or who wants to be running it in a way that the board doesn't like is a huge liability from the perspective of the board. And the board's job is to steward the company. And so just like Aman and Hilal are willing to take these big risks on getting the deal done where they will be liable for a lot of the shortfall if it doesn't happen. Um sometimes when boards give someone a very large bonus in order to get them to leave. It's basically paying them just not to blow up a deal or not to blow up a CEO transition that uh that is actually important for the company. So you Yeah, it uh it made me feel, you know, slightly slightly better about overpaying incompetent CEOs because you're often paying them specifically to make them go away and be incompetent in in running someone else's company instead. >> The the one that really jumps out to me is uh Hunter's first diance with I I guess this would have been CN Canadian National where he leaves in 2010 and he he's taken them up. You know, he's done a great job. Everyone says he's done a great job and he he's ready to stay and the board's like, "Actually, Hunter, it's time for you to go. We need to get get you out of here." Which, you know, how many times do you see a star a rockstar CEO who's taking the company further than anyone thought it could get in terms of operating margin, stock prices, stocks screaming higher? How many times do you see the board say, "Nah, we're good. Let's move along here." And it reminded me in many ways of uh sports coaches. You know, there are these coaches who are so grinding. Tom Tibido with the Knicks who got fired this season after taking the Knicks to the Eastern Conference championship. Remind me they're so grinding they win and everybody loves him for a year or two and then after three years every's like I'm kind of done with this guy man. Let's it'd be more fun to not win and like not be around this guy. And I feel like Hunter is kind of like that. And it it was just an insight for me into I think of these boards as honestly kind of uh like out for themselves just trying to cash a paycheck for a lot of them. But these guys in this case were just like this guy's so unpleasant. We need someone in here. And that's not kind of what I would have expected from a board trying to keep their jobs. And the Canadian National Board was a political animal. >> Yeah. I So maybe that is part of the Hunter Harrison production function is he irritates a lot of people, ruins a lot of people's days. Um, and you know, when he does things like doing the job of someone five levels down the org chart and just insisting to them that he's going to do their job and then doing it better, like that's got to be humiliating, right? So, um, he probably is a really it was a really unpleasant person to work with in many ways. I I assume he paid his people well enough that some of them were willing to stick around and maybe, you know, people also just vary in how much they tolerate different kinds of unpleasant personalities. But if he if his sticktick is you look very carefully at the existing network you have. You look at all the ways that you could drive more efficiency by just telling customers here's the new way things are and you know if you don't like it just go ahead and pay two and a half times as much per ton mile um to our competitor you know to the trucking companies instead. um you you only need that once. And maybe it's actually more valuable to have one person show up, lay down the law, lay off a ton of people, and then have someone else who just doesn't have that track record and who is not the guy who did that and not the guy who said that or humiliated people. And maybe that guy produces, you know, 5% less operating income growth per year than Hunter Harrison would, but if everyone likes him, then uh it probably means there's less executive attrition. and um the board can spend more time thinking about actual business problems and not just gossiping about how noxious their CEO is. So it might be that this is actually another case of efficient markets at work is that yeah sometimes he does get uh gently gently removed from from the company and then sometimes there's u there's some friction in getting him out depending on how close he is to finishing whatever transformation it is. Like I I think if you if you had the same person and he just was at the same railroad for his entire career, I think one he would probably go crazy and two it would be an interesting piece of trivia if you were able to say, "Hey, did you know that the best performing US railroad over the last, you know, x number of years is this small cap railroad that never consolidated?" But I think the story makes a lot more sense if he is going from one to another to another to another. And by the time a critical mass of North American railroad infrastructure is already on this precision scheduled model, everyone else just has to comply. And then he's kind of, you know, that that's I I always feel a little bit depressed reading comprehensive biographies of someone who died because the last chapter or the last couple chapters are about things like and then he started forgetting the names of his grandkids and, you know, he got moved into a home or, you know, the last bit is just it's really unpleasant. Um but then in his case he kind of he actually seems to have done exactly what he feels he was put on this earth to do and then he died. Um so he kind of got the the full the full thing and um I'm sure if if someone had interviewed him on his deathbed that one he would have wanted to talk about trains and two he would have said yeah I think that uh the railroad industry is never going back and it's always going to be profitable more profitable than it otherwise would have been. is always going to deliver more more service at a lower cost than otherwise would have and um that's good job Hunter. I I don't know why this one I there is a tinge of sadness reading I think it's because the author genuinely likes Hunter and he develops a relationship with him and uh but I I was sad and you know the ending like he he dies suddenly he goes on medical leave of absence and two days later passes away but I was sad but yeah it was sad hearing him like he's orchestrating this last great turnaround and he's doing it multiple times they mentioned he can't travel as much he's doing it from his bathrobe in in his home one other story I was interesting and I just love your take on it. And then I want to compare him to one other figure we've read about recently. Uh so he every time he switches jobs he is getting paid and when he's talking to people he lets them know I get paid. The two stories that I thought were really interesting were uh and he you know he buys CSX shares on the open market when he's about to take over and he says that's a huge motivating factor for him. The two stories I thought were really interesting I'd love to share your world view. Number one, he gets paid on operating targets and he has a meeting with his management team and this is at CSX so his last railroad and they're trying to plan everything and he's like look here are the operating m operating metrics that are in my bonus target that is what we hit and it sounds great coming from a guy who's driving turnarounds all this sort of stuff but you know what else it sounds like that sounds like fraud to me like a fraudster says hey we hit my EPS metrics so I just want to hold on that one the other one that just I don't think there's much to I don't know if there's anything to read on but he goes on tangents fighting tooth and nail for every last dollar of compensation to the point where you know Persian Square and Polal get this man $400 million all in probably right they get them all and when he's about to take over CSX he yells at Paul and says hey for four months I was consulting for Persian Square and trying to get the CEO role at uh Canadian National Pacific whichever it was and I wasn't getting fully paid on that on that time and the reason that struck me was because when he starts posting people for his last job at CSX there are all these stories where the people are talking and he's like, "You're going to get well compensated." They're like, "Hey man, I've been working here for a month. I don't even have an employment agreement or compensation or anything yet." And it it was just so funny because that's also another thing that's kind of reminiscent in the back of my head of bad actors where it's like they bring everyone over on promises and then nobody get made but them. So, I just wanted to ask those two things from this go. I'm not accusing anyone of anything. Just like if you gave me these in a a black envelope, be like, "Oh, yeah. I'd be very hesitant around that guy." I mean, that's that's part of what makes fraud so hard to spot is that sometimes I mean, sometimes they're just really obvious, but sometimes they're they're hard to spot because the fraudster is doing what everyone else is trying to do and they're able to hit the numbers that everyone else tries to hit. It's like the the observation that people in um when when people when um long distance um bike racers were doing lots of blood doping and things, it wasn't like the 200th fastest person who is turning himself into a guinea pig in order to become the 150th fastest person. It's the top people. It's the people who they would be number 11 and forgotten, but they could be they could be on the top 10 list if they make this one little decision. and it makes them 1% better, but it's in a domain where 1% is the difference between world famous and nobody outside like only the sport fans actually know this person's name. So um so sometimes something you can execute well enough that it does look like fraud. I think the other thing is that when he is doing these weird self-centered negotiations, but he's also paid very much on performance, what has to be in the back of people's minds is he's going to fight about this hard every time he's talking to the unions, every time he's talking to suppliers, every time he's talking to customers. And so maybe he is actually worth whatever that incremental extra amount of money is because he just does not give up until he's gotten everything he possibly can. So, and you also and then you can think about that one step further and be like, if he spends the next two weeks just full-time negotiating comp, that's two weeks he's not going to spend running the railroad, and that's two weeks that we have to wait before things start improving. So, maybe it's actually worth paying him just to shut him up and get him to focus on other things. um the other stuff. Yeah, he he seemed, you know, very very organized when it came to moving large uh large vehicles around on tracks and maybe a little bit less organized in terms of moving paper to the appropriate um HR person and getting getting an actual number on someone's employment contract. Um, and I I don't know, maybe maybe some of that is that he's just doing a little bit of working capital management and trying to rope people in and then, you know, they they they're getting paid very well, but maybe 15% less than they thought they were getting paid and they but it's not quite enough that they want to quit because that would also look bad. People would wonder if they just can't handle working under Hunter and maybe they're just not not quite as good as they think. And so like all this stuff, it's it's a pretty effective bundle where if you are really abrasive and you set incredibly high standards, it does actually allow you to get away with a lot of otherwise abusive behavior that people would call you on because they know that if they just quit it, people will wonder if you're just not the kind of person who can deliver the right operating ratio. >> It's all great points. Uh let me let me ask my last point. I I can't believe I'm not going to mention Piss and Bill, but we're we're going to have to pass them for for time. But let me do my last one. The last book you and I read, if I remember correctly, and there's always a chance time's fine for was Larry Ellison. And I was interested in the similarities and contrast between the two, right? Like similarities both of them. Ellison gets into sailing, Hunter gets into equestrian. They've got side bit projects that they're having their company sponsor and especially at CN it becomes an issue for Hunter, but the expensive side projects. They've got great lifestyles. I mean, Larry is a different magnitude than Hunter, but Hunter's 100 millionaire. Larry's a billionaire at some point, minimal type. Uh, you know, the real things I was thinking about though was uh Hary Ellison has no problem taking vacations, right? It actually becomes a point of concern with the board and investors. He's going six weeks sailing everywhere. Hunter Harrison does not vacation, right? He's cutting vacations left and right. That there are all these stories of his family being like he works Christmas morning. His chief of staff's like Saturday morning we called it hunter time because the chief of staff. So I was just interested in the difference in different industries and everything. But do you compare and contrast when you read these two? Do you see anything in the management styles or anything that that blends or is it just hey two different people exceptional different paths to reach similar results? you kind of read just the huge convergence between these books we just read. Yeah, I think I think the the kind of e lack of self-awareness or total comfort in one's own skin depending on whether you like them or not like that's that's definitely a commonality and I don't know if people like that just have some moment in their life where you know I I don't know if Barry Ellison just had some moment where he said okay I have you know I have made everyone around me so much money because Oracle is all me and therefore if I feel like taking a vacation that's the best thing for Oracle because when I'm running Oracle I always do what's best for Oracle. You know, by definition, this is what's best. Or um I think the other way is that it's just a a pretty natural thing that Thunder Harrison wakes up on Saturday morning and he's been dreaming about the railroad and he wants to start talking to people about the railroad and that's what he's going to do. Um, so yeah, it might be just like a slightly different wiring where if it is fun and gratifying and it just it feels like a lot of this book, it actually feels like this is really the first biography of an esports star where he you're reading about someone who is just making a ton of complicated decisions based on some very complex thing where you have limited controls, limited inputs. there a bunch of external things that are happening, but if you are able to make lots of reasonably good decisions really really quickly, you just automatically win. And he seems like that kind of guy at at multiple levels. But also, if you look at competitive esports, a lot to get good, you have to just have lots of actions per minute and incredible reaction time and you have to put a lot of hours in. But to get really good, you also have to come up with a new meta. You have to figure out some strategy that other people did not figure out. And then you have to be very adaptive whenever the circumstances change and figure out what is the new strategy that didn't work before and will be the dominant one now. And he did some of that too. So it's it is the same kind of um the same kind of epicycles like cycles and epicycles of you've got to get everything to where it's supposed to go today but you also have to get the business to where it needs to be over the next 10 years. Um, and Ellison, I guess maybe there's there's also some kind of compatibility where if Harrison's big thing was we're actually going to stick to a schedule and everything flows from that. If that's the case, it means that everything that everything else has to vary in response to how much effort is needed to keep that schedule. And that means that's just not a a good system. It's not a system that's very compatible with long vacations. It's not a system that's compatible with being asleep during normal business hours, um, US time. Whereas with Ellison, like part of Ellison's attitude was there was that really interesting parallel where Ellison talks about how customers will tell him, you need to change your e-business suite around our business. And he would say, "No, you just need to change your business around the EB business suite." And in one sense, that is what Harrison was doing. But in another sense, I think Ellison was just he was more okay with downtime. And if Harrison's big idea was downtime is the problem. And downtime and unpredictability are completely unacceptable, then that just leads to very divergent attitudes towards how much intensity, how much your work intensity should be coming from you, coming from the fact that you're pretty interested, pretty jazzed right now versus how much of it is just there is a problem and you are the the person with whom the buck stops. So you're working until the problem's gone. >> If I could just ask a point you made ear the esports one is great cuz and I I compared Harrison to a coach. He reminds me of one of those hard church and coach esports great. Like to me when I read the Harrison biography I I I kind of got it right. Like this is a man who was all consumed by railroads. And not that he wasn't smart, but he wasn't like there's no hint of like Harvard Business School or this man was a natural genius or anything, right? But he literally has a photographic memory when it comes to one thing, railroads. And he's obsessed. And he's not obs I I think the book makes tonight point. He's not obsessed to the point where he's got like railroads on it. He's not a >> He loves the business of railroading. Go ahead. >> The the specific point they made there was that the railroad industry does attract people who are just really nostalgic for when railroads were a lot more important and silly and so on. >> Joe Biden would have been a perfect railroader. >> Yeah. Yeah. But then yeah, the I think the line is something like Hunter Harrison is really interested in the railroad industry today and the railroad industry in the future. And from a financial perspective, you could say he is he has no interest in what the stock chart looks like, but he has a lot of interest in what the net present value of the business is. And that is uh that's something you really want in a CEO. You want someone who can show up at a company that's doing incredibly well and not feel really nervous like if they change anything, they ruin everything. And also can show up in a company where the stock price is down 90% from the peak. or in the case of railroads where they used to be something like 70% of US equity market cap and now we've had to create new categories like transportation just so that there is a sector that is big enough that isn't just like here are the three names. Um so he if you can be completely indifferent to what happened before but you can be very responsive to what's going on right now then you can do quite well in a space like that. It's I guess maybe that that's something um on the Ellison versus Harrison point with tech. It is more of an active business like you have to decide what the future looks like and either >> makes multiple bets right and I think both of us are impressed if he makes seven big bets five of them turn out correctly which in tech I mean because the bets can be grand slams that it's an unparalleled track record. >> Yeah. Yeah. Like it's it's so funny to read that book and and he's basically you know he doesn't have the vocabulary for it but he's basically like you'll be doing a lot of your work on your iPad and on your iPhone and you you know everything's going to be on a server somewhere and you won't actually have files that are on some physical device in your home except as just a temporary working cash or something like he he knew that stuff was coming and he got it right. um with Harrison, you know, he does have that one big bet, but in a sense that one big bet is just it it's not some kind of cosmic macro bet really. It's just a way that you could recut the spreadsheet. you know, he I I think the timing is wrong for this to have literally been the output of a pivot table where he just tries to look at, okay, what what do margins look like if we just sometimes move these trains partially filled and what does it look like if we assume that by the end of this, you know, within a year or two, everyone's just going to adapt to that and how much can we lower our costs if they get a little salty about that? like he it's the timing doesn't quite work for that, but it is the kind of thing where you when you make a bunch of incremental progress, you realize that's actually what you're progressing towards and that you could make progress a lot faster by just going straight there. So, in that that that model of you're going to constantly make incremental progress like you're you're sending trains that would be recognizable to u to Cornelius Vanderbilt on routes that Cornelius Vanderbilt may have personally owned and it's going to haul things where he could look at it. he could say, "Oh, that one's full of coal. That one's full of gravel." You know, he would be able to understand. He'd be able to read the 10K pretty straightforwardly. Um, so in that sense, you you don't want to be super imaginative. You you actually just want to be very literal and linear and um and so you also don't need to take a lot of time off to dream big dreams about railroads. Like the big dream is we could grow revenue 2% faster annually and that really compounds over time and it's very very accreative. we could buy back a lot of stock as we get rid of some of our excess capital equipment. Like it doesn't doesn't require insanely bold dreaming, but it does require just this relentless grind of making everyone step up their game a little bit. >> The the only other point and I think we have to wrap here because I I have to stop, but the only other point was there's so many differences and I think I lean a little bit more the Harrison model where like the price of greatness, right? Harrison to me has the price of greatness whereas Larry Ellison I'm not saying he's not great because he's clearly great. He's just like out there like two weeks in Australia. Two months in Australia, guys, and then we'll make the bet of the century when I come back. Uh, but the the one thing that jumped out to me is both of them are obsessed obsessed with how Wall Street reacts to their quarterly earnings numbers. Like they're really obsessed with it. A lot of uh like I told you in the Oracle book so much of it is you they take out an ad to promote the earnings and tell people why there's no SC and with uh Hunter like so much especially in the latter years is around oh my god we're about to report earnings we've got to make sure people understand it the stock price reaction and I would have guessed like these guys in my mind are business builders I would have guessed they're thinking beyond that I don't know if this is just N of2 but I I was just really surprised by how how much obsession they put on the quarterly earnings results, the analyst interpretation, all that sort of stuff. I'll let you have the last word there if you have anything to add on to that. >> No, I think it's it's nice to have internal motivation and you it's very hard to accomplish things without some external reference. And Wall Street is very good at being cynical. You know, people love to be the first person to figure out that somebody is lying or that some trend that looks invincible is actually completely unsustainable. So, um, it's, you know, it's a great way to stress test yourself and figure out to to what extent did you actually pull off something amazing and to what extent did you really manage to shift some costs and shift some business uncertainty onto the next person. But, you know, so far railroads, they they haven't had some complete collapse. It's uh, so it's clear that Underre Harrison was not single-handedly holding the industry together. And also that he didn't just, you know, he probably did identify a lot of the low hanging fruit, like maybe there's an alternate version of the railroad story where it takes 10 or 20 years longer to have valuations reset where they are today, but it does end up happening. Um, so but it it does look like he he did he made necessary changes. They actually worked out really well. He did reset the standard of the industry. missed out on some vacation time. But I think I think he'd be very like I'm I I suspect he was very happy looking back at his career >> at at Oh, I think the book even says it at the end of the book. So, he passed away and he was talking about CSX, which is his last business, getting them to a mid50s O and they were kind of in the mid the mid uh 65s when he takes over and they were stuck right there. And I I thought it was interesting right now CSX, I looked it up, they're in the mid60s as we speak today, almost, let's just call it 10 years later, right? And you do wonder like, hey, if he was still alive, would all the railroads be pushing into the mid-50s? Or if we lived in an alternative universe with no Hunter Harrison, would all the railroads today kind of be in the high 70s and there would be the new Hunter Harrison be coming along and be like, we can get to the mid60s and by 2035. Why don't we end it there, Bern? This has been great. Uh, I'm looking forward. I'm about to go on the baby moon tomorrow. So, you and I are gonna have to pick a book for next month so I can read it on the the flight there because you've got four kids. I'm about to have two. You know, the best time to read is when the grandparents have the kids. >> But, uh, >> absolutely. >> Burn Hobart from the DI, this has been awesome and looking forward to chatting next month. >> Likewise. All right. >> A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.