Cornelius Vanderbilt was the richest and most powerful man in America when he died in 1877. Had he liquidated his holdings, it would have taken a fifth of the nation’s money supply to buy his assets.
How did he get so rich? Over the previous eight decades, he built empires in steamships and railroads, abandoning the former just as the latter assumed the central role in the movement of goods and people from one side of the country to the other.
More to the point, he built these empires by exploiting the emotional irrationality of others. Long before Warren Buffett urged investors to be fearful when others are greedy and greedy when others are fearful, Vanderbilt embodied this philosophy by using steep market downturns to expand his holdings at sharp discounts.
“To him, the great Panic of 1837 was a time for the hunt,” wrote T.J. Stiles in his Pulitzer Prize-winning biography of Vanderbilt, The First Tycoon. While the rest of the nation retrenched to lick their wounds in the ensuing depression, the then-43-year-old businessman dispatched boats to crush his competitors in rate wars and launched a new state-of-the-art vessel named after himself.
He was able to do so in part because he was frugal. The steamship trade was one of the most “aggressively competitive businesses in America” at the time, noted Stiles. But because Vanderbilt kept his costs low, he could make money even after slashing his prices to a fraction of his competitors.
Part of this was technological, as his newest steamships used half as much fuel as the older versions operated by his peers. Part of it was also achieved by shifting costs to customers, much like restaurants do by putting the onus on customers to compensate waiters and waitresses. “He kept personnel expenses down by shifting them to his customers; passengers began to complain that they were expected to tip for almost everything,” says Stiles.
The fact that he carried little debt also mattered. By being better capitalized than other steamboat and railroad operators, Vanderbilt could absorb losses much more comfortably than competitors who had banks and bondholders breathing down their necks. He made it a habit as well to be flush with cash, the most valuable commodity at the nadir of an economic downturn.
His maneuvering to take control of the Stonington Railroad between 1845 and 1847 serves as a textbook illustration of how he used these strengths to build his empires.
The Stonington served as a critical link between New York and Boston. Steamboats would depart Manhattan, travel through the Long Island Sound, and then drop passengers off in Stonington, Conn., at which point they’d board a train for the remainder of the journey. After the railroad teamed up with Vanderbilt’s competitors to offer lower consolidated fares for the trip, and thereby threatening the Commodore’s steamship lines in the area, the burgeoning millionaire set his sights on running the highly leveraged Stonington into the ground through a cut-throat rate war.
As word of the war splashed across newspapers in New York and New England, the Stonington’s stock plummeted. Vanderbilt bought up enough of its now-discounted shares to seize five seats on the board in 1946. One year later, he named himself president of the branch line. His coup was complete, and he was able to accomplish it for pennies on the dollar by acquiring Stonington’s stock when everyone else thought it was going to zero.
Vanderbilt used this maneuver time and again over subsequent decades to build the biggest and most powerful company in the country at the time, the New York Central, which lives on even to this day via Vanderbilt’s crowning masterpiece, Grand Central Station.
The lesson in all of this is that market swoons, like the one we’re currently experiencing, are nothing to be afraid of. If you position yourself appropriately by keeping cash on hand and avoiding debt (particularly margin debt in your brokerage account), these are the opportunities to double down on great companies at attractive prices.
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