An Investing Story About Extravagance vs Value

by Matt Spillar · July 15, 2019

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I recently finished reading Reminiscences of a Stock Operator, by Edwin Lefevre. The book is a fictionalized biography of famous stock trader Jesse Livermore, who Lefevre names Larry Livingston. Originally published in 1923, the book has continued to be a classic nearly 100 years later. It discusses how Livermore learned how to trade, the lessons he picked up, and his many successes and failures throughout his life. You can read my full recap here.

There was one story in particular within the book that stood out to me, and has been on my mind a lot these past couple weeks. I wanted to share the story and my key takeaways with you today.

The Pennsylvania Dutchman investigates

This story describes a wise investor known as The Pennsylvania Dutchman. While many speculators are content with acting on hot stock “tips” they hear from others, a wise investor is one that does their own research. The Pennsylvania Dutchman was holding a significant number of shares in Atchison, Topeka, & Santa Fe Railroad. He began hearing reports that the company’s president was an extravagant and reckless manager, so he decided to pay him a visit to see if this was true.

He was a great investigator, an indefatigable Missourian. He believed in asking his own
questions and in doing his seeing with his own eyes. He had no use for another man’s
spectacles. This was years ago. It seems he held quite a little Atchison. Presently he
began to hear disquieting reports about the company and its management.

He was told that Mr. Reinhart, the president, instead of being the marvel
he was credited with being, in reality was a most extravagant manager whose
recklessness was fast pushing the company into a mess. There would be
the deuce to pay on the inevitable day of reckoning.

This was precisely the kind of news that was as the breath of life to the Pennsylvania
Dutchman. He hurried over to Boston to interview Mr. Reinhart and ask him a few
questions. The questions consisted of repeating the accusations he had heard and then
asking the president of the Atchison, Topeka & Santa Fe Railroad if they were true.

Mr. Reinhart not only denied the allegations emphatically but said even more: He
proceeded to prove by figures that the allegators were malicious liars. The Pennsylvania
Dutchman had asked for exact information and the president gave it to him, showing
him what the company was doing and how it stood financially, to a cent.

The Pennsylvania Dutchman thanked President Reinhart, returned to New York and
promptly sold all his Atchison holdings. A week or so later he used his idle funds to buy
a big lot of Delaware, Lackawanna & Western.

Years afterward we were talking of lucky swaps and he cited his own case. He explained
what prompted him to make it.

“You see,” he said, “I noticed that President Reinhart, when he wrote down figures, took
sheets of letter paper from a pigeonhole in his mahogany roll-top desk. It was fine heavy
linen paper with beautifully engraved letterheads in two colors. It was not only very
expensive but worse it was unnecessarily expensive.

He would write a few figures on a sheet to show me exactly what the company was
earning on certain divisions or to prove how they were cutting down expenses or reducing
operating costs, and then he would crumple up the sheet of the expensive paper and throw
it in the waste-basket. Pretty soon he would want to impress me with the economies they
were introducing and he would reach for a fresh sheet of the beautiful notepaper with the
engraved letterheads in two colors. A few figures and bingo, into the waste-basket!

More money wasted without a thought. It struck me that if the president was that kind
of a man he would scarcely be likely to insist upon having or rewarding economical
assistants. I therefore decided to believe the people who had told me the management was
extravagant instead of accepting the president’s version and I sold what Atchison stock I held.

He visits the president, Mr. Reinhart, to confront him about whether he’s being reckless with the company’s money. After emphatically denying the allegations, Mr. Reinhart wrote out exact details of why they were wrong and where the company stood financially. There was only one problem – he was writing out these details on fancy linen paper with beautifully engraved letterheads. This paper was unnecessarily expensive, and after jotting down a few notes, he crumpled it up and threw it away! It’s clear that he wasn’t valuing money well, and a company with leadership like this was sure to struggle in the future. The Pennsylvania Dutchmen took his findings and sold all his shares of Atchison.

Pivoting to a Better Investment

“It so happened that I had occasion to go to the offices of the Delaware, Lackawanna &
Western a few days later. Old Sam Sloan was the president. His office was the nearest to
the entrance and his door was wide open. It was always open. Nobody could walk into
the general offices of the D. L. & W. in those days and not see the president of the
company seated at his desk. Any man could walk in and do business with him right off,
if he had any business to do. The financial reporters used to tell me that they never had
to beat about the bush with old Sam Sloan, but would ask their questions and get a
straight yes or no from him, no matter what the stock-market exigencies of the other
directors might be.

“When I walked in I saw the old man was busy. I thought at first that he was opening his
mail, but after I got inside close to the desk I saw what he was doing. I learned
afterwards that it was his daily custom to do it. After the mail was sorted and opened,
instead of throwing away the empty envelopes he had them gathered up and taken to his
office. In his leisure moments he would rip the envelope all around. That gave him two
bits of paper, each with one clean blank side. He would pile these up and then he would
have them distributed about, to be used in lieu of scratch pads for such figuring as
Reinhart had done for me on engraved notepaper. No waste of empty envelopes and no
waste of the president’s idle moments. Everything utilised.

“It struck me that if that was the kind of man the D. L. & W. had for president, the
company was managed economically in all departments. The president would see to
that! Of course I knew the company was paying regular dividends and had a good
property. I bought all the D. L. & W. stock I could. Since that time the capital stock has
been doubled and quadrupled. My annual dividends amount to as much as my original
investment.

And the beauty of that story is that it is true and that no other stock that the Pennsylvania
Dutchman could have bought would have proved to be so good an investment as D. L. & W.

Directly quoted from Reminiscences of a Stock Operator by Edwin Lefevre (Pages 177-179).

On the other hand, the second company that The Pennsylvania Dutchmen visits is the complete opposite. Sam Sloan, the president of Delaware, Lackawanna & Western, exhibits a frugal nature – reusing empty envelopes as scrap paper. This trait shows that he truly realized the value of a dollar and it was more likely that his company would succeed in the long-term. The Pennsylvania Dutchmen invested in D. L. & W. and has seen its value skyrocket.

Lessons Learned

So what lessons can we learn from this story? The biggest takeaway for me was that sometimes small actions can have a massive impact. While I would never tell people they can’t have lattes and need to cut back on every small indulgence, I am a proponent of spending money on what you truly value. By being wasteful or careless with small expenses, we’re building habits that will make it more likely that we’ll be wasteful or careless with larger expenses. It’s all about the attitude we have towards how we spend our money. When we align our spending towards what we truly value, our finances are in a much better place.

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