Saturday Serendipity
Quote, Ivar Kreuger, Interesting find.
Hi.
Reading time: About 8 minutes
Quote
There’s obviously a balance to maintain between confidence and humility. You have to be humble enough to recognise when you’re wrong. I’m willing to look silly.” - Bill Ackman
Ivar Krueger
I heard the episode of Ivar Kruegger on Founders Podcast by David Senra and I absolutely loved it.I highly recommend you listen to it. There is also a book on him named ‘Match King’
My partner Charlie (Munger) says there is only three ways a smart person can go broke: liquor, ladies and leverage,” Warren Buffett said. “Now the truth is -- the first two he just added because they started with L -- it’s leverage.”
The problem is not getting rich, it is staying sane. —Charlie Munger
Ivar Kruegger was born in Sweden in 1880. He was a very ambitious young person. He wanted to make a lot of money, but when he was young he realised that all the art is in Europe and the money in America. He wanted to create a monopoly in the match business as he recognised that there was a lot of negativity as they were struggling in the match business. Matches were basic and essential products back then. He studied John.D.Rockefeller and Andrew Carnegie as to how to build a ‘monopoly’. He uses their principles to make a match monopoly. Before he did this he was successful in other businesses like construction . So looking at the situation he decided to go ‘all-in’ and he bought a lot of production facilities and went on a capex spree. He wanted to minimise competition. That was his focus. Build monopolies. He did just that.
He created good companies. His companies were listed on the stock exchange and he knew that he needed financing to scale his business. To go with this he decides to announce a 25% dividend to all the shareholders. This causes a lot of people to buy his stock. He wanted to borrow money as he knew that this 25% dividend was not sustainable. He knew that the big banks would not give him money. So he targeted a bank named Lee Higinson. He targeted a partner name Durant at Lee Higinson. At this point his business was well known as they were making good profits. And at the same time Ivar had built up a reputation of making everyone a lot of money. Ivar pays a Swedish broker to set up a meeting with Durant(broker sets up a meeting with Durant). As he has this meeting Ivar tells the broker to slyly mention him and his businesses success. Now Durant was intrigued. He wanted to meet Ivar. Durant asked to meet Ivar. Ivar knew human nature very well. He made himself more important by saying that he could not meet him as he was busy but he would try to arrange a meeting. He played hard to get. Ivar was a master manipultor. He knew how to get people to listen. This meeting eventually led to the downfall of Ivar and the bank.
They risked what they had and needed for things they did not have and did not need. Just as Buffett said. Ivar prioritised growth over survival. This is what leads to the end of most businesses. Never ever underestimate the survival aspect.
To win the race you have to first ensure that you will finish.
Ivar pulled off a masterclass. He made a deal with many European governments who were struggling. Where he lended the government money so that they can handle their debt and in return for this he would get a monopoly for his match business. Now the problem with this was he did not have enough money to give to the government to manage their debt. He needed the backing of a big bank. This is where Durant comes into the picture. He hooked Durant. Government loans for match monopolies.
Ivar Kruegger had a very successful construction business as well with one of his partners who was an engineer named Toll. They opened up a business named Kruegger and Toll and it was very successful. He understood the power of incentives. At that time in the construction industry the biggest problem was the delays. There were a lot of delays in the project being completed and this ended up hurting the builder. The risk of delay lied entirely on the builder not the person constructing.
Ivar took the risk on himself. So what he did was he realigned the incentives. He said that if there was a delay in the construction he would bear the loss of delay. And if he did it earlier or on time he would get a bonus. He knew that people would pay for getting their projects to get over earlier and at the same time increase the efficiency of Kruegger and Toll. He made a ton of money. He became the biggest construction company in Sweden. This business acumen of his shows how smart he is. He understood incentives and used it to his benefit to dominate the industry. There is no doubt that he was a very smart person.
But.
He used this profitable business as a collateral. He borrows money. He uses John Rockefeller’s techniques. He was very successful in this he built a monopoly. It was one of the few companies which were profitable during the war. Durant who was backing Krueger. Now had an easy pitch to American investors.
He said this guy has an amazing track record in multiple businesses and pays a 25% dividend as well. American Investors were sold. Ivar got Rockefellers son to get into the board and leverage his network to raise even more money.
In order to succeed he had to grow at a good growth rate because of the amount of money he borrowed. If this did not happen. He would lose everything. He used to raise a lot of money to pay earlier debts but at the same time actually earned real profits. This is where the stupidity set in. Everything is destroyed in one instance if the growth is tapered off.
Over time Ivar Krueger had the banks who were the largest shareholders in his business to lend him more and more money. These banks made a helluva lot money as they got a lot of dividends. This made them ignore the blatant reality in front of them.
They hired an outside third party auditor who had to audit the financial statements of his companies. He sees the numbers and tries to make sense of them but cannot but still does not do anything. Well the answer is simple. Incentives. Ivar Kruegger is paying them a lot of money.
Even Durant was a little uneasy about the financial statements. So he used to go to the auditor and asked if he is fine with the numbers. But all of the doubts went away as the money flowed in. Ivar kept giving those dividends. As soon as the money comes all the concerns fly out of the window. People did not want to believe he is doing something wrong.
By 1929 Ivar Krueger had 400 companies! He has to sell a lot of shares as he follows the same thing for every single company he builds. For the last 10 years everyone is doubtful of his numbers but those doubts keep going away as the money they get keeps increasing.
Ivar was a very weird manipulator as well. He kept fake phones in his office to make him feel more important and also inviting people to parties with fake politicians (actors). He hired actors and used fake phone calls to make himself more important in the eyes of the other person.
Ivar wanted to expand his business monopoly to Germany. He was going to lend a 125 million to the German government to get a monopoly for his match business in Germany. When he signed this biggest deal of his life on the weekend when the market was shut. He thought by Monday the worst would be over as he would transfer the liability to the American investors. This was if the markets were normal. But the next two days in the market were the biggest fall in the stock market history. At this time the financial institutions were on high alert and slowly everyone starts cutting him off. Ivar was at the risk of defaulting. This would lead to a lot of banks also defaulting. By this time Ivar was going crazy. David Senra believes him going crazy was just an act.
There was a meeting with the bankers who financed Ivar. The Swedish police started investigating him as well. And at the night of the meeting in Paris. He buys a gun with ammunation in Paris. Durant was concerned as he was late. When they enter his bedroom they see him on his bed dead with three sealed notes. Saying this is the best solution for all. Lee higinson went bankrupt.
Ivar Kruegger was a legit businessman who could not stay sane as he got rich. He used the power of incentives to manipulate people and kept running his unique ponzi scheme and fooled a lot of people into bankruptcy. The crazy thing is he is not a person who was entirely a scam. He had businesses which were so successful they survived a long long time. Phillip Morisson bought his match business and took the business private some time back.
Interesting find
Experience of attending this years Berkshire Hathaway meeting
Thank you for reading,
Samvit.