6 lessons from this tycoon

Known as the first great corporate tycoon in American history, he amassed wealth and power of unprecedented size.
By Larissa Fernand |  03-06-19 | 
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Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

When Cornelius Vanderbilt was just 15, he spotted a Periauger (a 2-mast sail boat capable of transporting goods and passengers along the New York waterfront) that was up for sale. Not having the funds, he requested his mother to lend him $100. That was a lot of money in the early 1800s, so she drove a hard bargain. Before his birthday, which was a few weeks away, he would have to plough, harrow and plant an uncultivated 8-acre plot of land. If he fulfilled that condition, he would get the money. Do note, it was a loan, not a birthday gift.

He quickly enrolled the help of some neighbourhood boys and set out to accomplish the task. He succeeded, got the money and bought the boat. Years later, he would comment that he never felt as much satisfaction, even when he made $2 million on a deal, as he did on that bright May morning when he hoisted the sail, put his hand on the tiller and took his boat out to sea.

Vanderbilt began to ferry passengers to and fro across New York harbour. Within a year, he repaid the capital with an additional $1,000 gift to his mother.

The Commodore

In 1812, when the U.S. and Britain went to war over maritime and trade rights, Vanderbilt procured the contract to supply the forts stationed in New York Harbour. The British blockaded New York harbour and the U.S. army needed someone to carry provisions to the fortifications protecting the city. His small fleet of ships ferried food, munitions, and soldiers to the American forts. His activities during the war earned him the nickname “The Commodore,” a moniker that stuck throughout his life.

He worked hard, lived frugally, saved profits which were invested in other boats. By the time he was 24, he was worth $9,000 and owned several boats. He also took an interest in ship design and proposed modifications and design changes to boat builders.

When commercially viable steamboats arrived in New York, Vanderbilt realized that the future belonged to these vehicles independent of wind and tide. He set out to teach himself all that could be learned about this new mode of transport. He also wanted to learn how to handle these volatile vessels, which would explode if too much pressure built up in the boilers.

Since he could not afford to buy or make one, it entailed no longer running his own show. He opted to work as a captain for attorney Thomas Gibbons’ steamboat ferry service. He negotiated a payment of $60/month as the flat remuneration and half of the profits from the business.

After a successful run, he and Gibbons decided to run a ferry service from New York to New Jersey. Gibbons financed the building of a new and large steamboat, designed and commanded by Vanderbilt. This fares on this boat were priced extremely low to undermine the competition, but the price of food and drinks were raised to compensate.

While this is not the right place to detail down the very engaging drama that ensued as the monopoly operating the service (with state backing) tried to shut them down and get him arrested, it is worth noting that by 1829 Gibbons’ fleet had over 70 steamboats in operation.

Vanderbilt, who by then accumulated $30,000 of capital, decided to venture out on his own. Typical to his style, he engaged in fierce price wars with all competitors.

In the New York to Albany run, he pitched a battle with the Hudson River Association, a cartel of steamboat owners. The ensuing price war lasted for a few years with Vanderbilt eventually offering free passage on his boat, with extremely high costs of food and drink. He was losing money, but so was the association. Eventually, they blinked first and offered him $1,00,000 with an annual payment of $5,000 to leave the Hudson River for a period of 10 years. Naturally, he accepted and turned his attention to other waterways. By the middle of the century, he was recognized as the greatest ship owner in the U.S.

The discovery of gold in California gave rise to the Gold Rush. But travel was not easy. To reach California, people would sail around Cape Horn (South America) or sail to Panama and then take a ship to San Francisco.

Ever the opportunist, he felt there had to be a better route (this was before transcontinental railroads). If a steamboat could sail the San Juan River that connected Lake Nicaragua with the Atlantic, the route to the Pacific would be shorter and less arduous than the ones being taken. He backed his instincts and constructed a special steamboat to overcome the rapids, sand bars and rocks. This venture began to earn him a $1 million every year.

The Colossus of Roads

In October 1833, he took his first train ride. The locomotive powered up to 25 mph and derailed, throwing him down a 35-foot embankment and giving him three broken ribs and a punctured lung. He was not put off that easily. He realized that railroads were not simply carrying passengers to embarkation ports, but would soon compete directly with shipping lines. He set out to build a railroad empire.

He noticed that the New York and Harlem Railroad was poorly run and generated scant revenues. But he also noticed that it was one of the only two railroads with direct access to Manhattan. He began to buy the stock which wavered between $8 and $15 a share. The more it dipped, the more he bought. The stock price eventually galloped ahead. The other stock he purchased was the Hudson River Railroad, with a laughable short track of 140 miles, but direct access to Manhattan.

He invested in the New York and Erie railroad, acquired the Canada Southern Railway, amassed a railroad empire with the first complete service between Chicago and New York, and eventually earned the moniker Colossus of Roads.

Learning from the tycoon

In The Life of Cornelius Vanderbilt, he is described as wantonly cruel to many of those closest to him, deeply committed to his own erotic pleasures outside of marriage, devoid of manners and charity. He was also famed for his ability for expressive profanity. But he possessed a furtive genius for making money. Cornelius Vanderbilt, the wealthiest men in America at one time, built his fortunes on the transportation revolution - owning and operating railroads and steamboats that changed the face of America. He reportedly accumulated a $100 million fortune by the time of his death in 1877 - more than was held in the U.S. Treasury at the time.

1. He was singularly focussed.

Being a school drop-out, he never let his lack of education come in the way. He never let his emotions or ambitions get the better of him. He once confessed that he has “been insane on the subject of moneymaking” all his life.

2. Frugality was one of his most potent weapons.

He understood the folly of extravagance. He told his son that any fool can make a fortune, but it takes a man of brains to hold onto it.

He controlled his money, he never let his money control him. He always looked for value when he spent. He invested wisely. He personally invested millions in building Grand Central Station, one of the largest train depots in the world.

3. He shunned debt.

He never lived beyond his means. Was never in debt. Never bought on credit.

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.

4. He saw disruption as an opportunity.

He never let disruption get the better of him, instead he seized it with both hands. The steam engine was one of the most disruptive wealth-building advancements of the 1800s. Later, it was rail transportation.

5. He was focussed on his delivery.

He knew that if he met a need, he would make money. In his case, it was to make travel easier. One of Vanderbilt’s quotes underscores his penchant for giving consumers a better deal: “I have always served the public to the best of my ability. Why? Because, like every other man, it is to my interest to do so.”

6. Competition never fazed him.

The Stonington Railroad served as a critical link between New York and Boston. Steamboats would depart Manhattan, drop passengers off in Stonington, at which point they'd board a train for the remainder of the journey. Stonington Railroad teamed up with Vanderbilt's competitors to offer lower consolidated fares for the trip, thereby threatening the Commodore's steamship lines in the area.

Vanderbilt resorted to the cut-throat rate war. Stonington Railroad's stock plummeted. As the stock collapsed, he began to pick it up and eventually seized five seats on the board in 1846. His coup was successful.

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