Invest in the Supplier

Charles Crocker, Mark Hopkins, Collis Huntington and Leland Stanford became some of the wealthiest men in California. by selling supplies to the gold seekers of the California gold rush. The story of how they became the “Big Four” and be some the wealthiest and most powerful businessmen in the world is even more instructive. Conventional wisdom has it that they did so by building and owning the Central Pacific Railroad. The reality of the wealth of the Big Four is entirely different.

The four merchants saw a need for a wagon road into the foothills to keep up the profitable traffic through their stores. A visionary by the name of Theodore Judea convinced them that converting that wagon toad into a railroad would lower cost and increase traffic. The beginning of the Civil War allowed the Northern dominated United States Congress to passed the Federal Act of 1862 to Build the Transcontinental Railroad. The Big Four were positioned to take the big gamble.

The Big Four sold investors stock in the railroad and borrowed more in government guaranteed bonds to obtain the millions of dollars needed to build the railroad. Then they hired themselves to build the railroad. Charles Crocker was in charge of construction. Huntington was in charge of raising money. Stanford handled all of the politics.

When the golden spike was driven home to signal the completion of the transcontinental railroad, the Central Pacific was essentially  bankrupt. There was far more debt than cash flow to pay the interest payments. Most of the original investors gave up in despair allowing the Big Four to use the profits from the building the railroad to buy up the almost worthless stock of the Central Pacific railroad. The Big Four gave up control in the early days of the Central Pacific, to buy it back for pennies on the dollar once it was completed.

The Knowledge Nugget from Charles Crocker, Mark Hopkins, Collis Huntington and Leland Stanford is simple. Just like when they made a small fortune selling supplies to the gold seekers they made a larger fortune selling supplies and services to the railroad. The suppliers to a fast growth industry often make more money than the participants in a high growth industry.