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.
The next billion-dollar iSecret
The world's biggest tech company forgot to show you something at its recent event, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here .
The article Here's What Cornelius Vanderbilt Would Do When Stocks Tumbled originally appeared on Fool.com.
Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
Copyright © 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
