Railroader（2025年8月 fintwit 读书会）

You're about to listen to the yet another value podcast with your host me, Andrew Walker. Today is my monthly book club with my friend Byrne Hobart. He writes the Diff. He's one of my favorite people to read. I think his newsletter has a higher open rate than any other thing that hits my inbox. So, I really enjoy talking to Byrne. We talk about the Railroader. The reason we're talking about it, as we'll discuss, is there's been a lot of railroad activity. So, we kind of thought we'd read something topical. Really interesting book. I think both of us were surprised by our takeaways and how we thought about it and the takeaways from the book, but really interesting book. I'll include a link in the show notes if you want to go check out the book or anything, but I'm excited to get to the monthly Finchwood book club. But first, a word from our sponsors. Today's podcast is sponsored by well, kind of Alpha Sense, but also kind of me. Look, I've been talking about it on the blog for a while, but podcast number 333. I'd encourage you to go listen to it. It's me and Ardan Faulen talking about the how to kind of improve and perfect the craft of investing. I think it's a fantastic podcast. I had so much fun. We got great reviews on it. And then alongside that podcast, we did a webinar with AlphaSense talking about using two tools that I think have kind of revolutionized investing for especially small investors over the past 10 years. Expert networks and AI. Alpha has a burgeoning set of AI tools and obviously one of the reasons I got involved with Alphus is because of the expert calls. So, I think you're really going to enjoy that podcast. I think you're going to learn a lot from that. I think you're going to learn a lot from the webinar. I'd encourage you to go the podcast is always free. So encourage you to go listen to episode 33. But the webinar is free. All you have to do is follow the link in the show notes. Go sign up and you can listen to us talking about a tool that I think will really improve anyone as a fundamental investor. So that is the sponsor of this podcast. And thank you for listening. And we'll get to the full episode now. All right. Hello. Welcome to the another value podcast. I'm your host Andrew Walker. With me today, it's my co-host for our monthly book club, Byrne Hobart from The Diff and Capital Gains. Byrne, how's it going?

Going great.

Awesome. Well, today, I’m excited to talk to you about the book we read, Railroader. That’s the name of the book, right? I can’t even remember the name of our own book.

It’s just Railroader. Yeah.

Yeah, Railroader. It’s cleaner. This is the history of Hunter Harrison, the CEO who ran 4—there are only 7 Class I railroads, and he ran 4 of them. He gets involved with Ackman in the book. He’s basically the railroad GOAT, right? I think people widely regarded him that way, and we decided to read the book because railroads have been in the news.

When we started doing this, there were lots of rumors that Buffett’s railroad, BNSF, and CSX would merge because Union Pacific and Norfolk Southern announced a merger about a month ago. So, we’re seeing the railroads start consolidating again, and we thought, “Hey, this will be a really interesting book to talk about with that backdrop.”

Just as we were getting ready to record, I think it was Bloomberg who reported that Buffett is—

Buffett’s not bidding.

Say again.

He’s not bidding, right?

He’s not bidding on CSX, but they announced a partnership at like three different places or something, and there should be synergies there. So everything’s all the chess pieces are still kind of rearranging. So, anyway, that’s the overarching theme of the book and what we thought. I’ve got tons of questions. I thought this was very interesting, but I’d love to start overall. Byrne, what were your takes on the book?

One of the things about the book is that I feel like he was either born in the exact ideal generation or the wrong generation. When you read about Harrison and his management style, he is extremely blunt. He’s very first-principles-driven—not in the sense that he just imagines there’s a way the business could work and makes it work that way, but he’s clearly someone who spent a lot of time looking at the spreadsheets, as well as the physical infrastructure, and asking himself, “Is there a better, faster way to do this?”

I feel like he was actually born to be a staff software engineer at AWS, Eddie, Google, or some hyperscaler because he has this very linear way of thinking about things. But he’s also able to abstract away the way things are done and ask if there’s a better way to rearchitect the whole system.

It’s kind of a spoiler alert for the book, but the historical way that the railroads worked, as it’s portrayed in the book, is that a train arrives, gets filled up with stuff, and, when it’s full, departs. It’s the customer deciding when it fills up. The railroad is trying to get trains to where there is demand, and obviously they’re scheduling this stuff, but the schedule is kind of a work of art. They’re always willing to delay things in order for someone to add one more carload of stuff.

That, of course, encourages the customer to take their time. They don’t have a really strong incentive to optimize around the train schedule because the train schedule is whatever they need it to be. Harrison’s idea is, “No, let’s actually just set a schedule. If the train’s not full, we will leave.” Then you know exactly how many trains you have, and you have a much better sense of where they are, how many of them you need, how many backups you need, and all of that stuff. Suddenly, the network actually becomes more tractable.

What’s weird about that is that there are all these anecdotes in the book where it’s clear that he has insane working memory, specifically around managing railroad networks. There’s the anecdote at the beginning where he likes to get a hotel room with a view of the railroad yard when he’s traveling for business.

He’ll call up the rail manager and be like, “Hey, I see the black engine over there isn’t moving. Why is that engine not moving?”

Then there’s another point later in the book where he actually pulls an all-nighter just being the dispatcher remotely for a different location. He spends the entire night doing that, even though he’s the CEO.

He’s the CEO. He’s 60—I think he’s in his late 60s at that point. He’s having some health problems, and he just casually pulls an all-nighter as a dispatcher. He says, “Dispatcher, listen up. I’m gonna make this work.”

Yeah. So, he’s really good at the granular, day-to-day details. You feel like people like that end up doing very well for themselves, and they hit some level where the thing they’re managing is at their maximum working memory. If they try to do a little bit more, things would start to break.

He just seems to be able to toggle back and forth between, “Here’s what’s happening over the next 15 minutes in this physical place,” and, “Here’s what’s happening over the next 50 years in the railroad business.” He does talk about the capital intensity and how railroad capital just depreciates more slowly than trucking.

One of the threads in this book is how much he hates and resents the truckers because they clearly have what is, in many ways, a better business—or certainly a much easier-to-manage business. Then he realizes that railroads do have this unbeatable competitive advantage: if you want to move a ton-mile of cargo over land and you have train tracks between where it is and where you want it to be, there is no cheaper way to do it.

So, you have that cost advantage, and then you have all this capital. He has some line about how the capital investments—the capital-allocation decisions you make now—are the ones you live with over the next half-century. You have to be really confident that you know what you’re doing.

That’s also what he’s trying to do with his management approach: make that a more tractable problem. If you have more of a sense of what utilization really looks like, where it trends, and where it peaks, then you actually can afford to buy more equipment and more trains, or repair the ones that you already have. You’re not flying blind as much.

In some ways, it’s also a book about the capital asset pricing model and how you can really lever up if you know more about what your returns are and how good or bad they’ll be.

Let me go high-level. There are lots of themes in this book. I found it fascinating. In particular, I was really surprised by this, and I want to talk about it with you in a second. I thought this was the best book I’ve read in a long time because it had these casual throwaways about how CEOs and boards work together, and how activists work. I’ve read entire activist books and never heard insights like that.

So, I want to put a pin in that for a second. But if I just back up to the high level, I’d say I read this book, and the whole book is about Hunter Harrison being the railroad GOAT. When Ackman wants to buy a railroad, he goes and gets Hunter Harrison. He gets his railroad to basically pay—I think this is CN paying CP $50 million—to get him out of his noncompete.

Yeah. And then when Paul Hilal spins out and wants to go get a railroad, he guarantees Harrison over $100 million.

I think he guarantees Harrison $100 million, and they pay CP, in this case, $100 million to get him out of his contract. People are throwing around—forget AI researchers—huge sums of money to get this 1 man, and the whole book is about Hunter Harrison being the railroad GOAT. I want to ask you: is he that good?

Because the whole book is dedicated to him, but throughout the whole book you'll see stuff like, “Hey, he takes their operating ratio down from 90 to 65,” but I keep seeing every other peer out of the corner of your eye is at 70. I keep seeing, “Oh, the stock went up 4× in this time period.” I went and looked at the stock price of all the other peers in the time period. They're better. Harrison's better, but it's not like you're screaming, “Better.” So, do you think that this is a case of this 1 man's brilliance, or do you think this is a case of, “Hey, he had a lot of tailwinds”? The railroad industry, for a lot of reasons, was getting better from the early 1990s to the 2010s, and he was really riding that.

Yeah. When I mentioned earlier, I wasn't sure if he was born in the exact right generation or the wrong one. There's some line where he gets his first job at the Frisco, and he's something like the 2nd person to be added to the team. I don't remember how absurdly long it was. I want to go back and look—I underlined this. Maybe I did. Hopefully I did.

Well, look, I'll just throw out a random one at the beginning. He gets married, and he's married to his wife for about 50 years, but they get divorced for a few years in the middle. It's like, oh, yeah, he would go to a bar and get into 3-on-1 fights and wake up in a hospital room. You're like, “What? This man would become the CEO? This is crazy.”

It is railroad business, and apparently there are all these anecdotes in that business about—it seems like the last gasp of a certain kind of blue-collar culture. It's not just that you should act as if you could throw hands if you're mad at someone; no, you will probably get into periodic fistfights at the office.

I love that he joins CSX, and this is completely different from throwing hands, but he joins CSX like, “Wait, our rulebook has policies on napping during the day for our workers?” We're not taking naps during the day. It's just like, that is true old blood: we are a monopoly, we have railroad tracks, and people will go on them.

Yes. So, here we go. He joins at the end of 1963, and he says he is the 1st or 2nd person hired in his department at Frisco since the end of the Second World War.

Some industries go through that, especially industries where they were growing fast and then they're in decline, where the last large class of people who got hired into that industry are the people who end up running it. Once growth slows down, average age goes up, and everyone is really cautious. The people who move up in that business are the ones who were more cautious, the ones who did not want to spend and did not want to change things, and could manage the decline well. Eventually, you reach this point where all the bad trends are exhausted.

Coal was such a big part of the railroad business for a very long time. Railroads are great for transporting coal, but we just don't want to be transporting as much coal as we used to, so that number always ticks down, and you have competition from trucking. He did seem to get into the industry probably before it reached equilibrium, but he got into the industry at a point where they were very close to equilibrium with trucking.

Maybe things like the oil shock, where it affects trucking more than railroads, helped out early in his career. Suddenly, the phones are ringing again with customers they haven't talked to in a very long time saying, “We just can't afford to be paying people, with gas expensive. We can't afford to be paying people to truck this stuff around. Let's put some of it back on trains again.” So, he had some of those advantages.

I'm sure there's some level of PR, and there's some amount where he has to present himself as a smart guy. Surely, after the 1st time he realizes that people are going to pay to cash him out of his noncompete, he realizes that a lot of his net worth comes down to how much he can convince boards that he is just the railroad messiah versus being a good—maybe the best—of the railroad CEOs, but the best among a pretty comparable peer set.

There's an interesting anecdote. Sorry, which one was the one he did with Ackman? Was it CP, or was it CN? I can't remember which Canadian railroad.

I think—yeah, I forget. I think it's CP, yeah.

So, there's an interesting anecdote. Ackman runs this campaign in 2011, and they get Harrison installed in 2012. Ackman retires from the CP board in 2016, and when Ackman's getting ready to retire, before anything even happens, the CP board, while Harrison is still the CEO, sends Harrison a letter that's like, “Hey, we just want to remind you of your fiduciary duty and obligations to CP, right?”

When you read the book, it does not say anything untoward had happened then. But I read that and I was like, “Oh, I'm sure the board has in the back of its mind that this has happened before.” At this point, Harrison's in his early 70s, mid-70s. When I read that, I was like, “Oh, this is a board where there had to be a little smoke here for them to send the CEO a letter saying, ‘Hey, you can't go talk to competitors and stuff.’”

I do think it kind of underplays how much Harrison was like, “Hey, I am looking for the next payday. I am looking to level up. I am always looking for someone.” The biggest through line of the book is customer complaints, employee complaints, and Harrison looking to get paid. So, it very much matches up with his personality.

Yeah. I think there's sometimes a way that someone makes a lot of money: realizing that an industry's net promoter score is actually higher than it needs to be. Especially if it's a monopoly, a high net promoter score is just the raw material that you turn into high free cash flow by spending less on whatever it is that makes customers so happy, because they have nowhere else to go.

That's quite cynical, but it's also quite true. It is just the case that the railroads have this really valuable asset: a route network. It's very hard to build new railroads in the United States today, so we pretty much are stuck with whatever rights-of-way we have. In fact, it's hard enough to build stuff that there are cases where people acquired railroads just to get the rights-of-way in order to build fiber and things like that.

You know something I learned recently because of the Cogent-Sprint deal. I did not realize this: Sprint stands for Southern Pacific Railroad internal network transmission or something, or something. It's because all of their rights-of-way that form the network were built along the railroad. I did not realize that. So, you are—yeah, exactly correct.

Yeah. So, just the ability to move something in a straight line across the United States is this incredibly valuable asset. The railroads have ended up owning that asset. Depending on your discount rate, you can almost say that maybe they're actually getting what they really deserve for the fact that the U.S. has a really good freight network, and that railroad investors did very badly for a couple generations in there.

Even going back to the late 19th century, you have these periods where 1/4 of U.S. track miles are in bankruptcy. Passenger traffic, I think peaking in 1913, just declined forever after that, and freight traffic also had its ups and downs. In some ways, the railroads were subsidizing the rest of the economy for a very long time, and now they're taxing it again. We'll see where things equilibrate after that.

You can imagine a lot of different directions for things to go after that. But, yeah, he's very much out for himself. He does realize that you can be a little bit relaxed on safety. There was 1 bit where they talk about the safety numbers, and the book presents it in an interesting way because it says that, I think, per worker-hour, accidents went up a little, but per cargo ton-mile, accidents went way down.

So, you're getting more productivity out of each worker, and then the workers are facing a very slightly elevated risk, but there's more money to go around. It is a job where you kind of expect there to be physical risks, and he certainly is out there getting grease on his shirt and actually moving stuff around. I'm sure the CEO has fewer on-the-job accidents than the average worker just on the line, but he was also that average worker when he started. He did work his way up from the very bottom.

Forget about when he started. I mean, there are multiple stories in here, and again, I'm sure part of this is building lore. I think the interesting thing when you read this is how he's setting the culture, right? At CSX, he isn't traveling that much anymore, but he's still setting the culture.

There are multiple stories. One of the tracks is underwater, and everybody says it's not safe to run a train over it. So he says, “Okay, cool. I'm going to hop in that train, and I'll take it over myself, and we'll get this network back on track.” There's a story of a railroad crew.

This is towards the end: a railroad crew that's trapped somewhere, and he shimmies over a bridge, hanging onto the bridge, to tell them, “Hey, help is on the way.” So this man is literally putting himself in harm's way, and it's an interesting way of thinking about setting the culture and everything there. But unless you have a thought on the culture, let me go back to the customer point.

Yeah. On the culture stuff, and how he presents himself versus how good he is, I think that within the context of railroads, he definitely counts as a celebrity CEO. Although I hadn't really read much more than occasional references to his name before I picked up the book, I knew railroads had done well. I didn't realize there was a guy who kind of symbolized this.

One of the things I was thinking about when I was reading it is that there's this book by Connie Bruck about Steve Ross of Time Warner. It's a really good investigative-journalism-type book, and she talks about how he had this whole persona of always being happy, always being friendly, and always being really lucky.

She talks about how he would take his friends to Vegas and tell them, “Hey, I'm going to go gamble for a while. See you later.” Then he'd come back with a huge stack of chips. I forget if she says that someone caught him doing this, or if they just had the realization that he wasn't actually playing blackjack for a couple of hours and making $50,000. He was just buying a bunch of chips and returning those chips later.

It seemed like a really clever way that you could produce good vibes if people always had these stories about how he went to Vegas, was a really lucky guy, gambled a lot, and always came out ahead. If he's running a really levered media conglomerate that sometimes does very strategically messy deals, it makes sense to have someone who's just very lucky in charge of that.

So I think for Hunter Harrison, he might have looked at those situations and thought, “He could use the walkie-talkie, probably, or he could yell. But if he actually crawls over there, that's the story that people will remember and tell, and that means that's who he's got to be.” Maybe this is a story about someone creating a kind of exaggerated brand, then actually living up to it and pulling it off.

I love your point, though. The difference would be that, with the Time Warner guy you mentioned, all he has to do is pull $50,000 out of his bank account. He runs the risk of being mugged and losing $50,000. Whereas with Harrison, when he goes on that train while the tracks are underwater, he even says, “Oh, I did the whole thing standing outside the engine because if the train derailed, I was going to jump off it.”

So he literally is putting his life at a little bit more risk. But I love that point on culture. Let me just go back to the customer complaints really quick. You read this book, and I wish it had delved more into them instead of just reporting, “Here's what they said.” Do you think they were real or not?

Because here's the fact: if you're laying off 20% of the workforce at all the places he goes, you're going to have some complaints. When you're dealing with the unions, you're generally going to have some complaints. When he's increasing prices on customers, you're generally going to have some complaints.

But do you think these were anything more than just what you said—every monopoly is going to have some complaints? Maybe the service was—he would argue that his service was above average, right? The book is littered with reports of customers emailing him and him getting the company to improve service levels for customers. Do you think there was actual statistical significance—that this railroad was materially worse for employees, customers, or whoever it was? Or was this just, “Hey, he's the top guy, and every top guy is going to have people take shots at him”?

Yeah. I just feel like a lot of this is people doing their jobs. The union collects dues, and your job, if you're representing the union, is to tell the boss, “We need more money, we need more job protections, and we need the job to be safer,” along with whatever else is on the wish list. That is your job.

For the customer, the customer's job is to periodically call up suppliers and try to beat them down on pricing or get them to throw in some extra service. So everyone's doing what you expect them to do.

I think some of it was that the railroads were enabling bad habits on the part of their customers, less so for the employees. I think it's just the nature of a capital-intensive, network-based logistics business that the individual workers have a lot of responsibility to do their job right, but it's really tough for them to figure out how their whole job would be rearranged.

It's just a more hierarchical organization. You do want that kind of thinking happening at particular levels of the org chart, so I don't think they would really be in a position to push back on that. They can certainly feel salty about it if accident rates go up on a per-worker-hour basis.

Of course, that's how the workers are thinking. They're not thinking, “Well, I am slightly more likely to have a broken bone or potentially die. On the other hand, I am responsible for shipping more cargo ton-miles than I otherwise would have been, so it's all fine.”

There is room to pay people a little bit better if there's more throughput, especially in a business with lots of fixed costs. Of course, a lot of those returns accrue to the shareholders, and a lot of those returns also accrue to Hunter himself. But I'm sure some of that at least makes it less likely that someone gets laid off because there isn't enough money to support them, if there is in fact plenty of money to support them.

So you just have to figure out what the trade-offs are. Given that people like Hunter Harrison exist, and given that they do rise to the top of different organizations, what it probably means is that you want to make sure laws on workplace safety are written very clearly and state exactly what we as a society think is an acceptable level of physical harm in order to enjoy all of our material abundance.

I wasn't super surprised by the worker complaints. With the customer complaints, though, a lot of it is just that if you were used to the idea that the railroad was going to be your logistics backstop, and you messed something up earlier in the week, and one shift was not as productive at the factory as you expected, then the shipment you thought was ready on Thursday might not be ready until Friday.

If that becomes your problem because the railroad is now insisting on sticking to a timetable, that complicates your life. But what it means is that he's basically taking his approach to running a railroad and making it contagious.

This is kind of the story of globalization. A lot of U.S. business norms, and then U.S. cultural norms, get accidentally imposed on other countries because we need our counterparties to understand things in the same way that we do. We need a lot of standardization in terms of the rules that people follow and the expectations they have.

Because the U.S. is that economic center of gravity, the U.S. ends up de facto writing a lot of those rules. It doesn't feel like that because, if you're an American company and you order something from a different American company, and then you order something from a Chinese company and don't get what you were expecting, you had the same parameters and they just interpreted them differently.

To you, that just feels like a bad customer experience. To them, it probably feels like these customers are really needy, and they also don't know what they're asking for. Whoever has the most financial stake in getting the transaction to happen is going to be the one who adapts.

In the case of the companies that were using the railroads, because the cost gap was so big between the railroads and the trucking companies, I think the railroads basically got to write the rules. But I also think you can tell this whole story in a way that's consistent with the generational story and with your observation that all the other railroads did fine, too. You could just have made a sector bet; it's not just about this one guy.

I think it was probably the case that the industry was at this kind of inefficient equilibrium where railroads were somewhat overcapitalized. Therefore, they always had some spare capacity, and they didn't have a sense of urgency around maximizing efficiency and utilization at all times.

But once you have someone who actually thinks they can make it happen, it does happen, and it happens pretty much everywhere. There was a footnote that talked about 2 of the other railroads adopting Precision Scheduled Railroading. One of them does it in September 2018, and the other one does it in October 2018.

So once people realize that’s the way things are going to go, that’s just the way they have to go.

You jumped on my next point. I was wondering if one of the reasons that other railroad stocks—and again, his is the best—is that they’re not screaming higher like you would kind of think, just based on the reputation and everything. I was wondering if one of the other reasons was: Hey, he gets in there and does it at 2 railroads, and then everybody starts saying, “Look, you’ve got to get on board with what he’s doing, or else we’re going to fire you and literally replace you with him.”

It’s not lost on me that the only one that doesn’t really start improving is CN, where everybody has said for years—and I remember this from when I was at a consulting firm before he took over—“Oh, the reason it doesn’t work there is they’re going through the Canadian mountains, and it’s really steep and everything. So they have a structural disadvantage, which explains why their operating ratio is so high.”

Everyone else kind of has to get on the program because he, in the same way Roger Bannister—I’ve been using this all the time—proves you can run a 4-minute mile, and then the 4-minute mile starts falling like crazy. He proves you can take your operating ratio from the 90s to literally the 60s, and then everyone else might not quite get to where he is, but everyone else is kind of getting to the high 60s, low 70s on their own once they follow this path.

That’s it. I want to switch gears completely. I have some other stuff I want to talk to you about, but the back half of this book is where most of the meat is, and it’s really interesting. Bill Ackman, Pershing Square, and Mantle Ridge are huge players in that. I just want to ask: When you read this book—Ackman’s obviously still in the news all the time—how do you feel Ackman, Pershing Square, and Mantle Ridge come out of this book looking?

I mean, they look kind of like the generation of value investors who spent a lot of time reading 10-Ks and buying cheap stuff, realized they had to do a little bit more than that to make a high return, and got into various flavors of activism. I think there’s some level of pretty mercenary behavior, and that’s what you expect. It would be very odd to expect a hedge fund to be the participant in this drama who’s best behaved or most friendly.

But I think they also just saw that there was this opportunity. They saw that there’s this set of assets that can be used more efficiently, and there’s a way to make that happen really effectively. I think sometimes, to your point on Zuckerberg and how much he pays for AI researchers, that’s the actual insight you have to have: If you think there is a $1 billion opportunity, then the difference between paying someone $10 million a year or $50 million a year to make that opportunity happen is actually pretty immaterial.

But it is weird to be the first person saying, “We will just literally pay you 5 times as much as you were making before,” when you thought that what you were making before was absurd. That’s just sometimes how things go, especially if you have a fixed asset and every uptick in utilization is a lot closer to pure profit than just the average performance of that business.

It does make sense that if you can transform these companies, and if you want to do that in a de-risked way, you probably want someone who has successfully de-risked it before. I think it was also just impressive that they—I mean, in some ways, the person who comes out of this book looking the most impressive might actually be Buffett, because he figured out—presumably, he’d been reading railroad annual reports for half a century before he decided that BNSF was finally cheap enough that he could actually buy some of the thing, and eventually bought all of it.

So he figured that out early, but I think people still had to—you could still look at that deal and say, “He picked a specific network, he bought a specific railroad, and we can’t just assume that the same thing works for every other railroad.” I guess Ackman had the view that, yeah, it probably does work for every other railroad, and that view worked. But I’m curious about what you thought of all the boardroom drama, all the 13Ds, all that stuff.

The one story that really jumped out to me was after they’d taken over CP, they made a bid for Norfolk Southern, and Ackman came on and said, “Look, the bid for Norfolk Southern has to make sense to my 8-year-old daughter.” Then he launches into this crazy, complicated bid where they’d throw CP into a blind trust, Harrison would become the CEO of Norfolk Southern, there’s a CVR that pays out to Norfolk Southern if the stock goes down, and all this type of stuff.

I was just like, classic Ackman: Say something’s going to be simple and then launch into things. They say the IR firm had never been inundated with as many calls as with a CVR. I love CVRs, but that was my personal favorite.

I’m with you. I hadn’t thought about the Buffett thing, but the Buffett thing looks absolutely incredible in hindsight, right? Also, it might be because I was literally mapping Harrison’s performance at each of these companies for about 5 years. I was matching railroad returns over 5-year periods. I was like, “Oh, railroads start really taking off right around when Buffett starts buying.” I’m kidding. There he is. He has none of the drama.

I think Ackman and Hilal come out incredible in this. The investment in the railroad is great. They generally win on the strength of their arguments and logic. I think they generally checkmate the board despite a lot of talk about Canadian pride versus Americans coming in.

Hilal comes out great. A lot of his concerns when he and Harrison take on CSX, as kind of Harrison’s last dance, actually come to be real concerns. I’m particularly thinking about Harrison saying, “Get me in there and I’ll start turning the railroad around,” and Hilal saying, “No, man, we need control of this board so you’ve got the backing to do what you want to do.” Harrison ignores him, and that comes to bite him a few times.

How many times has a hedge fund said, “I’m going to write an insurance policy for the CEO? I’ll pay $100 million to buy him out. We’ll be on the hook for that if we can’t get him installed as CEO. By the way, the new company, the first thing they’re going to have to do is pay the $100 million buyout, and they might try not to pay it because it’s not going to him—it’s going to us, because we make him whole”?

He really turns it into a trade. He says, “Okay, there’s a piece of this risk that everyone is reluctant to take. No one really wants to underwrite it, but we think it’s underwritable, and we’ll just be on the hook for it in order to make this next thing happen.”

So, in that sense, it is just the liquidity-provision function of the financial system in general. You look for cases where the reason something isn’t getting done is that there’s some risk that nobody really wants to quantify and where the bid-ask spread is too wide for anyone to really transact. You find a way to shrink that bid-ask spread. That often means taking on the most unloved piece of the transaction and just making that yours at whatever price makes it make sense.

It is also evidence that it’s great to have a large balance sheet. It’s great to be able to put just a lot of money into the equity of something if you think that you’re going to be pushing—if you think you’re going to be driving a lot of the upside.

You could definitely imagine feeling a little bit salty that they were mostly riding along with regular shareholders. Someone could have just seen the same 8-K that was the result of their many months of effort, bought the stock, and gotten most of the returns from there.

There are a lot of stories of people in the industry seeing, “Oh, Hunter is going to take over that railroad,” and buying the stock and making basically the same returns as Ackman and them. So, pretty interesting.

Let’s go to some of the—I’d love to build on that with some of the stories throughout the book about board dynamics and activism. I thought the most interesting one that jumped out to me was early in the book. I think it’s the early ’90s. There’s a CEO who’s about to leave, and he just says, “Hey, our long-term targets are”—I’m making numbers up because I didn’t write down the specifics—“we’re going to get down to a 65, and we’re going to be growing 5% per year.”

Then he leaves, and all his lieutenants are looking around like, “What? There’s no chance on earth we can do that.” There are lots of stories like that involving director and board dynamics. Did this give you any insight into—and obviously, a railroad is different from a tech company—but did this give you any kind of new or unique insight into the dynamics between CEOs, their lieutenants, their board, all that type of stuff?

Yeah, it felt like it was a kind of uniquely weird, sort of internally really hostile industry sometimes.

I wasn’t sure how much to read into that, but I think just general questions on CEO succession: What should a CEO—what should a lame-duck CEO do? What should a former CEO say or not say? You hear about a lot of these norms, and they do seem kind of weird and specific and constraining, like a former CEO should not talk about the person who took over afterward, other than to be blandly, generically positive about their protégé, et cetera.

But then you definitely see in this, like, here are all the frictions that can show up if someone decides that his last act as CEO is to put out some impossible target, or say something weird to the media, or whatever. So, yeah, you can definitely see why.

I think what that blows back into is actually some of the compensation stuff. People get outraged about golden parachutes and things, but a CEO who doesn’t really want to be running the company, or who wants to be running it in a way that the board doesn’t like, is a huge liability from the perspective of the board. The board’s job is to steward the company.

Just like Ackman and Hilal are willing to take these big risks on getting the deal done, where they will be liable for a lot of the shortfall if it doesn’t happen, sometimes when boards give someone a very large bonus in order to get them to leave, it’s basically paying them not to blow up a deal or not to blow up a CEO transition that’s actually important for the company.

So, yeah, it made me feel slightly better about overpaying incompetent CEOs, because you’re often paying them specifically to make them go away and be incompetent in running someone else’s company instead.

The one that really jumps out to me is Hunter’s first dance with—I guess this would have been Canadian National—where he leaves in 2010. He’s taken them up, he’s done a great job, everyone says he’s done a great job, and he’s ready to stay. The board’s like, “Actually, Hunter, it’s time for you to go. We need to get you out of here.”

How many times do you see a star, a rock-star CEO who’s taking the company further than anyone thought it could get in terms of operating margin and stock price, with the stock screaming higher? How many times do you see the board say, “Nah, we’re good. Let’s move along here”?

It reminded me in many ways of sports coaches. You know, there are these coaches who are so grating—Tom Thibodeau with the Knicks, who got fired this season after taking the Knicks to the Eastern Conference Championship. They’re so grating: they win, and everybody loves them for a year or 2, and then after 3 years everyone’s like, “I’m kind of done with this guy, man. Let’s—it’d be more fun not to win and not be around this guy.”

I feel like Hunter is kind of like that. It was just an insight for me into—I think of these boards as honestly kind of out for themselves, just trying to cash a paycheck for a lot of them—but these guys, in this case, were just like, “This guy’s so unpleasant. We need someone in here.”

That’s not kind of what I would have expected from a board trying to keep their jobs. The Canadian National board was a political animal.

Yeah. So maybe that is part of the Hunter Harrison production function: he irritates a lot of people and ruins a lot of people’s days. When he does things like doing the job of someone 5 levels down the org chart, insisting to them that he’s going to do their job, and then doing it better, that’s got to be humiliating, right?

He probably was a really unpleasant person to work with in many ways. I assume he paid his people well enough that some of them were willing to stick around, and maybe people also just vary in how much they tolerate different kinds of unpleasant personalities.

But if his shtick is that you look very carefully at the existing network you have, and look at all the ways that you could drive more efficiency by just telling customers, “Here’s the new way things are, and if you don’t like it, just go ahead and pay 2.5 times as much per ton-mile to our competitor—the trucking companies—instead,” you only need that once.

Maybe it’s actually more valuable to have one person show up, lay down the law, lay off a ton of people, and then have someone else who just doesn’t have that track record—who is not the guy who did that, and not the guy who said that or humiliated people.

Maybe that guy produces 5% less operating-income growth per year than Hunter Harrison would, but if everyone likes him, then it probably means there’s less executive attrition. The board can spend more time thinking about actual business problems and not just gossiping about how noxious their CEO is.

So it might be that this is actually another case of efficient markets at work: sometimes he does get gently removed from the company, and then sometimes there’s some friction in getting him out, depending on how close he is to finishing whatever transformation it is.

I think if you had the same person and he just was at the same railroad for his entire career, 1, he would probably go crazy, and 2, it would be an interesting piece of trivia if you were able to say, “Hey, did you know that the best-performing U.S. railroad over the last X number of years is this small-cap railroad that never consolidated?”

But I think the story makes a lot more sense if he is going from one to another to another to another. By the time a critical mass of North American railroad infrastructure is already on this precision-scheduled model, everyone else just has to comply.

I always feel a little bit depressed reading comprehensive biographies of someone who died, because the last chapter, or the last couple of chapters, are about things like, “And then he started forgetting the names of his grandkids,” and, “He got moved into a home.” The last bit is just really unpleasant.

But in his case, he actually seems to have done exactly what he felt he was put on this earth to do, and then he died. So he kind of got the full thing. I’m sure if someone had interviewed him on his deathbed, 1, he would have wanted to talk about trains, and 2, he would have said, “Yeah, I think that the railroad industry is never going back, and it’s always going to be more profitable than it otherwise would have been, is always going to deliver more service at a lower cost than otherwise would have, and that’s a good job, Hunter.”

I don’t know why, but there is a tinge of sadness reading this. I think it’s because the author genuinely likes Hunter and develops a relationship with him. I was sad, and the ending—he dies suddenly, goes on medical leave of absence, and 2 days later passes away—was sad. It was sad hearing about him orchestrating this last great turnaround and doing it multiple times. They mention he can’t travel as much and is doing it from his bathrobe at home.

One other story was interesting, and I’d love your take on it. Then I want to compare him to one other figure we’ve read about recently.

Every time he switches jobs, he’s getting paid, and when he’s talking to people, he lets them know, “I get paid.” He buys CSX shares on the open market when he’s about to take over, and he says that’s a huge motivating factor for him. The 2 stories I thought were really interesting, and I’d love to hear your worldview on them, are these.

Number 1: He gets paid on operating targets, and he has a meeting with his management team. This is at CSX, his last railroad, and they’re trying to plan everything. He’s like, “Look, here are the operating metrics that are in my bonus target. That is what we hit.”

It sounds great coming from a guy who’s driving turnarounds and all this sort of stuff. But you know what else it sounds like? That sounds like fraud to me. A fraudster says, “Hey, we hit my EPS metrics.” So I just want to hold on that one.

The other one—I don’t think there’s much to it, and I don’t know if there’s anything to read into—but he goes on tangents, fighting tooth and nail for every last dollar of compensation, to the point where Pershing Square and Paul Hilal get this man $400 million all-in, probably, right? They get him all-in.

When he’s about to take over CSX, he yells at Paul Hilal and says, “Hey, for 4 months I was consulting for Pershing Square and trying to get the CEO role at Canadian Pacific, or whichever it was, and I wasn’t getting fully paid for that time.”

The reason that struck me was because when he starts poaching people for his last job at CSX, there are all these stories where the people are talking, and he’s like, “You’re going to get well compensated.” They’re like, “Hey, man, I’ve been working here for a month. I don’t even have an employment agreement or compensation or anything yet.”

It was just so funny because that’s also another thing that’s kind of reminiscent, in the back of my head, of bad actors: they bring everyone over on promises, and then nobody gets paid but them.

I just wanted to ask you about those 2 things from this guy. I’m not accusing anyone of anything. Just, if you gave me these in a black envelope and were like, “Oh, yeah,” I’d be very hesitant around that guy.

I mean, that’s part of what makes fraud so hard to spot. Sometimes—I mean, sometimes they’re just really obvious—but sometimes they’re hard to spot because the fraudster is doing what everyone else is trying to do, and they’re able to hit the numbers that everyone else tries to hit.

It's like the observation that when people in long-distance bike racing were doing lots of blood doping and things, it wasn't the 200th-fastest person who was turning himself into a guinea pig in order to become the 150th-fastest person. It's the top people. It's the people who would be number 11 and forgotten, but could be on the top-10 list if they made this one little decision. It makes them 1% better, but it's in a domain where 1% is the difference between world-famous and nobody outside of sport fans actually knowing this person's name.

Sometimes, something can be executed well enough that it does look like fraud. I think the other thing is that when he is doing these weird, self-centered negotiations, but he's also paid very much based on performance, what has to be in the back of people's minds is that he's going to fight about this hard every time he's talking to the unions, every time he's talking to suppliers, and every time he's talking to customers. Maybe he is actually worth whatever that incremental extra amount of money is because he just does not give up until he's gotten everything he possibly can.

You can take that one step further: if he spends the next 2 weeks just full-time negotiating compensation, that's 2 weeks he's not going to spend running the railroad, and that's 2 weeks that we have to wait before things start improving. Maybe it's actually worth paying him just to shut him up and get him to focus on other things.

He seemed very organized when it came to moving large vehicles around on tracks, and maybe a little less organized in terms of moving paper to the appropriate HR person and getting an actual number on someone's employment contract. I don't know; maybe some of that is that he's just doing a little bit of working-capital management and trying to rope people in. They're getting paid very well, but maybe 15% less than they thought they were getting paid, and it's not quite enough that they want to quit because that would also look bad.

People would wonder if they just can't handle working under Hunter and maybe aren't quite as good as they think. All this stuff is a pretty effective bundle: if you are really abrasive and set incredibly high standards, it does actually allow you to get away with a lot of otherwise abusive behavior that people would call you on, because they know that if they just quit, people will wonder if you're not the kind of person who can deliver the right operating ratio.

Those are all great points. Let me ask my last point. I can't believe I'm not going to mention Jobs and Bill, but we're going to have to pass them for time. Let me do my last one.

The last book you and I read, if I remember correctly—and there's always a chance I'm wrong—it was Larry Ellison. I was interested in the similarities and contrasts between the two. Similarities: both of them—Ellison gets into sailing, Hunter gets into equestrian. They've got side projects that they're having their companies sponsor, and especially at CN, it becomes an issue for Hunter: the expensive side projects.

They've got great lifestyles. Larry is a different magnitude from Hunter, but Hunter's a hundred-millionaire. Larry's a billionaire, at a minimum. The real things I was thinking about, though, were that Larry Ellison has no problem taking vacations. It actually becomes a point of concern with the board and investors. He's going sailing for 6 weeks. Hunter Harrison does not vacation; he's cutting vacations left and right.

There are all these stories of his family saying that he works Christmas morning. His chief of staff said, "Saturday morning—we called it Hunter time." I was just interested in the difference between different industries and everything. When you compare and contrast these two, do you see anything in the management styles that blends, or is it just two different people with exceptional, different paths to reach similar results? Did you see a huge convergence between the books we just read?

I think the lack of self-awareness—or total comfort in one's own skin, depending on whether you like them or not—is definitely a commonality. I don't know if people like that just have some moment in their life where, I don't know, Larry Ellison said, "Okay, I have made everyone around me so much money because Oracle is all me, and therefore, if I feel like taking a vacation, that's the best thing for Oracle. When I'm running Oracle, I always do what's best for Oracle. By definition, this is what's best."

Or I think the other way is that it's just a pretty natural thing that Hunter Harrison wakes up on Saturday morning, he's been dreaming about the railroad, and he wants to start talking to people about the railroad. That's what he's going to do.

It might just be slightly different wiring where, if it is fun and gratifying and it feels like—this book actually feels like the first biography of an esports star—you are reading about someone who is making a ton of complicated decisions based on some very complex thing where you have limited controls and limited inputs. There are a bunch of external things that are happening, but if you are able to make lots of reasonably good decisions really quickly, you just automatically win. He seems like that kind of guy at multiple levels.

But also, if you look at competitive esports, to get good, you have to have lots of actions per minute and incredible reaction time, and you have to put a lot of hours in. To get really good, you also have to come up with a new meta. You have to figure out some strategy that other people did not figure out, and then you have to be very adaptive whenever the circumstances change and figure out what the new strategy is that didn't work before but will be the dominant one now. He did some of that, too.

It is the same kind of cycles and epicycles: you've got to get everything to where it's supposed to go today, but you also have to get the business to where it needs to be over the next 10 years.

Ellison, I guess maybe there's also some kind of compatibility where, if Harrison's big thing was, "We're actually going to stick to a schedule and everything flows from that," then everything else has to vary in response to how much effort is needed to keep that schedule. That means it's just not a good system. It's not a system that's very compatible with long vacations. It's not a system that's compatible with being asleep during normal business hours, U.S. time.

Whereas with Ellison, part of his attitude was that there was this really interesting parallel where Ellison talks about how customers will tell him, "You need to change your Oracle E-Business Suite around our business," and he would say, "No, you just need to change your business around the E-Business Suite." In one sense, that is what Harrison was doing. But in another sense, I think Ellison was just more okay with downtime.

If Harrison's big idea was that downtime is the problem, and downtime and unpredictability are completely unacceptable, then that just leads to very divergent attitudes toward how much work intensity should come from you—how much of it comes from the fact that you're pretty interested and pretty jazzed right now, versus how much of it is that there is a problem and you are the person with whom the buck stops. So you're working until the problem's gone.

If I could just ask about a point you made earlier, the esports one is great because I compared Harrison to a coach. He reminds me of one of those hard-charging coaches in esports. To me, when I read the Harrison biography, I understood it: this is a man who was all-consumed by railroads.

Not that he wasn't smart, but there was no hint of Harvard Business School or that this man was a natural genius or anything. He literally has a photographic memory when it comes to one thing: railroads. And he's obsessed. I think the book makes this point: he's not obsessed to the point where he's got, like, railroads on his mind. He's not a—

He loves the business of railroading. Go ahead.

The specific point they made there was that the railroad industry does attract people who are just really nostalgic for when railroads were a lot more important and silly and so on.

Joe Biden would have been a perfect railroader.

Yeah. But then I think the line is something like, "Hunter Harrison is really interested in the railroad industry today and the railroad industry in the future." From a financial perspective, you could say he has no interest in what the stock chart looks like, but he has a lot of interest in what the net present value of the business is.

That's something you really want in a CEO. You want someone who can show up at a company that's doing incredibly well and not feel really nervous that, if they change anything, they ruin everything. You also want someone who can show up at a company where the stock price is down 90% from the peak—or, in the case of railroads, where they used to be something like 70% of U.S. equity-market capitalization, and now we've had to create new categories like transportation just so that there's a sector that's big enough that isn't just, "Here are the 3 names."

So, if you can be completely indifferent to what happened before but very responsive to what's going on right now, then you can do quite well in a space like that. I guess maybe that's something on the Ellison-versus-Harrison point with tech. It is more of an active business: you have to decide what the future looks like and either—

Makes multiple bets, right? And I think both of us are impressed if he makes 7 big bets and 5 of them turn out correctly. In tech, because the bets can be grand slams, that's an unparalleled track record.

Yeah, yeah. It's so funny to read that book. He doesn't have the vocabulary for it, but he's basically like, "You'll be doing a lot of your work on your iPad and on your iPhone, and everything's going to be on a server somewhere, and you won't actually have files that are on some physical device in your home except as just a temporary working cache or something." He knew that stuff was coming, and he got it right.

With Harrison, he does have that one big bet, but in a sense, that one big bet is not some kind of cosmic macro bet, really. It's just a way that you could recut the spreadsheet. I think the timing is wrong for this to have literally been the output of a pivot table where he just tries to look at, okay, what do margins look like if we sometimes move these trains partially filled, and what does it look like if we assume that by the end of this—within a year or 2—everyone's just going to adapt to that, and how much can we lower our costs if they get a little salty about that?

The timing doesn't quite work for that, but it is the kind of thing where, when you make a bunch of incremental progress, you realize that's actually what you're progressing toward, and that you could make progress a lot faster by just going straight there. In that model, you're going to constantly make incremental progress. You're sending trains that would be recognizable to Cornelius Vanderbilt on routes that Cornelius Vanderbilt may have personally owned, and they're going to haul things where he could look at them and say, "Oh, that one's full of coal. That one's full of gravel." He would be able to understand it; he'd be able to read the 10-K pretty straightforwardly.

So, in that sense, you don't want to be super imaginative. You actually just want to be very literal and linear, and you also don't need to take a lot of time off to dream big dreams about railroads. The big dream is we could grow revenue 2% faster annually, and that really compounds over time and it's very, very accretive. We could buy back a lot of stock as we get rid of some of our excess capital equipment. It doesn't require insanely bold dreaming, but it does require just this relentless grind of making everyone step up their game a little bit.

The only other point—and I think we have to wrap here because I have to stop—but the only other point was that there are so many differences, and I think I lean a little bit more toward the Harrison model, where the price of greatness—Harrison, to me, has the price of greatness—whereas Larry Ellison, I'm not saying he's not great because he's clearly great. He's just out there, like, 2 months in Australia, guys, and then we'll make the bet of the century when I come back.

But the one thing that jumped out at me is that both of them are obsessed—obsessed—with how Wall Street reacts to their quarterly earnings numbers. They're really obsessed with it. A lot of it, like I told you in the Oracle book, is that they take out an ad to promote the earnings and tell people why there's no secret, and with Hunter, so much, especially in the latter years, is around, "Oh my God, we're about to report earnings. We've got to make sure people understand the stock-price reaction" and all that sort of stuff.

I would have guessed these guys, in my mind, are business builders. I would have guessed they're thinking beyond that. I don't know if this is just n of 2, but I was just really surprised by how much obsession they put on the quarterly earnings results, the analyst interpretation, all that sort of stuff. I'll let you have the last word there if you have anything to add on to that.

No, I think it's nice to have internal motivation, and it's very hard to accomplish things without some external reference. Wall Street is very good at being cynical. People love to be the first person to figure out that somebody is lying or that some trend that looks invincible is actually completely unsustainable.

So, it's a great way to stress-test yourself and figure out to what extent you actually pulled off something amazing, and to what extent you really managed to shift some costs and shift some business uncertainty onto the next person. So far, railroads haven't had some complete collapse. It's clear that Hunter Harrison was not single-handedly holding the industry together, and also that he probably did identify a lot of the low-hanging fruit.

Maybe there's an alternate version of the railroad story where it takes 10 or 20 years longer to have valuations reset where they are today, but it does end up happening. So, it does look like he made necessary changes. They actually worked out really well. He did reset the standard of the industry, missed out on some vacation time. But I suspect he was very happy looking back at his career.

I think the book even says it at the end of the book. He passed away, and he was talking about CSX, which was his last business, getting them to a mid-50s OR. They were kind of in the mid-60s when he took over, and they were stuck right there. I thought it was interesting: right now, CSX—I looked it up—is in the mid-60s as we speak today, almost. Let's just call it 10 years later, right?

And you do wonder: hey, if he was still alive, would all the railroads be pushing into the mid-50s? Or if we lived in an alternative universe with no Hunter Harrison, would all the railroads today kind of be in the high 70s, and there would be a new Hunter Harrison coming along and be like, "We can get to the mid-60s by 2035."

Why don't we end it there, Byrne? This has been great. I'm looking forward—I'm about to go on the babymoon tomorrow. So, you and I are going to have to pick a book for next month so I can read it on the flight there because you've got 4 kids. I'm about to have 2. The best time to read is when the grandparents have the kids.

Absolutely.

Byrne Hobart from The Diff, this has been awesome, and I'm looking forward to chatting next month.

Likewise. All right.

A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.