Jim Clayton: Turning Competitors’ Mistakes Into $1.7B [Outliers]

0:00:03 This is the story of Jim Clayton and Clayton Holmes.
0:00:08 Welcome to Outliers. I’m your host, Shane Parrish.
0:00:10 This show is all about learning from others,
0:00:12 mastering the best of what they’ve figured out
0:00:14 so you can use their lessons in your life.
0:00:20 Jim Clayton grew up in a small town, Tennessee,
0:00:21 during the Great Depression.
0:00:24 He was the son of a sharecropper who farmed cotton.
0:00:28 Seven years later, Warren Buffett would read his autobiography
0:00:32 and buy his company for $1.7 billion in cash.
0:00:35 The same autobiography that I read that we’re going to talk about today.
0:00:38 It’s time to listen and learn.
0:00:41 This episode is for information purposes only.
0:00:47 Jim Clayton spent his first 18 years in a log cabin in Tennessee.
0:00:51 The walls had no insulation, so in winter they froze,
0:00:52 and in summer they boiled.
0:00:56 He was born into a family of sharecroppers during the Great Depression.
0:01:00 They worked someone else’s cotton fields and split everything down the middle.
0:01:04 The entire family, his father, his mother, Jim, and his brother, Joe,
0:01:06 made about $8 a week combined.
0:01:12 It sounds like they lived under extraordinarily harsh circumstances, and they did.
0:01:15 But Jim reflects in his autobiography.
0:01:20 Even in that time and place, I learned that certain concepts are ageless, self-discipline,
0:01:21 willpower, perseverance.
0:01:24 Realizing that disappointment is not defeat.
0:01:27 Knowing that problems often present opportunities.
0:01:32 Obstacles may get in the way, but the human spirit can triumph over these things.
0:01:36 Jim’s father was different from most sharecroppers at the time.
0:01:37 He could read and write.
0:01:41 He’d finished high school, and he insisted his boys would learn, too.
0:01:44 One morning at breakfast, his father laid out the dream.
0:01:49 Lee, if you work hard, save your money, finish high school, and buy yourself a mule,
0:01:51 I’ll get you a second mule.
0:01:54 And that cotton patch out there will be yours.
0:01:55 You’ll have it better than me.
0:02:02 Jim nodded and smiled, but even he knew, back then, that he’d never be a dirt farmer.
0:02:07 He had bigger dreams, and while he didn’t know it at the time, he would one day sell his company
0:02:08 to Warren Buffett.
0:02:10 But first, he had to learn the value of a seed.
0:02:14 Jim’s first business was selling seeds door-to-door.
0:02:16 He was only 10, and he was quite natural at it.
0:02:20 The seed company offered prizes to motivate the kids to sell.
0:02:26 You could choose the instant gratification of a toy car or more seeds to sell on your own
0:02:27 and keep the profit.
0:02:30 Every other kid took the toy car.
0:02:32 Jim took the seeds.
0:02:34 Decades later, he’d write about this choice.
0:02:39 Without realizing it, I was setting the tone and shaping a philosophy that would characterize
0:02:40 the rest of my life.
0:02:42 I chose the seeds.
0:02:44 It was my first attempt to become an entrepreneur.
0:02:47 Plowing the money back into my business was a smart move.
0:02:52 I get to keep all the proceeds from extra seeds, so it really increased my cash flow.
0:02:55 But I learned something far more profitable.
0:02:59 Forgo those things that give you momentary satisfaction.
0:03:01 Look at the long term.
0:03:04 Defer profits for something more substantial.
0:03:08 Pass up the plastic toy and invest your capital.
0:03:10 Plant the right seeds.
0:03:15 It’s funny how the foundation of how he would go on to build his empire was already taking
0:03:16 shape when he was 10.
0:03:20 The money wasn’t just changing Jim’s bank balance.
0:03:22 It was changing how he saw the world.
0:03:26 During World War II, his father got a deferment from the draft because he raised cotton and
0:03:27 food for the war effort.
0:03:33 He also acquired a Ford 8N tractor that did the work of six men and a dozen mules.
0:03:40 With so many farm boys gone off to war, Jim’s father ran that tractor 24 hours a day, plowing
0:03:43 not just his own fields, but all the neighbor’s fields too.
0:03:48 His father would run it all night until sunrise, and then Jim’s mother would take over, and
0:03:49 then Jim and Joe.
0:03:53 Just before dark, his father would hop back on and keep plowing.
0:03:57 They charged $50 a day, and that year made over $2,000.
0:04:04 That money let the family leave the log cabin and move into a house in town, one with electric
0:04:06 lights and individual bedrooms.
0:04:07 Jim saw something crucial.
0:04:09 Jumping social classes was possible.
0:04:12 The cotton patch was not his destiny.
0:04:15 He started working every job he could find.
0:04:20 He was still selling seeds, of course, but now he was also running his own taxi service.
0:04:24 Every morning before high school, he’d drive his mother and four of her colleagues to work
0:04:25 at 6.45 a.m.
0:04:29 Then he’d pick up four of his teachers and drive them to school along with himself.
0:04:32 25 cents per person, per week.
0:04:36 By 16, Jim was getting good at the guitar, and he landed his first real break.
0:04:42 A radio station in Jackson, Tennessee had a live Saturday program called the Farm and Home
0:04:45 Show, where local performers could get half-hour slots.
0:04:47 But there was one catch.
0:04:51 You had to bring in your own sponsors to pay for the airtime.
0:04:56 Each commercial was a dollar a hauler, 60 seconds of ad time for a buck.
0:05:00 Jim landed two sponsors from nearby store owners.
0:05:05 He brought in his own band, did country songs, and closed with a hymn, and handled all the commercial
0:05:06 reads himself.
0:05:11 He’d call each sponsor before the show to customize the ads with their latest offers and inventory.
0:05:14 He was 16 years old with his own radio show.
0:05:17 He was podcasting before podcasting.
0:05:21 And if you’re wondering why we have sponsors, this is why we have sponsors.
0:05:23 Jim understood exactly what this was.
0:05:25 He called it his loss leader.
0:05:30 Maybe I didn’t make any money from the program itself, but it brought in other work and gave
0:05:31 me a certain cachet.
0:05:36 The people running those church socials and country fairs heard my show and suddenly saw
0:05:38 me in a special light, as a star in some cases.
0:05:44 At 16, Jim already understood that sometimes you don’t make money on the product itself.
0:05:46 You make money on what the product makes possible.
0:05:52 It worked so well that one of the staff guitar players started playing backup for Jim every
0:05:52 Saturday morning.
0:05:58 This guitarist was also a sharecropper’s son whose dad had made his first guitar from a cigar
0:06:00 box, a broom handle, and a bailing wire.
0:06:06 Within five years, this fellow would scribble out a song on the back of a potato sack called
0:06:09 Blue Suede Shoes and sell two million copies.
0:06:13 That guitar player who backed up teenage Jim Clayton every Saturday morning?
0:06:15 His name was Carl Perkins.
0:06:20 While Jim was building his side businesses, his relationship with his father was fracturing.
0:06:23 Jim’s mother and grandmother loved his radio show.
0:06:26 They’d offer suggestions and tell him how good he sang.
0:06:27 But his father?
0:06:28 Jim says,
0:06:32 Dad never said much to me about the radio show, though I know he listened some Saturdays
0:06:34 if bad weather kept him inside.
0:06:37 Then came a moment that would stick with Jim for the rest of his life.
0:06:42 He was at the local service station when he overheard his father talking to a neighbor.
0:06:44 The neighbor asked if Jim repaired radios.
0:06:48 His father, not knowing Jim could hear him, said he’s really good at fixing most anything
0:06:49 that can go wrong with him.
0:06:51 Jim wrote,
0:06:55 I can’t begin to describe the good feelings that washed over me when Dad said that.
0:06:59 He didn’t think I had heard him, and I surely didn’t bring it up to him later.
0:07:01 So afraid was I to break the spell?
0:07:06 That overheard compliment was the first real praise from his father ever.
0:07:07 It made Jim hungry for more.
0:07:10 So he decided to do something nice for his dad.
0:07:13 He secretly installed a radio in his father’s old Chevy pickup.
0:07:18 He figured his father could listen to the news, music, maybe even Jim’s Saturday radio show.
0:07:23 At lunch, Jim snuck over to the truck and carefully installed a used radio in the dash.
0:07:25 It worked perfectly.
0:07:30 But when Jim proudly told his father about the surprise gift, his father exploded.
0:07:33 If I’d wanted a radio, I’d have bought one.
0:07:40 Then his father grabbed his barlow knife, cut a switch from a peach tree, and came at Jim to whip him.
0:07:44 But Jim was 18 years old, and he was making his own money, and he’d had enough.
0:07:48 You’re not going to whip me now, and you’re not going to whip me again, Jim admits.
0:07:49 He said it while backing away.
0:07:55 That might not sound particularly courageous, not exactly on the order of Churchill telling the Germans to go to hell,
0:08:03 but considering that I had never at that point talked back to dad in my entire life, this was the ultimate defiance.
0:08:05 His father couldn’t catch him.
0:08:06 Instead, he yelled,
0:08:09 Come back here and take your whipping like a man, Jim says simply.
0:08:12 I failed to see the correlation between the two.
0:08:16 That night, Jim removed the radio and made sure his father never saw it again.
0:08:22 Months later, when his father traded in the truck for a new one, it came with a deluxe push-button Chevy radio.
0:08:27 Jim was 18 years old and knew with absolute certainty he was done with farming.
0:08:34 He saw three escape routes, join the military, move to Detroit and build cars, or become a country music star.
0:08:37 His mother shut down the military immediately.
0:08:39 She wanted him closer to home.
0:08:43 And Jim knew the music option would take more time and luck than he had.
0:08:49 The day after his high school graduation in June 1952, Jim borrowed the family car and headed to Memphis.
0:08:52 He wore a used suit from the second-hand store.
0:08:57 He went to the state unemployment office, and by the end of the day, he had four interviews.
0:08:59 He got two job offers.
0:09:00 One was welding.
0:09:05 The other was with Memphis Light, Gas, and Water, repairing two-way mobile radios.
0:09:10 It paid a quarter less per hour, but radios were his specialty, so he took it.
0:09:13 The job was brutal, but Jim thrived.
0:09:20 He repaired TVs at night, played honky-tonk for 20 bucks a show, started selling vacuum cleaners door-to-door.
0:09:23 He even kept his radio show going in West Memphis.
0:09:25 Then he met Bill Elliott.
0:09:32 Bill was an electrical engineer at Memphis Light, Gas, and Water, a few years older than Jim and already on the fast track.
0:09:37 He had something Jim had never really considered before, a college degree.
0:09:40 Bill became Jim’s unofficial mentor.
0:09:44 First, he coached Jim to get his FCC radio operator license.
0:09:46 Jim passed and got an immediate raise.
0:09:48 Then Bill did something more ambitious.
0:09:53 On a Saturday morning, he took Jim on a tour of the Memphis State University campus.
0:09:56 By Monday at lunch, they’d worked out a schedule.
0:10:02 Jim would take pre-engineering classes in the morning and work at the utility company in the afternoon.
0:10:05 The pace was unsustainable.
0:10:11 College classes, homework, utility job, TV repair work, the honky-tonk band, the radio show.
0:10:16 By Christmas, the right side of Jim’s face began twitching uncontrollably.
0:10:18 Then it went completely paralyzed.
0:10:24 And I know from personal experience just how freaky this is because I had Bell’s palsy.
0:10:26 For six months, he couldn’t smile.
0:10:29 He couldn’t close his right eye without using his finger.
0:10:31 His body was forcing him to slow down.
0:10:34 Doctors couldn’t diagnose it.
0:10:37 The paralysis eventually faded, but the lesson stuck.
0:10:39 Still, Bill Elliott kept pushing.
0:10:43 By summer of 1953, Bill was nudging Jim toward an even bigger goal,
0:10:47 getting an electrical engineering degree from the University of Tennessee.
0:10:52 So Jim packed his Chevy and moved 400 miles to Knoxville.
0:10:56 On his first day, he joined a fraternity and met his future wife Mary on a blind date.
0:11:00 She was a home economics major from a religious family.
0:11:02 Her father was a Studebaker car dealer.
0:11:04 Her brother sold Oldsmobiles.
0:11:08 That detail would matter more than Jim knew at the time.
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0:12:52 In the spring of 1954, Jim saw a billboard that said,
0:12:54 See Knoxville by Air for $5.
0:13:01 He’d never been in a plane, but 10 minutes later, he was taking a flying lesson for $10 instead of the tourist ride.
0:13:05 Within six lessons, he fell in love with flying.
0:13:10 But flying lessons were expensive, and Jim needed his own plane.
0:13:15 So he found a classified ad mentioning a good airplane for $895.
0:13:17 That was a crazy amount of money at the time.
0:13:20 The seller was a bootlegger doing time.
0:13:22 Jim had an idea.
0:13:25 He convinced his brother and some buddies to form a flying club.
0:13:27 Each put in $120.
0:13:30 So they bought the plane together.
0:13:35 The other guys quickly discovered that getting a pilot’s license required actual work.
0:13:36 They’d lost interest.
0:13:40 Jim essentially had his own airplane for $120.
0:13:45 He decided to fly home to show his family what the sharecropper’s son had become.
0:13:49 He circled the town at 800 feet watching people pour out of buildings to look up.
0:13:53 His mother, who’d never flown, climbed in without hesitation.
0:13:56 His father’s pride was unmistakable.
0:13:59 But the flight back to Knoxville nearly killed him.
0:14:02 He was following his flight plan when his passenger checked the map.
0:14:05 The checkpoint should have had a stream running through a valley.
0:14:08 The valley was there, but the stream wasn’t.
0:14:09 They must be off course.
0:14:14 Jim abandoned his flight plan and started searching for Highway 70.
0:14:15 He couldn’t find it.
0:14:16 They turned south.
0:14:17 20 minutes later, north.
0:14:21 They were chasing their tails with the fuel gauge bouncing on empty.
0:14:27 They barely made it, landing on a two-lane road 50 miles off course.
0:14:30 Some farmers gave him some fuel, and they eventually made it home.
0:14:35 But the whole fiasco would teach him some business lessons that would guide him for decades.
0:14:37 Later, he writes,
0:14:40 How do you know which way to go if you don’t know where you are?
0:14:44 That was the crux of the question, and it applies to more than just an airplane ride.
0:14:51 A business, a family, a relationship, or an individual all need a plan to reach the desired goal.
0:14:57 For whatever endeavor a human being is engaged in, an anchor is needed, reference points,
0:15:04 to provide directions to the destination along with the time and resources required to get there.
0:15:05 And he goes on,
0:15:12 Abandoning a well-thought-out and well-researched plan is an act of desperation that occurs just before a crash and burn.
0:15:13 Stay with the plan.
0:15:17 A bad plan is more likely to work than no plan at all.
0:15:21 If I’d always acted on my feelings, there’s probably a time or two I’d have jumped off a building.
0:15:25 Instead, it’s good to put emotions in their proper perspective.
0:15:30 Recognize that in the course of a single day, you’ll pass through dozens of different emotions.
0:15:34 You’ll shrug off some, laugh at some, and minimize reaction to them.
0:15:37 Chart your course with strategic planning.
0:15:42 Think of a business plan as your map, with a timeline and checkpoints to follow en route.
0:15:46 Basically, when you’re flying, you have to ignore the seat of your pants feelings.
0:15:50 Under certain conditions, your senses just can be dead wrong.
0:15:55 The only thing that matters is data from the instruments or outside visual references.
0:16:00 Jim summed this up in a line he took from a pilot’s book that I think is really important.
0:16:03 The last thing you should do is the first thing you feel you should do.
0:16:07 In other words, during predicaments, when you’ve lost all sense of direction,
0:16:09 don’t trust your senses.
0:16:10 Don’t act on impulse.
0:16:12 It’s the same with your business.
0:16:16 If you’ve lost all sense of direction there, don’t react on a whim.
0:16:19 Instead, take your feelings out of the mix.
0:16:20 Gather all the data you can.
0:16:22 Analyze what you’ve got available.
0:16:24 Consult with your experts.
0:16:27 Engage your reliable sources.
0:16:33 And identify the root cause of the problem through rational thinking, not raw passion.
0:16:38 Around the same time, Jim made another discovery that would actually change his life.
0:16:41 He and Mary were looking for an apartment when they passed a mobile home park.
0:16:43 This was 1956.
0:16:49 Mobile homes were seen as temporary housing for construction workers or military families.
0:16:51 But Jim saw something different.
0:16:54 A product that solved multiple problems at once.
0:17:00 Affordability, privacy, no shared walls with neighbors above, below, or beside you.
0:17:04 So he found a retailer desperate to get out of business.
0:17:07 Convinced him to sell a home for just the balance owed to the bank.
0:17:10 That was $500 below wholesale.
0:17:15 Years later, Jim discovered that the retailer had added a $500 kickback to the invoice.
0:17:20 This was his first lesson in how the mobile home industry worked.
0:17:22 There was skimming at every level.
0:17:27 Keep in mind, this is an industry that he would come to dominate.
0:17:29 The business started with cars.
0:17:35 Jim had been trying to sell his old Kaiser, a car nobody wanted because parts were impossible to find.
0:17:40 So he ran a three-line ad in the local paper, must-sell car to pay for college.
0:17:43 He got two offers right away at his asking price.
0:17:46 After selling the Kaiser, he had another buyer still interested.
0:17:51 So Jim rushed over to a friend, Studebaker, that was for sale and sold that too.
0:17:53 The friend gave him $50 for the favor.
0:17:55 Two cars, one ad.
0:17:57 Jim thought, I’m on to something here.
0:18:02 So he started haunting the used car lots on the Clinton Highway, going to auctions.
0:18:09 He’d buy a Chevy for $200, fix it up, run his classified ad about needing money for college, sell it for $300.
0:18:13 $50 profit for a few hours of work.
0:18:15 Soon he was buying two or three cars at a time.
0:18:19 He recruited his brother Joe and six friends as his sales force.
0:18:25 The business grew so fast that the state motor vehicle department showed up one rainy afternoon.
0:18:30 It was immediately obvious Jim was operating in a legal car dealership.
0:18:34 They explained the massive fines that he was facing.
0:18:39 But instead of fighting them, Jim admitted his ignorance and turned his adversary into an ally.
0:18:41 Jim writes about this moment.
0:18:44 It was obvious that arguing with them would be self-defeating.
0:18:47 So I became humble and listened intently.
0:18:49 I acknowledged my ignorance.
0:18:51 I assured them my goal was to obey all laws.
0:18:59 I thanked the examiner for bringing this to my attention and apologized for inconveniencing the various departments and their staff.
0:19:07 With the appropriate meekness, I asked him to assist me in becoming a fully authorized license and registered automobile dealer.
0:19:11 Within moments, my adversary became my mentor.
0:19:15 If Jim acted quickly to meet all their requirements, they’d waive the fines.
0:19:22 By then, Jim had graduated with his electrical engineering degree and gotten a stable government job at the TVA.
0:19:27 It was decent money, but he was bored out of his mind and making more selling cars on the side.
0:19:28 So he quit.
0:19:34 He rented space at Texaco Station for $60 a month and put up a sign, Jim Clayton Autoland.
0:19:37 He was in business, legally this time.
0:19:43 The breakthrough came when Jim met Fenton Kinstein, a loan officer at Valley Fidelity Bank.
0:19:47 Jim asked him, would you like to have applications on good future customers of mine?
0:19:49 Fenton was enthusiastic.
0:19:50 He said yes.
0:19:52 They worked out a system.
0:19:55 Jim would pre-screen customers and send the good ones to Fenton.
0:19:57 Credit checks, documents done.
0:20:02 Jim would have his check quickly, but Fenton became more than a loan processor.
0:20:04 He became Jim’s mentor.
0:20:08 You’re selling your cars too damn cheap, Fenton told him bluntly.
0:20:09 Charge a little more.
0:20:10 Your cars are worth more.
0:20:16 Jim listened and raised his profit from $100 to $250 per car.
0:20:17 Sales kept climbing.
0:20:21 By 1959, Jim had moved into imports.
0:20:24 He discovered he could sell Volkswagen as a gray marketer,
0:20:27 buying beetles that Volkswagen secretly supplied,
0:20:31 keeping official dealers on the allocation to create artificial scarcity.
0:20:39 The official Volkswagen dealer in town, the Snyder Brothers ran huge newspaper ads warning against gray market Volkswagens.
0:20:42 They never named Jim, but everybody knew.
0:20:46 Unwittingly, Jim recalls, the Snyder Brothers became excellent promoters for us.
0:20:49 The more they ran those ads, the more beetles we sold.
0:20:58 Everyone wanted to know what a gray market Volkswagen was and why you didn’t have to wait to buy one like you did at all the official Volkswagen dealers.
0:21:03 By 1960, Clayton Motors had grown beyond anyone’s imagination.
0:21:09 Jim had franchise agreements with Volvo, Renault, British Motor Company, and American Motors.
0:21:12 They had 70 employees in multiple locations.
0:21:13 They were growing fast.
0:21:19 I want to tell you about a few of the tricks that they used to grow fast because I think they were interesting.
0:21:23 Jim insisted that managers know the market before advertising.
0:21:26 For example, which radio stations do people listen to?
0:21:29 And this information can be easily gathered.
0:21:41 One way that they used to do this in the 50s, 60s, and 70s was to go to a nearby shopping center, walk through the parking lot, and look through each car window to see where the radio dial was set.
0:21:44 Almost always, most of the cars would be set to the same station.
0:21:46 I thought that was really clever.
0:21:53 Another unconventional thing Jim did was his managers would always insist on these big and expensive yellow page ads.
0:21:56 After all, all the competition has them.
0:22:00 So Jim would argue with them, but eventually he would agree on one condition.
0:22:08 A bright red phone is set aside in the sales center office specifically for this test, a new number assigned to it.
0:22:11 This number only appears in the Yellow Pages ad.
0:22:22 The deal is that if the red phone rings even a handful of times, we’ll remove the yellow handcuffs and let the manager buy an ad, a small ad with the sales center’s main number listed.
0:22:23 Guess what?
0:22:25 That phone never rang.
0:22:28 No matter how big the ad was they placed.
0:22:30 They were growing fast.
0:22:32 That’s when Tom Preston showed up.
0:22:37 He was a young vice president at Hamilton National Bank, Knoxville’s largest bank.
0:22:43 His main qualification was having a grandfather who’d owned a large share of the bank and an uncle who was bank president.
0:22:49 But Tom told Jim exactly what he wanted to hear grow more and faster.
0:22:52 This was the opposite of Fenton’s advice.
0:22:56 Remember, Fenton had been doing all the financing up until now.
0:22:59 Fenton wanted to put Jim on a growth moratorium for a year.
0:23:04 He thought Jim was growing too fast and Fenton didn’t much like Tom Preston.
0:23:08 But Tom was whispering to Jim exactly the words he wanted to hear.
0:23:12 So in 1960, he made the decision that would nearly destroy everything.
0:23:16 He transferred all of his accounts to Hamilton National Bank.
0:23:20 He walked into Fenton’s office with a cashier’s check for $110,000.
0:23:23 Fenton didn’t get angry.
0:23:25 He didn’t even raise his voice.
0:23:30 But, Jim writes, he was sad, and not so much because he was losing my business.
0:23:32 More than anything, he seemed to be sad for me.
0:23:36 Fenton, of course, was up to speed on Tom Preston and his various activities
0:23:42 and was well aware of how Tom’s liberal credit requirements had already taken significant market share.
0:23:47 There were tears in his eyes when he said Tom’s department’s going to get in trouble.
0:23:48 I’ll give him a year.
0:23:50 You’ll be lucky if you don’t get caught up in it.
0:23:54 Jim’s reaction at the time was, there goes Fenton again.
0:23:55 So conservative, so careful.
0:23:58 The only problem, Fenton was right.
0:24:04 Tom Preston was about to get in a lot of trouble, and Clayton Motors would get caught up in it.
0:24:09 In the spring of 1961, after just five years of selling cars,
0:24:12 Volvo named Jim their top dealer in America.
0:24:15 They flew him to Sweden for two weeks of celebration.
0:24:20 Jim even gave a speech to 600 Volvo dealers from around the world,
0:24:23 with dozens of interpreters translating simultaneously.
0:24:28 If you build them, America will buy them, and I’ll keep selling my share, he told them.
0:24:30 He received a standing ovation.
0:24:34 At 27 years old, Jim was treated like royalty.
0:24:38 He was the personification of Volvo’s American future.
0:24:44 A few days later, his brother Joe met him at the airport with devastation written on his face.
0:24:47 I have a problem at the bank, he said immediately.
0:24:52 During Jim’s two weeks in Sweden, the aggressive bank that Jim had switched to, Hamilton National,
0:24:55 had discovered what Fenton had predicted.
0:25:02 Tom Preston’s book of business was full of bad loans, poor documentation, and angry customers.
0:25:05 It had finally caught up with him, and the bank was panicking.
0:25:11 They decided to terminate relationships with all their indirect dealers immediately.
0:25:13 Jim Clayton was one of those dealers.
0:25:16 They were calling in all of Clayton Motors’ notes.
0:25:20 $275,000 due today.
0:25:23 The meeting at the bank was a disaster.
0:25:26 Jim and Joe brought their lawyers, both fresh out of law school.
0:25:32 The young lawyers started telling the bank’s veteran attorneys and president Harry Nacy what they could and couldn’t do.
0:25:34 That was not a good idea.
0:25:37 Jim watched the aggravation mount.
0:25:39 Finally, Nacy looked at his watch.
0:25:41 He had a tennis match in 20 minutes.
0:25:45 Let’s bankrupt these little SOBs, Nacy said.
0:25:46 I can’t be late for my tennis match.
0:25:49 While Jim and Joe were still in that meeting,
0:25:54 bank representatives were already at both Clayton Motors locations with court orders.
0:25:57 They took everything, every car, every key,
0:26:01 even the keys to customers’ cars that were in for oil changes.
0:26:04 They grabbed mechanics’ tools, cash, and accounting records.
0:26:09 They even took the adding machine from Jim’s accountant, who was there doing an audit.
0:26:13 When the accountant tried to leave, he discovered they’d taken his car keys too.
0:26:17 The Knoxville newspapers ran the bankruptcy on their front pages.
0:26:20 The TV news covered it.
0:26:23 One paper mentioned Jim had just returned from Sweden,
0:26:25 which some readers confused with Switzerland.
0:26:31 A rumor would persist for decades that Jim had secret Swiss bank accounts.
0:26:33 Clayton Motors was gone.
0:26:37 That night, Jim went to bed, thinking his life was over.
0:26:40 Then he woke up the next morning feeling great.
0:26:44 By 6.30, he and Joe were at a local restaurant with four of their best employees,
0:26:45 planning a resurrection.
0:26:49 They would form a new company, Clayton Motors Incorporated.
0:26:53 Their bankruptcy attorney, Bernie Bernstein, explained that even in bankruptcy,
0:26:54 they could form a new corporation.
0:26:59 The challenge was getting a location, since Hamilton National had taken over their leases.
0:27:01 Bernie had a solution to that too.
0:27:06 Contact the old landlords and sign new leases for the same properties under the new company name.
0:27:10 When the bank found out, they were furious, but they had no choice.
0:27:16 Clayton Motors Incorporated even let the bank store the seized cars there while preparing for auction.
0:27:21 Jim wanted it to look like business as usual to all the passing traffic.
0:27:25 Meanwhile, Jim’s parents found out about the bankruptcy from a mysterious caller.
0:27:27 His mother was home and the phone rang.
0:27:30 Miss Clayton, there’s something you need to know, the voice said.
0:27:35 But first, you have to promise never to tell anyone I gave you this information.
0:27:38 When she agreed, the caller dropped the bomb.
0:27:40 Your sons have just filed for bankruptcy.
0:27:45 To his mother, bankruptcy was as bad as first-degree murder.
0:27:49 Nobody in the Clayton family had ever welshed on her debt.
0:27:51 She called her boys immediately.
0:27:52 She was horrified.
0:27:55 The next morning, their father was on the road to Knoxville.
0:27:58 When he arrived, Jim saw something he’d never seen before.
0:28:00 Tears in his father’s eyes.
0:28:02 Are my boys going to jail?
0:28:03 His father asked the lawyer.
0:28:06 Bernie put his arm around his shoulder and said,
0:28:13 Before leaving, their father gave them a check for $2,600.
0:28:15 It was everything he had in the bank.
0:28:18 Auto franchises dropped Jim and Joe immediately.
0:28:20 American Motors, gone.
0:28:21 Renault, gone.
0:28:22 British Motor Company, gone.
0:28:24 All except one.
0:28:28 Jim called Volvo headquarters and explained that their golden boy was now bankrupt.
0:28:31 However, six new Volvos were already on the way to Knoxville.
0:28:33 So Volvo had a choice.
0:28:35 They could reclaim the cars or trust Jim to pay them.
0:28:37 Volvo chose trust.
0:28:39 Now came the clever part.
0:28:43 Bernie confirmed that while the business was bankrupt, Jim and Joe as individuals were not.
0:28:47 They could bid at the bank’s liquidation auction under the new company.
0:28:53 So when the bank auctioned off the seized inventory, Jim and Joe were there with lads of cash.
0:29:02 $2,600 from their father, $3,000 from their staff, and $8,500 from selling a Volvo sports coupe that Jim had bought in Sweden.
0:29:08 At the auction, Jim and Joe knew every car, every part, every tool.
0:29:10 They knew exactly what everything was worth.
0:29:17 As they won bid after bid, buying back their own inventory at bargain prices, the bank’s representatives watched in horror.
0:29:19 Is this legal?
0:29:20 Can we stop them?
0:29:20 Can we stop them?
0:29:22 They couldn’t.
0:29:23 But here’s the brilliant part.
0:29:28 Jim and Joe pre-sold many of those cars before the auction even started.
0:29:35 They’d contacted customers, explained how they could get a great car at auction prices, take their cash, and made the purchase.
0:29:50 As Bernie pointed out, if creditors got much more than 10% in bankruptcy proceedings, the bankruptcy probably wasn’t justified.
0:29:53 Jim’s creditors got $0.41 on the dollar.
0:29:55 The bank should have just worked with them.
0:29:58 They dropped, as Jim put it, an atom bomb.
0:30:00 Jim and Joe made a vow.
0:30:09 They would pay back not just the $0.41 on the dollar required by bankruptcy, but $0.100 on the dollar to every single creditor.
0:30:13 It took five years, but they paid everyone back in full.
0:30:16 This theme is super interesting because it keeps coming up.
0:30:20 Do you remember Jimmy Patterson’s father, who worked for decades to pay everyone back?
0:30:28 Dick Stack, who founded Dick’s Sporting Goods, sold everything he had to pay his creditors back when the first company went bankrupt.
0:30:33 There are three things about the bankruptcy that I want to draw your attention to that stood out for me.
0:30:36 The first is the advice his grandfather gave him.
0:30:39 If you have to swallow a frog, don’t look at it too long.
0:30:42 If you have to swallow two frogs, swallow the big scudder first.
0:30:45 And Jim would write that about bankruptcy.
0:30:49 There were so many frogs to swallow, and these were all supersized.
0:30:51 I really like that line.
0:30:54 If you have to swallow a frog, don’t look at it too long.
0:30:58 Another thing that stood out to me was his optimistic approach.
0:31:04 Certainly, he wrote, these were depressing times, but Joe and I spent almost no time moaning about what happened.
0:31:06 Both of us tend to be consistently optimistic.
0:31:13 The lesson here is that all the time you spend complaining about what happened or how unfair it was,
0:31:15 comes at the expense of making the situation better.
0:31:21 And finally, hard times reveal which of our relationships are truly lasting.
0:31:23 You can’t figure that out in the easy times.
0:31:28 Every day at the bankruptcy courthouse, Jim sat next to Bernie Bernstein, his lawyer,
0:31:31 watching the lawyers tear through the bankrupt Clayton Motors.
0:31:45 If he’d known what Bernie knew, Jim thought, he never would have ended up here in the first place.
0:31:51 So in 1962, while most men his age were settling into their careers, Jim Clayton enrolled in law school.
0:31:56 Not because he wanted to become a lawyer, but because he wanted to avoid bankruptcy again.
0:32:00 The University of Tennessee School of Law didn’t know what to make of him.
0:32:05 He showed up in class, in the back row, hiding behind the biggest student he could find,
0:32:08 what Jim called a quote-unquote double-wide.
0:32:13 He’d snap to attention when called upon, venture a comment about torts or contracts,
0:32:15 and then go back to his juggling act.
0:32:21 Law school student in the morning, car dealer in the afternoon, working at the radio station again too.
0:32:24 His grades were straight Cs, just enough to keep moving forward.
0:32:27 But Jim wasn’t there for the grades.
0:32:29 He was there to learn how to see around corners.
0:32:33 Every contract he’d draft, every lawsuit he’d dodge,
0:32:39 every regulation he’d navigate for the next 40 years would be filtered through what he learned in those three years.
0:32:42 The real education came from watching Bernie work.
0:32:48 Jim spent countless hours observing how Bernie devoured mountains of research before taking any position.
0:32:52 Bernie taught him that business was about being prepared,
0:32:57 and a large part of that preparation meant understanding the rules better than anyone else in the room.
0:33:01 The most important lesson he’d learned, though, was avoiding trouble.
0:33:10 My experience he reflected later indicates that over 80% of legal claims originate because of a failure to deliver customer satisfaction.
0:33:18 Therefore, it has always been my conclusion that most of our claims can be eliminated if we simply meet or exceed customer expectations.
0:33:25 This reminds me of a passage from Poor Charlie’s Almanac that I want to read to you, and this is Charlie Munger talking.
0:33:28 When I was very young, my father practiced law.
0:33:32 One of his best friends, Grant McFadden, Omaha’s pioneer Ford dealer, was a client.
0:33:40 He was a perfectly marvelous man, a self-made Irishman who’d run away uneducated from a farm as a youth because his father beat him.
0:33:42 So he made his own way in the world.
0:33:45 He was a brilliant man of enormous charm and integrity.
0:33:47 Just a wonderful, wonderful man.
0:33:55 In contrast, my father had another client who was a blowhard, an overreaching, unfair, pompous, difficult man.
0:33:59 And I must have been 14 years old or thereabouts when I asked,
0:34:08 Dad, why do you do so much work for Mr. X, this overreaching blowhard, instead of working more for wonderful men like Grant McFadden?
0:34:13 My father said Grant McFadden treats all of his employees right, his customers right, and his problems right.
0:34:21 And if he gets involved with a psychotic, he quickly walks over to where the psychotic is and works out an exit as fast as he can.
0:34:26 Therefore, Grant McFadden doesn’t have enough renumerative law business to keep you in Coca-Cola.
0:34:31 But Mr. X is a walking minefield of wonderful legal business.
0:34:34 This case demonstrates one of the troubles with practicing law.
0:34:39 To a considerable extent, you’re going to be dealing with grossly defective people.
0:34:43 They create an enormous amount of the renumerative law business.
0:34:46 And even when your own client is a paragon of virtue,
0:34:52 You’ll often be dealing with gross defectives on the other side or even on the bench.
0:34:54 That’s partly what drove me out of the profession.
0:35:00 I’d argue that my father’s model, when I asked him about the two clients, was totally correct.
0:35:03 He taught me the right lesson.
0:35:04 The lesson monger says,
0:35:11 As you go through life, sell your services once in a while to an unreasonable blowhard if that’s what you must do to feed your family.
0:35:14 But run your own life like Grant McFadden.
0:35:18 And Jim Clayton, even with his law degree, was running his life like Grant McFadden.
0:35:22 Treat your employees right, treat your customers right, and treat your problems right.
0:35:24 And you avoid most legal trouble.
0:35:28 The transition from cars to mobile homes started with an irritation.
0:35:34 Every morning from his growing car dealership, Jim watched a traffic jam on the highway in front of his dealership.
0:35:38 The Taylor brothers were delivering a mobile home.
0:35:46 These massive boxes, 10 feet wide and 50 feet long, would lumber out of their lot while cars were backed up both directions on the highway.
0:35:48 And every time Jim saw one, he would think,
0:35:54 This happens every day, these darn guys, and I hear they make a couple thousand bucks every time they sell one.
0:35:57 Ten times what we make when we sell a car.
0:35:58 Darn guys.
0:36:00 Those Taylors sure are doing well.
0:36:01 No wonder they’re living the high life.
0:36:02 Real party guys.
0:36:08 Just think, every time I see one of those big things pass me on the road, they’ve made a couple grand.
0:36:11 And I see it every day.
0:36:14 Gee, that mobile home business must be really good.
0:36:16 Remember, this was the 1960s.
0:36:19 $2,000 was a lot of money.
0:36:23 He already knew a lot about mobile homes, having lived in a couple.
0:36:25 So he decided to test the waters.
0:36:26 He found a classified ad.
0:36:30 10 by 56, like new, small kitchen fire.
0:36:34 When Jim arrived, he discovered small kitchen fire was being generous.
0:36:36 The kitchen was charcoal.
0:36:38 The ceiling had melted.
0:36:41 Black soot covered everything like volcanic ash.
0:36:43 But Jim saw something else.
0:36:48 Bones worth $1,200 that could be rebuilt into something worth $4,500.
0:36:51 So he recruited his parents for the rebuild.
0:36:53 His mother attacked the soot.
0:36:55 His father rebuilt the fixtures.
0:36:58 Jim handled the business side, negotiating with suppliers.
0:37:07 Two days and $800 later, they hadn’t even finished the new floor when somebody driving by saw the sign for sale and bought it on the spot.
0:37:11 $2,000 profit in two days of work.
0:37:15 Jim started studying the mobile home business at night.
0:37:18 He wanted to know every single detail.
0:37:22 He’d walk through the Taylor Brothers lot, measuring homes, examining construction.
0:37:29 He’d visit other dealers, posing as a customer, asking about suppliers, margins, financing.
0:37:33 He discovered an industry that was booming, but still a little prehistoric.
0:37:35 The numbers were staggering.
0:37:42 In 1966, when Jim was getting serious about mobile homes, the industry was shipping about 200,000 units a year.
0:37:46 By 1973, it would hit 580,000.
0:37:48 Mobile homes weren’t a niche anymore.
0:37:52 This is how a growing portion of Americans were choosing to live.
0:37:56 But industry was stuck in the dark ages.
0:37:59 Manufacturers built homes like they were still travel trailers.
0:38:05 Retailers operated on pure commission with no training, no standards, and no service after the sale.
0:38:10 Lenders treated mobile home buyers like subprime borrowers, even with perfect credit.
0:38:16 Everyone was trying to extract maximum profit at every level with minimal effort.
0:38:19 And demand was still growing like gangbusters.
0:38:25 Jim’s first real move came through a chance meeting with Don Tidwell, a mobile home manufacturer and madman genius.
0:38:29 Tidwell had Elvis Presley-like sideburns.
0:38:34 He wore rhinestones, studded shirts, and had transformed mobile home design by doing something revolutionary.
0:38:36 He used colors other than brown.
0:38:44 While every other manufacturer covered every surface with dark wood paneling, Tidwell was using bright reds, blues, and golds.
0:38:47 Customers couldn’t get enough.
0:38:48 But Tidwell had a problem.
0:38:50 Turns out, the Taylor brothers.
0:38:56 They wanted to prevent him from selling to competitors while they directed sales to other manufacturers.
0:39:00 It was a classic strom-arm tactic in an industry full of them.
0:39:03 And Tidwell was fed up, and he was looking for an out.
0:39:11 So when Jim showed up, this pilot, lawyer, engineer, car dealer, who actually understood manufacturing, Tidwell saw his opportunity.
0:39:18 Standing on the airport tarmac, Tidwell sketched a sign for Clayton Mobile Homes, right on the wing of Jim’s Cessna.
0:39:20 He drew a little revolving mobile home on top.
0:39:22 Then they shook hands.
0:39:25 Jim had just become a mobile home dealer.
0:39:28 Except he had no inventory, no lot, no real experience.
0:39:31 But he had something more valuable.
0:39:34 He had a crystal clear vision for what the industry could become.
0:39:43 Fenton, the banker that originally backed Clayton Motors, the one who warned him about growing too fast, was called to help finance things.
0:39:44 Jim writes,
0:39:49 You could see the reluctance on his face, even before his feet touched the grovel.
0:39:53 It seemed hard for him to even look at the shiny new homes.
0:39:58 He was quick to remind me that with one bankruptcy under our belts, he was too old to go through another.
0:40:03 I spent considerable time assuring him the mobile home business was just something on the side.
0:40:04 Nothing more.
0:40:07 After all, we had to do something with the extra land.
0:40:10 Fenton, I understand your concerns, I said.
0:40:15 But I assure you, there’ll never be more than 10 homes on this lot, ever.
0:40:16 That promise would last a month.
0:40:23 The Clinton Highway location Jim chose was strategic, right across from the Taylor brothers on land that had been a failed drive-in restaurant.
0:40:29 Every customer who got frustrated with the Taylor’s high-pressure sales tactics would see Jim Clayton’s sign.
0:40:34 Every traffic jam the Taylors caused would have drivers staring at Jim’s inventory.
0:40:38 But Jim’s real innovation wasn’t location, it was integration.
0:40:43 Manufacturers wanted to build homes as cheaply as possible and ship them to dealers.
0:40:48 Dealers wanted to sell homes for as much markup as possible and then forget about them.
0:40:54 Lenders wanted to charge the highest rates possible and foreclose at the first missed payment.
0:40:57 Nobody was thinking about the customer after they walked out the door.
0:41:00 Nobody was thinking about the life cycle of the product.
0:41:03 Nobody was thinking like an engineer.
0:41:05 Jim was an engineer.
0:41:07 And his approach was different.
0:41:12 When a customer bought a home from Clayton, that was the beginning of the relationship, not the end.
0:41:15 When something broke, Clayton fixed it immediately.
0:41:18 When customers needed to upgrade, Clayton took their trade-in.
0:41:23 When financing fell through, Clayton found another lender or financed it themselves.
0:41:27 But to really control quality, Jim realized he needed to control manufacturing.
0:41:31 My original plan was to build homes that were nothing like the competition.
0:41:35 I quickly found out how difficult it would be to make homes that unique.
0:41:39 Even building homes with the standard look was going to be a problem.
0:41:43 His first factory was an abandoned body shop, barely big enough for three homes.
0:41:47 The very first home they built was 12 feet wide.
0:41:50 The door in the body shop was 11 feet 10 inches.
0:41:52 They had to knock out the wall to get it out.
0:41:55 His father was helping with production called with the news.
0:41:57 We have a small problem.
0:41:59 The home is too big for the darn door.
0:42:02 But the mistake taught Jim something crucial.
0:42:06 In the mobile home industry, nobody really measured anything precisely.
0:42:09 Homes were built to about 12 feet wide.
0:42:11 They were around 60 feet long.
0:42:15 Two halves of a double wide pretty much fit together.
0:42:20 This casualness was why mobile homes had such a terrible reputation.
0:42:23 Jim instituted quality control.
0:42:25 Every home was measured to the inch.
0:42:27 Every system was tested before shipping.
0:42:31 When the industry standard for double wides was to build them separately and hope they
0:42:36 fit together at the site, often involving a sledgehammer, Jim insisted on building them
0:42:38 as one unit, then sawing them apart.
0:42:43 When those homes arrived at a customer site, they fit together perfectly.
0:42:44 No sledgehammer required.
0:42:49 The manufacturing plant lost money for six straight years.
0:42:52 For six years, his banker shook their heads at him.
0:42:54 His board pushed him to shut it down.
0:42:56 But Jim saw what they didn’t.
0:43:00 Every perfectly fitted home was a customer who would recommend Clayton to friends.
0:43:02 Every recommendation was a future sale.
0:43:06 Every future sale was another step towards market domination.
0:43:09 As they grew, so did customer complaints.
0:43:13 Competitors hired squadrons of lawyers to fight them.
0:43:15 But Jim took a different path.
0:43:20 For 30 years, Clayton Homes operated with a legal department of one person, Jim himself.
0:43:24 Not because he couldn’t afford more lawyers, but because he didn’t need them.
0:43:28 When an angry customer threatened to sue, Jim didn’t hide behind legal briefs.
0:43:29 He’d pick up the phone.
0:43:32 The opposing attorney would be expecting another attorney.
0:43:34 Instead, they get the CEO.
0:43:37 Jim would disarm them with talk of football, then say simply,
0:43:41 We lawyers always have a stack of files on our desk that will be profitable,
0:43:44 and another stack not likely to produce much income.
0:43:48 I don’t see how either one of us is going to retire on this case.
0:43:51 Often, the opposing attorney would chuckle and agree.
0:43:54 They’d reach an amicable settlement.
0:43:57 When you support Movember, you’re not just fundraising.
0:44:00 You’re showing up for the men you love.
0:44:04 Your dad, your brother, your partner, your friends.
0:44:05 It isn’t just a men’s issue.
0:44:07 It’s a human one.
0:44:09 That’s why Movember exists.
0:44:11 To change the face of men’s health.
0:44:13 From mental health and suicide prevention,
0:44:17 to prostate and testicular cancer research and early detection,
0:44:21 Movember is tackling the biggest health issues facing men today.
0:44:24 Join the movement and donate now at Movember.com.
0:44:26 Jim remembered something from law school.
0:44:30 His professors rule number one about being an attorney, get the fee.
0:44:32 So during these conversations,
0:44:36 Jim would offer to reimburse the attorney’s client for their legal fees.
0:44:38 He wouldn’t suggest an exact number,
0:44:40 but give them a ballpark he knew would be enough.
0:44:43 On other occasions, and this is what worked the best,
0:44:46 he’d do something no corporate lawyer would do.
0:44:48 He’d visit customers personally.
0:44:52 He’d bring a camera, a notepad, and the manager from Clayton Homes who’d cause the problem.
0:44:54 Together with the customer,
0:44:57 they’d document every complaint from the front door to the back bedroom.
0:45:01 And a strange thing would happen halfway through this tour.
0:45:03 The hostile customer would stop being hostile.
0:45:05 They’d start saying things like,
0:45:08 ah, don’t bother with that little gap in the trim, I’ll take care of that myself.
0:45:12 By the end, they’d be laughing about fishing and politics.
0:45:15 The secret was something Jim called the Max Nichols service letter.
0:45:21 They’d fix everything on the list in order with the customer initialing each repair.
0:45:24 One furious couple whose home had been delivered late
0:45:27 ended up referring three new customers to Clayton within a year.
0:45:29 The total cost to resolve their complaint?
0:45:32 Their repair work, plus $500 towards legal fees.
0:45:35 A lawsuit would have been 50 times that.
0:45:38 Clayton spent a fraction on legal fees,
0:45:40 not because they had fewer problems,
0:45:45 but because Jim saw that 80% of legal claims came from one source.
0:45:48 A failure to deliver customer satisfaction.
0:45:52 Fix the satisfaction problem and the legal problems disappeared.
0:45:54 They’d never wanted to own mobile home parks,
0:45:56 but the deal fell into their lap.
0:46:00 An investor had built Greenacres mobile home park in Knoxville,
0:46:01 but couldn’t find anyone to move in.
0:46:04 He convinced Jim to put a dozen Clayton Homes there,
0:46:07 completely set up and ready for immediate occupancy.
0:46:09 The problem was nobody bought them.
0:46:12 It took two years to sell those 12 homes.
0:46:16 By 1973, with only 30 homes in Greenacres, the investor gave up.
0:46:20 He sold it to Clayton for less than the construction costs.
0:46:22 Jim thought it was still a good investment.
0:46:26 A profitable park would provide reliable year-round revenue
0:46:29 and take up the slack during winter when home sales were slow.
0:46:32 As they bought other parks, they learned an expensive lesson.
0:46:34 One park had a creek running through it.
0:46:35 No problem, they thought.
0:46:39 They’d reshape the land and divert the flow around the edge.
0:46:40 Major mistake.
0:46:44 Water goes where it wants to go, Jim writes.
0:46:47 And where it wants to go is where it is always gone.
0:46:49 Walkways collapsed.
0:46:51 The blacktop crumbled.
0:46:53 Fissures popped up where the creek used to be.
0:46:57 They paved that park twice, $30,000 each time.
0:46:59 And within a month, the rain washed it all away.
0:47:01 The lesson was simple.
0:47:03 Literally, go with the flow.
0:47:04 Make your plan.
0:47:07 Conform to the land, not the other way around.
0:47:10 Either work with it or walk away.
0:47:12 Now Jim was making the homes.
0:47:15 He was selling them and had parks to put them in.
0:47:18 The next step in the vertical integration was obvious.
0:47:24 Jim had watched lenders make fortunes off mobile home buyers, charging rates that would make a loan shark blush.
0:47:33 So he created Vanderbilt Mortgage, starting with just 12 index cards on his brother Joe’s desk representing owner-financed accounts they had started.
0:47:39 By controlling the financing, Clayton could sell to customers other dealers wouldn’t touch.
0:47:43 By servicing their own loans, they knew exactly how their customers were doing.
0:47:47 When someone missed a payment instead of foreclosing, Clayton worked with them.
0:47:49 Maybe they needed a payment holiday.
0:47:51 Maybe they needed to refinance.
0:47:54 Maybe they needed to trade down to a smaller home.
0:47:58 Every solution was available at Jim’s fingertips.
0:48:00 The integration went even deeper.
0:48:06 Clayton created Vanderbilt Life Insurance to protect both buyer and company if something happened to the breadwinner.
0:48:10 They bought mobile home parks so that they can control where the homes were placed.
0:48:15 They created warranty programs so customers knew exactly what was covered and for how long.
0:48:20 By 1973, Clayton Homes wasn’t really a mobile home company anymore.
0:48:23 It was a vertically integrated housing system.
0:48:27 They controlled every step from factory floor to the final mortgage payment.
0:48:34 When a customer walked onto a Clayton lot, they entered an ecosystem designed to solve every problem they might encounter.
0:48:36 The numbers were staggering.
0:48:39 In one weekend, they’d sold 26 homes.
0:48:41 In one month, they sold 86 homes.
0:48:45 From a single location, they sold 700 homes in a year.
0:48:47 A record that still stands.
0:48:53 No other dealer had ever come close because no other dealer had built the infrastructure Jim had built.
0:48:57 Then came 1974, and everything fell apart.
0:49:04 The OPEC oil embargo hit, inflation exploded, unemployment soared, and interest rates went through the roof.
0:49:12 The mobile home industry, which had shipped 580,000 units in 1973, sold only 212,000 in 1975.
0:49:15 It was a 60% collapse in two years.
0:49:21 Dead manufacturing plants that were bleeding cash, dozens of retail locations burning through overhead,
0:49:27 hundreds of employees depending on paychecks, and millions in personally guaranteed loans.
0:49:30 But Jim did something that seemed insane at the time.
0:49:32 He played offense.
0:49:35 While competitors closed locations, he kept everyone open.
0:49:38 While others fired salespeople, he kept them all employed.
0:49:41 While others cut advertising, he increased it.
0:49:43 His logic was simple.
0:49:47 When the recession ended, Clayton Homes would be the only company ready to capture the recovery.
0:49:50 To survive, they had to innovate, though.
0:49:59 So Jim’s team created the Vegas, a stripped-down model that sold for $5,995, less than many used mobile homes.
0:50:03 When traditional lenders stopped lending, Jim expanded Vanderbilt Mortgage.
0:50:07 When customers couldn’t afford down payments, they created new insurance products.
0:50:11 Every problem became an opportunity to strengthen the ecosystem.
0:50:16 By 1976, when the recession ended, Clayton Homes had done something unprecedented.
0:50:23 They not only survived the worst downturn in industry history as a fully integrated housing company, but they grew.
0:50:28 The few competitors who survived were still just retailers or manufacturers or lenders.
0:50:29 Clayton was all of those things.
0:50:35 When other recessions arrived in the late 70s and 80s, Clayton had developed a saying,
0:50:39 The country is in a recession, and we have elected not to participate.
0:50:49 During those tough times with 20% interest rates, Clayton grew sales by 25% each year while keeping factories open and sales centers staffed.
0:50:51 Wall Street noticed Clayton Homes.
0:50:53 Investment bankers started calling.
0:50:55 The company went on a roadshow for their IPO.
0:50:57 20 cities in 10 days.
0:51:02 When they got to Boston, analysts whispered to Jim that Peter Lynch might drop by for five minutes.
0:51:08 The Peter Lynch who turned Fidelity’s Magellan Fund into the best performing mutual fund in history.
0:51:10 He’d stayed a full hour.
0:51:13 By the time Jim got back to his hotel, everyone wanted in.
0:51:16 Fidelity wanted three times their initial allocation.
0:51:21 The IPO priced at $16 on June 22, 1983.
0:51:24 By noon the next day, it was trading at $19.50.
0:51:27 Did raise $31 million in a single morning.
0:51:30 Before the IPO, Jim owned 100% of the company.
0:51:38 After selling 20% to the public, he received $10.5 million in cash and retained an 80% ownership of Clayton Homes.
0:51:41 Now valued at $120 million.
0:51:46 When his team asked if he wanted a party, Jim suggested they all get back to work.
0:51:48 Going public changed the game a bit.
0:51:54 Quarterly earnings calls and analysts who’d never sold a mobile home telling you how to run your business.
0:51:57 But Jim ignored the noise and just focused on the fundamentals.
0:52:01 They paid off all their debt and opened a new manufacturing plant.
0:52:03 The strategy was surprisingly simple.
0:52:07 While competitors in the late 80s chased growth by loosening credit standards,
0:52:09 Clayton maintained discipline.
0:52:13 When those competitors collapsed in the early 90s from the savings and loan crisis,
0:52:15 Clayton was still standing.
0:52:18 Between 1983 and 2003,
0:52:22 Clayton Homes grew from 30 retail centers to over 300.
0:52:26 From three manufacturing plants to 20.
0:52:30 From a few million in mortgage receivables to over a billion.
0:52:35 By the late 90s, the manufactured housing industry was in another meltdown.
0:52:38 All the big names were either dead or dying.
0:52:40 They’d all done what Jim refused to do.
0:52:44 They’d all chased growth with bad loans to bad borrowers.
0:52:46 Does that sound familiar?
0:52:48 This is what happened in 2008 too.
0:52:50 Clayton didn’t just survive this though.
0:52:51 They played offense.
0:52:57 So as competitors collapsed, Clayton bought their best retail locations for pennies on the dollar.
0:53:03 As lenders fled the industry, Clayton’s financing arm grabbed more and more market share at steep discounts.
0:53:08 By 2002, Clayton Homes had emerged as the last man standing.
0:53:10 Then Warren Buffett called.
0:53:13 In 2002, Jim Clayton decided to write his memoirs.
0:53:17 First, a dream was the title and is the book that we’re discussing today.
0:53:22 He self-published it, figuring maybe a few hundred people in the industry might want to read it.
0:53:27 Little did he know that we’d be doing a podcast on this, reaching hundreds of thousands of people.
0:53:29 He gave copies to business schools.
0:53:31 He handed them out of conferences.
0:53:34 He mailed them to anyone who seemed interested.
0:53:40 One of those copies ended up in the hands of some University of Tennessee students heading to Omaha, Nebraska to visit Warren Buffett.
0:53:43 They brought the book as a gift from Tennessee.
0:53:48 According to Buffett’s account at the 2003 Berkshire Hathaway annual meeting,
0:53:53 he called this gift from the students an unlikely source that put Clayton Homes on his radar.
0:53:55 Buffett read the book over a weekend.
0:53:59 Shortly after, Kevin Clayton, who’d been running the company since 1999,
0:54:02 received a voicemail that would change everything.
0:54:07 Buffett said he’d read the book, enjoyed it, and congratulated them on taking it to the top of the industry.
0:54:09 But there’s more to this story.
0:54:13 The manufactured housing industry in 2003 was still in crisis.
0:54:18 Even Clayton Homes, despite being what Buffett called the premier company in the industry,
0:54:21 faced a critical problem, access to capital.
0:54:23 As Kevin Clayton would later explain,
0:54:26 while the company’s balance sheet showed little debt,
0:54:33 it lacked the enormous capacity for borrowing needed to sustain its mortgage lending and inventory needs.
0:54:36 About a billion dollars annually.
0:54:41 The lending community had got burned very badly by past failures
0:54:45 and had largely sworn off providing financing for manufactured homes.
0:54:49 In other words, while Clayton’s loans were performing and they had no problem with Clayton,
0:54:54 the banks weren’t giving them more because of how all their competitors behave and the consequences.
0:54:58 The acquisition moved with remarkable speed.
0:55:00 As Buffett stated at the Berkshire Hathaway annual meeting,
0:55:03 A few phone calls later, we had a deal.
0:55:09 Clayton Homes and Berkshire Hathaway entered into a merger agreement for $1.7 billion in cash.
0:55:15 The strategic brilliance of the deal lay in Berkshire’s unique ability to solve Clayton’s critical capital problem.
0:55:18 Berkshire could do something that nobody else could do.
0:55:22 They could hold the loans on their own balance sheet rather than sell them to other people.
0:55:26 As Buffett explained, Berkshire would keep it in the portfolio.
0:55:29 This was a lifeline for Clayton.
0:55:31 By providing the capital they needed,
0:55:37 Berkshire transformed what would have been an industry-wide liability into an unparalleled competitive advantage.
0:55:39 Some shareholders resisted.
0:55:43 But Jim Clayton, who owned 28% of the company, supported the deal.
0:55:45 He understood this just wasn’t about the price.
0:55:49 It was about ensuring Clayton Homes had a permanent home with a parent company
0:55:52 that would provide the capital it needed to thrive.
0:55:55 The deal closed in August 2003.
0:55:59 Kevin Clayton would continue as CEO under Berkshire’s ownership.
0:56:04 Clayton began sourcing the materials from other Berkshire subsidies like Benjamin Moore
0:56:08 and Shaw Industries carpet, creating a self-reinforcing ecosystem.
0:56:13 From that log cabin in Tennessee where the family made $8 a week,
0:56:16 Jim Clayton had built an empire worth billions.
0:56:20 He’d survived bankruptcy, multiple recessions, and industry collapses
0:56:22 that destroyed nearly every one of his competitors.
0:56:26 He’d taken Clayton Homes public and then sold it to Warren Buffett.
0:56:29 Clayton Homes grew from a single-use trailer bought for $1,200
0:56:33 to become the largest manufacturer for homes in America.
0:56:35 By the time of the Berkshire acquisition,
0:56:39 the company had provided housing for hundreds of thousands of families.
0:56:41 Through the Clayton Family Foundation,
0:56:44 he and his wife gave away millions of dollars each year.
0:56:50 The Clayton name appears on hospitals, museums, and university buildings all across Tennessee.
0:56:53 All the proceeds from his books went to charity.
0:57:00 The boy who chose seeds over a toy car at age 10 planted something that grew beyond his wildest dreams.
0:57:04 From selling seeds door to door to shaking hands with Warren Buffett on a billion-dollar deal,
0:57:08 Jim Clayton proved that a sharecropper’s son could build an empire,
0:57:11 lose it, build it again, sell it for billions,
0:57:16 and he still showed up at 87 to play guitar at the local Opry.
0:57:18 That’s the real story.
0:57:20 It’s not just success, but survival.
0:57:22 Not just wealth, but resilience.
0:57:29 Okay, I want to talk about some of my reflections from that incredible story.
0:57:34 There’s one part that I didn’t work into the episode that I thought was really interesting.
0:57:37 And Jim Clayton has this concept called the three A’s.
0:57:40 Action, attitude, and atmosphere.
0:57:41 Action.
0:57:44 We have to have action in all areas of our life.
0:57:46 The action must be positive and plentiful.
0:57:49 And on atmosphere, he says,
0:57:52 Of course, positive action produces positive attitudes,
0:57:54 which produce positive atmosphere.
0:57:58 The other thing that I didn’t highlight enough, I think, in this episode,
0:57:59 as I just reread it to you,
0:58:03 was that Jim Clayton was always playing offense.
0:58:08 So while his competitors worked themselves into trouble by lowering their loan standards
0:58:11 and found themselves in hot water and they had to pull back,
0:58:13 Jim Clayton was always moving forward.
0:58:19 He might not have grown as aggressively during those times by lowering his credit standards,
0:58:22 but he was able to grow throughout the cycle.
0:58:23 And I think that’s important.
0:58:25 We saw that with Carnegie, too.
0:58:27 We haven’t talked about that, but if you look at Carnegie,
0:58:31 he made most of his money during the recession of the 1870s
0:58:35 when everybody else stopped building steel plants and he kept going.
0:58:36 He bought out his partners.
0:58:41 He positioned himself to take advantage of the ensuing recovery.
0:58:45 And I think that’s a key lesson that we see over and over again.
0:58:49 John D. Rockefeller, Andrew Carnegie, Jim Clayton, they’re always playing offense.
0:58:52 They’re always positioned in a way that they can play offense.
0:58:56 OK, I want to talk about some of the lessons that we can take away from this.
0:58:57 We just talked about offense.
0:58:59 That’s definitely one of the lessons.
0:59:01 Always be playing offense.
0:59:04 Some of the other ones that stood out to me are,
0:59:08 if you have to swallow a frog, don’t look at it for too long.
0:59:12 When the bank demanded immediate repayment and forced Clayton Motors into bankruptcy,
0:59:15 he could have wallowed, but by 630 the next morning,
0:59:17 he’s at a restaurant planning his comeback.
0:59:20 All the time you spend complaining about what happened
0:59:23 comes at the expense of improving where you are.
0:59:26 Two, choose seeds over toys.
0:59:29 At 10, Jim Clayton sold seeds door to door.
0:59:33 The company offered prizes, instant gratification of a toy car
0:59:35 or more seeds to sell, keeping all the profit.
0:59:38 Every kid chose the toy.
0:59:40 Jim Clayton, no, he took the seeds.
0:59:42 That choice became his philosophy.
0:59:44 Forgo momentary satisfaction.
0:59:46 Plant the right seeds.
0:59:49 Three, water goes where it wants to go.
0:59:53 And where it wants to go is where it is always gone.
0:59:56 Clayton bought a mobile home park with a creek through it.
0:59:59 They spent $60,000 trying to divert the water.
1:00:03 Twice the pavement collapsed exactly where the creek used to flow.
1:00:08 Make your plan conform to the land, not the other way around, he learned.
1:00:11 Four, reality distortion field.
1:00:16 During the 70s crash, Clayton Homes watched competitors fire everyone in closed locations.
1:00:19 Clayton kept everyone employed and increased advertising.
1:00:20 Their motto?
1:00:23 The country is in a recession and we have elected not to participate.
1:00:27 They grew 25% annually through the disaster.
1:00:30 Recessions are market share redistribution events.
1:00:34 Five, the best legal department is a satisfied customer.
1:00:39 Clayton Homes operated for 30 years with a legal department of one, Jim Clayton.
1:00:42 Not because they couldn’t afford lawyers, because they didn’t need them.
1:00:47 Over 80% of legal claims originate from failure to deliver customer satisfaction.
1:00:50 Most companies hire lawyers to fight customers.
1:00:53 Clayton just fixed their problems.
1:00:56 Six, turn your adversaries into your allies.
1:01:01 State regulators caught Jim Clayton running an illegal car dealership.
1:01:03 They would have to pay massive fines.
1:01:08 Instead of hiring lawyers, he admitted ignorance with appropriate meekness and asked the examiner
1:01:08 for help.
1:01:12 Within moments, my adversary became my mentor.
1:01:14 Seven, there’s profit and precision.
1:01:18 The mobile home industry built homes about 12 feet wide.
1:01:19 That pretty much fit together.
1:01:21 Jim Clayton did something radical.
1:01:23 He measured every home to the inch.
1:01:28 While competitors built double-wide halves separately and prayed they’d fit together a process
1:01:30 that involved a sledgehammer on site.
1:01:34 Clayton built them as one, sawed them apart, and rejoined them perfectly.
1:01:37 Eight, bad loans are a virus.
1:01:42 In the late 1990s, Clayton watched every competitor chase growth by loosening credit standards.
1:01:43 Clayton held firm.
1:01:45 This wasn’t the first time they’d been through this.
1:01:48 One by one, competitors imploded.
1:01:51 Clayton bought their assets for pennies on the dollar.
1:01:54 By 2002, they were the last company standing.
1:01:57 Never interrupt your competitor when they’re making a mistake.
1:02:00 Number nine, money at every level.
1:02:02 Everyone sold mobile homes.
1:02:07 Jim Clayton built factories to make them, banks to finance them, parks to place them, insurance
1:02:07 to protect them.
1:02:13 When the 1974 crash killed 60% of the industry, Clayton survived.
1:02:15 They were their own supply chain.
1:02:18 Vertical integration just isn’t about efficiency.
1:02:20 It’s about becoming unkillable.
1:02:24 Ten, the last thing you should do is the first thing you feel you should do.
1:02:28 Flying a Cessna, Jim Clayton got lost when the landmark wasn’t where it should be.
1:02:30 He abandoned his flight plan.
1:02:34 He started chasing highways and nearly crashed running out of fuel.
1:02:38 In business, as in flying, he says, your instruments beat your instincts.
1:02:40 Eleven, the three A’s.
1:02:44 Jim Clayton discovered that success runs on self-reinforcing cycle.
1:02:49 Positive action produces positive attitudes, which produce a positive atmosphere.
1:02:54 During the 1974 crash, when competitors fired everyone, Clayton kept all the employees.
1:02:57 Everything starts with a positive action.
1:03:01 Twelve, certain concepts are ageless no matter what year you’re in.
1:03:04 Self-discipline, willpower, perseverance.
1:03:07 Realizing that disappointment is not defeat.
1:03:10 Knowing that problems often present opportunities.
1:03:14 Obstacles get in the way, but the human spirit can triumph over these things.
1:03:18 Adversity breeds resilience and can build character.
1:03:21 Thirteen, the ignorance advantage.
1:03:37 In his memoir, Jim wrote, if I had even the slightest idea of just how difficult it would be from the gut-wrenching heartaches to the hard work to the long hours, a grueling combination every entrepreneur can identify with, I probably would have remained a guitar picker or maybe a seed salesman.
1:03:39 And fourteen, always play offense.
1:03:42 Thank you for listening and learning with us.
1:03:49 I hope you enjoyed this episode and learning about Jim Clayton and the mobile home industry as much as I have.