The Commodore - Cornelius Vanderbilt (1794-1877)

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Cornelius Vanderbilt was born in Staten Island, New York in 1794. The unlikely stock market legend was the son of a farmer, he left school at the age of 16 with a $100 loan from his mother to buy a ferry and cargo transport that he operated along the Hudson and around New York. The loan was repaid within the year, with a $1000 premium. He never looked back.

By 1818 he had become a steamboat captain and began to learn the stock market as a junior partner to a firm that lead to the first major supreme court decision effecting interstate commerce. In the 1824 ruling in Gibbons v. Ogden the Court held that individual states did not have the power to regulate interstate commerce.  For Vanderbilt et al, it broke the monopoly over interurban water transport that was held by their rivals.

In 1862 and rather late in life as he was by now 68, Vanderbilt had gotten out of shipping and looked for new opportunities in what was the 1860's bleeding edge technology - the railroad industry. 

Railroads in this early period were in a fragmented and haphazard state, much like the early internet. Perhaps the capitalist allure of "rationalization" appealed to Vanderbilt as he set off on a course of consolidation, standardization, and the modernization of the railroads. 

The first property he acquired was the New York & Harlem. Two years later in 1864, he gained control over the New York & Hudson River Railroad. 

In both of these cases Vanderbilt was confronted by investment groups involved with Daniel Drew, whom we would today call a stock manipulator. In each instance, dealing on information from well-placed political friends, Drew and his group tried to short sell the Vanderbilt group. 

"Short-selling" is the practice of selling borrowed stock on the speculation (or knowledge,) that its price will drop in the future. The drop in price enables you to "cover" or re-pay the borrowed shares you had sold short at a cheaper price than what you were paid for them. The spread in the difference makes your profit. 

The risk of this method is that the short-seller could get caught in what's called a "squeeze" where the demand for the stock maintains it at a high price, and the short never has a chance to cover. At some point he'd have to make good on the shares he sold short, and to do so he'd have to pay the higher price than what he sold them for, thereby incurring his loss. 

In both of the Drew vs. Vanderbilt battles, the Drew group had insider information that Vanderbilt's railroad was going to loose a government concession; normally that sort of news would have driven the price of any normal stock into the ground, making it a good pick for a short sell.

But Vanderbilt twice bested his competition by buying-up all the shares that they were willing to sell. His counterattack was to launch a massive short squeeze against them. In the battle over the New York & Harlem he ran up the price of that stock from $9.00 a share to $179.00  a share. In the process he won outright control over the company, and financially ruined many of his opponents as well.

But he wasn't to win all his scraps with Drew. In 1867 as Vanderbilt was driving the New York Central to its knees, he also tried to gain control over the New York & Erie railroad. This adventure brought in two names that would go on to resound in Victorian business notoriety: Jay Gould and James B. Fisk. The Boesky and Milken of their day.

Repeating his tried and true method, Vanderbilt attempted to corner the stock of the Erie. Between that and his moves on the Central, he was cutting it close. He kept buying as more stock showed up, and the price climbed. Finally in a fit of desperation, the Drew-Gould-Fisk cabal threw up a block of 50,000  non-existent Erie shares, which were quickly bought by Vanderbilt.

This sudden dilution pummeled the stock, and although illegal, cost Vanderbilt over $2 million. The perpetrators of the fraud escaped to New Jersey and with a judicious application of guile and bribes, managed to get the state legislature to authorize the bogus shares.

Licking his wounds the Commodore abandoned his take over. In spite of this interlude, he usually got his way. By the time he died 10 year later, he left an estate of $105 million, the largest private fortune of the time in the United States.