Had a Chiquita banana lately? I was amazed to learn the remarkable story behind the brand, which began in 1911 with a company called Cuyamel Fruit Company and a Russian immigrant named Sam Zemurray. Sam (aka “Sam the banana man”) was a remarkable businessman who personified the American dream, but also exposed some of the ugliness of American business in the early part of the 20th century. While he had his fair share of faults, reading about his many positive qualities and remarkable successes constantly reminded me of Warren Buffett. Their early successes, mid-career transformations, and attitudes towards business were remarkably similar. Both took over mismanaged companies and turned them into behemoths of business. This quote, said of one of the two men, could have been said of either: “He’s a risk taker…he’s a thinker, and he’s a doer.”[i]
Here I highlight some of these similarities between the two men. I only scratch the surface of Sam Zemurray’s remarkable tale. For the whole story, I suggest you read The Fish that Ate the Whale: the Life and Times of America’s Banana King by Rich Cohen, from which I take most of the information and all the quotes for this story.
“Ripes” and “Cigarette Butts”
Early in his investing career, Buffett was famous for a style of value investing learned from Ben Graham. Through in-depth research he would find forgotten or discarded companies, trading at deep discounts to the value of their net assets, from which he could extract a little bit of value. These stocks were often terrible companies, but were trading below liquidation value. Buffett called them “cigarette butts,” because like discarded butts—from which one could enjoy one last puff—they offered one last bit of value, and Buffett was a master at extracting that value.
Sam Zemurray’s early success was owed to the exact same strategy. He moved to America from Russia at age 14 and did anything to make a buck. He discovered a clever strategy with the exotic banana fruit (which few Americans had tasted prior to 1900). The big fruit companies (the precursors to Chiquita and Dole) would import bananas from the equatorial tropics and move them to markets throughout the U.S. for sale. But some of the bananas would reach the U.S. already ripe, and would be discarded by the big companies because they’d rot before making it to market. As much as 15% of the bananas imported were ripes.
Zemurray realized that these discarded ripes—like Buffett’s cigarette butts—were far from worthless. It required hard work and coordination, but he could make a killing off of ripes. One man’s trash was Zemurray’s gold. He’d take the discarded ripes, quickly load them on a train, and sell them right out of the traincar as it moved from town to town—earning 100% profit.
Zemurray went into a Western Union office and spoke to a telegraph operator. Having no money, Sam offered a deal: if the man radioed every operator ahead, asking each of them to spread the word to local merchants—dirt-cheap bananas coming through for merchants and peddlers—Sam would share a percentage of his sales. When the Illinois Central arrived in the next town, the customers were waiting. Zemurray talked terms through the boxcar door, a tower of ripes at his back. Ten for eight. Thirteen for ten. He broke off a bunch, put the money in his pocket… In 1903, he sold 574,000. Within a decade, he would be selling more than a million bananas a year.
The banana man’s strategy was brilliant. He was selling hundreds of thousands of bananas each year without the normal costs:
His fruit was grown for him, harvested, and shipped for free. He was like a bike racer riding in the windbreak of a semitruck—the semitruck being United Fruit. By his twenty-first birthday, he had a hundred thousand dollars in the bank. In today’s terms, he would have been a millionaire. If he had stopped there, his would have been a great success story.
But while the ripes and “cigarette butt” strategies worked well on a small scale for a while, Sam Zemurray and Buffett wanted more—they had to adopt new strategies that worked on a larger scale.
Stage Two
Zemurray founded the Cuyamel Fruit Company in 1911 as a more traditional fruit company: growing, harvesting and distributing bananas. He bought land in Honduras and arranged sweet-heart deals with the local government. Kickbacks and bribes were necessary to keep costs down and profits flowing. Honduras, under Zemurray, was a true “banana republic." He built an empire there, ousting government leaders when they wouldn’t cater to his needs (read the book for more great details):
“Deposing [José Santos] Zelaya’s government in Nicaragua [in 1909] had required the combined efforts of the [American] State Department, the navy, the marines, and President Taft,” wrote Stephen Kinzer in Overthrow. “In Honduras, Zemurray … [did] the job himself.
Stage two for Buffett, of course, was moving on to great companies bought at reasonable prices. As he is famous for saying, “it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” After clever beginnings, both men thrived by owning great, efficient businesses. Buffett started with unknown downtrodden companies, but made his fortune in brand names like Coca-Cola and American Express. Zemurray started with a similar arbitrage strategy, but made his millions by building a great company.
Know Your Business and Empower Your People
In building Cuyamel from the ground up, Zemurray’s success came from getting into the weeds (or, more literally, the jungle). He spent his time on location in Honduras streamlining operations and building the world’s most efficient banana company. He worked 16 hour days and knew every aspect of the business. Buffett’s edge was similar. He was willing to put in the time reading Moody’s manuals cover to cover when no one else bothered. It takes discipline, time, and lots of energy to know a business inside and out, but the results are worth it.
Zemurray sold Cuyamel to the giant United Fruit company for $31.4 million of United Fruit stock in 1930, right at the outset of the Great Depression. Seen in the figure below, Zemurray sold his Cuyamel right at the peak, but United Fruit collapsed due to the economic hardships of the Great Depression and terrible mismanagement. Zemurray came out of a brief retirement frustrated by the inept leadership at United. The United executives were trying to manage operations in the tropics from their offices in Boston, and their micromanaging was killing the company. Zemurray knew this was a terrible strategy:
“This man in Guatemala, he’s your manager, isn’t he?” Zemurray asked [at a board meeting]. Yes. “Then listen to what the man is telling you. You’re here, he’s there,” said Zemurray. “If you trust him, trust him. If you don’t trust him, fire him and get a man you do trust in the job.”
Buffett, too, believes in trusting his different managers to make the right decisions and does not meddle. Empowering others leads to phenomenal results.
Behind the scenes, Zemurray gathered support from other shareholders of United Fruit and collected enough proxy votes to essentially take control of the company. He went to another board meeting and laid out his plan for improving the company, but didn’t reveal his ace in the hole. The chairman of United Fruit dismissed Sam's plan and chose instead to make fun of his Russian accent, saying “unfortunately, Mr. Zemurray, I can’t understand a word of what you say.” Sam stormed out, making the board members think they’d humiliated him, but he was just gathering the proxy slips he had stored outside. He returned and slammed the proxies on the table and said, “You’re fired! Can you understand that, Mr. Chairman? You gentlemen have been fucking up this business long enough!”
This incredible coup earning him the nickname “the fish that swallowed the whale.” He took over the company and remade it in the image of Cuyamel Fruit. From the time he took over in 1933 until his full retirement in 1954, United Fruit stock grew by 2,300%[ii]--640% more than the S&P 500 over the same time period.
When Zemurray took over United Fruit, he decentralized the company. He recognized that a chairman sitting in Boston should not be making decisions about how best to manage acres of banana plants in Honduras. Under Sam’s leadership, decision making power was pushed back to United Fruit employees in the tropics managing the fields. Both Sam and Buffett trusted managers to run their business without meddling.
Key Lessons
I’ve ignored the more dubious parts of Zemurray’s character and business, including bad labor conditions in the tropics and coordination with the CIA to overthrow Jacobo Arbenz, the Guatemalan president who wouldn’t cater to Zemurray’s needs. His complete story is remarkable and I highly suggest buying and enjoying the book; it is a great case study of a successful business. United Fruit eventually became Chiquita, but the early history—beginning with Zemurray and Cuyamel—is the most fascinating. Who knew a simple fruit could have such an incredible story.
Sam and Buffett’s stories offer many great lessons for business and investing, I’ll end with these three:
1. Start with small advantages. Look for corners of the market that have been forgotten or are too insignificant for the big players (individual investors, for example, can do well in micro-cap stocks like the ones with which Buffett began his investing career. Big entities can’t bother with these small companies, but small investors can).
2. Know your business from end to end. It’s amazing what an edge you can have by doing your homework. Both Sam and Buffett knew all aspects of their businesses and made better decisions as a result.
3. Trust your lieutenants to manage themselves, don’t micromanage. Empower managers. Once at the top of their companies, Zemurray and Buffett delegated and trusted their men on the ground.
[i] Andrew Preston, of the United Fruit Co., describing Sam Zemurray.
[ii] Using CRSP return data for United Fruit.