PDF Summary:Business Adventures, by John Brooks

Published in 1969, Business Adventures is a collection of essays about the unpredictability of corporations and Wall Street—and the people behind them. Longtime New Yorker contributor John Brooks explores how businesses and economies can rise and fall based on people’s behavior, which is often driven by emotions, habits of thinking, and human tendencies. Brooks’s essays are so insightful and engaging that Microsoft’s Bill Gates has called Business Adventures the “best business book ever.”

In this guide, you’ll find out how human nature led to corporate scandals, stock market setbacks, and major events that shaped the financial world as we know it. As the book was published half a century ago, we also include updates and commentary about the lasting impact of these case studies and connect them to contemporary events and issues.

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(Shortform note: Tax reforms have since addressed some of these loopholes. For example, the Tax Reform Act of 1986 mandated that capital gains be taxed at the same rate as ordinary income. Still, some loopholes remain accessible only to wealthy individuals. For instance, some people take advantage of gift and estate exemptions by setting up long-term trusts—a tactic that’s only feasible for those with at least $5 million to spare.)

By 1960, the federal income tax ceased to be a rich man’s tax, with those who were making a million dollars or more paying very little or no tax at all and the middle class paying the bulk of the taxes. (Shortform note: In this regard, not much has changed since the book was published. One report claims that Amazon’s Jeff Bezos—net worth $177.3 billion as of February 2022—paid no tax in 2007 and 2011.)

The growing disparities in tax obligations prompted experts to propose ways to make the tax law more equitable, such as introducing a value-added tax and taxing expenditures instead of income. However, Brooks says that such reforms would likely lead to other inequities and make an already convoluted law even more complex. He argues that the best tax law would be one that goes back to its 1913 roots: short and simple, with no loopholes.

(Shortform note: There have been major reforms since Brooks wrote the book, notably the Taxpayer Relief Act of 1997 which made more than 800 changes to the tax law. Middle- and low-income taxpayers benefited from amendments such as a new child tax credit and education credits. In 2017, Congress passed President Donald Trump’s tax cut, which some believe to benefit the wealthiest while increasing the burden on the working class. President Biden’s Build Back Better Act aims to correct this by raising taxes on those earning more than $10 million, but the plan hasn’t gained enough support as of January 2022.)

People Use Unclear Regulations to Their Advantage

In addition to exploiting income tax loopholes, people also generously misinterpret ambiguous laws for their personal gain. To illustrate this, Brooks writes about a landmark insider trading case against Texas Gulf Sulphur Company, in which the law’s definitions of “material evidence” and “a reasonable amount of time” were put to the test.

The case began in 1959, when Texas Gulf purchased some property in Timmins, Ontario to check for ore deposits. The company’s initial survey showed evidence of massive deposits of copper and zinc, so Texas Gulf quietly acquired the surrounding property.

As the company continued its survey, rumors of the find reached the US. To get ahead of the rumors, Texas Gulf officials sent out a press release, stating that the company hadn’t yet found anything conclusive. However, the team in Timmins had actually discovered that they were sitting on more than 25 million tons of ore. A few days later, Texas Gulf announced the exciting news.

The problem was that between the company’s initial survey up until the news was publically announced, a handful of Texas Gulf employees and their connections were buying up Texas Gulf shares. When the news was made public, the price of Texas Gulf stock shot up, and those who had purchased stock made a lot of money.

In 1966, the SEC took Texas Gulf to court for illegally using insider information and misleading the public with its initial press release. The main questions at the trial were whether Texas Gulf’s first survey provided “material evidence” of a rich mine and whether Texas Gulf officials allowed “a reasonable amount of time” for the information to reach the public before purchasing shares. The judge ruled in favor of Texas Gulf. However, the Court of Appeals overturned the decision in 1968, saying that the insider information was used illegally, arguing that the initial survey already yielded material evidence, and company officials should have waited until the information was public before trading.

What’s So Bad About Insider Trading Anyway?

There have been many headline-grabbing cases of insider trading since the Texas Gulf incident: A Wall Street executive was convicted for leaking information to an adult-film star, television personality Martha Stewart served prison time for selling her ImClone shares right before the stock price dipped, and a billionaire was sentenced to 11 years in prison after wiretaps revealed his illicit activities.

However, there has been a lot of debate over whether insider trading should, in fact, be illegal. Some of the arguments in favor of legalizing insider trading are:

• It’s a victimless act—one person’s profit doesn’t lead to another person’s loss. It’s thus more of a moral and ethical issue than a legal one.

• Some form of insider “trading” is legal in other industries, such as real estate, so why should the stock market be any different? For instance, after obtaining promising information from its first survey in Timmins, Texas Gulf wasn’t required to disclose its findings to the property owner before acquiring the surrounding land.

• Insider trading allows for the faster, more efficient spread of new information.

On the other side of the argument, experts say that:

• Far from being a victimless crime, insider trading victimizes average investors. By not having access to material information that insiders use to their advantage, average investors lose out by having to pay an inflated price down the line.

• It threatens investor confidence, which can have grave effects on the market.

• Legalizing insider trading would lead to a loss of transparency. With the possibility of financial gain, insiders have an incentive to keep important information from the board of directors, which may then lead to mismanagement.

• Making insider trading illegal makes the market more fair. A former SEC enforcement director stressed that this level playing field is “fundamental to our capital markets.”

Truth No. 4: People Tend to Copy What Others Are Doing—Even When It’s Illegal

While laws and regulations on taxation and insider trading can be somewhat open to interpretation, antitrust laws are more unambiguous: Section 1 of the Sherman Act of 1890 explicitly states that any act restraining trade is considered illegal. One such act is price-fixing, which happens when companies collude to increase their profits by agreeing on a price instead of competing for contracts. (Shortform note: Some argue that going after price-fixers is a waste of time because price-fixing is hardly ever successful anyway—the free market makes it unsustainable, the maneuvers to make it possible (such as getting foreign companies on board) are impractical, and competitors can’t trust and rely on each other in the long run.)

However, despite the clearly stated laws prohibiting price-fixing, in 1961, 29 companies in the electrical manufacturing industry—most notably General Electric (GE)—were found guilty of repeatedly engaging in the practice for years. (Shortform note: GE was the biggest company to be indicted, but it was only one of many; price-fixing was a widespread practice in the industry. In The Art of Thinking Clearly, Rolf Dobelli says that this kind of group behavior stems from the human desire to fit in—you copy other people’s behavior and judge that behavior based on how many people are doing it. The more people do something, the more you’re likely to consider it to be acceptable behavior.)

To determine what led the companies astray, Brooks reviewed the report on the senate hearings about the conspiracy. According to Brooks, the testimonies of GE executives implied that price-fixing was a result of poor communication. While GE sought to comply with antitrust laws and had its own policies prohibiting price-fixing, some executives thought these policies weren’t meant to be taken seriously. Thus, they would go through the motions of reminding subordinates about the rules—and then give them a wink. Subordinates took this wink to mean that they should ignore the rules and meet with competitors to fix prices. Bosses and subordinates would also sometimes talk in code, which was prone to misinterpretation.

How to Communicate With People From Different Cultures

As G.E. has demonstrated, communication can be tricky in the workplace, which can lead to poor decision making. This is especially true when people in a workplace come from different cultures that communicate in distinct ways. In The Culture Map, Erin Meyer describes how to navigate a cross-cultural work environment:

1) Low-Context Culture: In this type of environment, people communicate and receive messages at face value. Thus, the responsibility to clearly communicate rests with the speaker. When communicating with someone from a lower-context culture, Meyer says you should be clear and specific, ask questions instead of looking for subtext, and recap what you discussed—winking just won’t do.

2) High-Context Culture: In this environment, people don’t communicate at face value and thus have to read between the lines. In contrast with a low-context culture, the listener is responsible for interpreting the speaker’s message correctly. (GE would be considered to have a high-context culture, as managers and subordinates had a system of winking and talking in code.) When communicating with someone from a higher-context culture, Meyer says you should listen more, observe the speaker’s body language, and ask questions to clarify your understanding.

The top executives at GE insisted that they knew nothing about the winking and the resulting illegal activities. Though the judge was skeptical about their ignorance, there was no proof tying them to the conspiracy; thus, only middle managers were penalized, with some receiving 30-day jail terms.

(Shortform note: The GE case didn’t deter other companies from price-fixing, and the U.S. government cracked down on a number of big conspiracies over the decades: In the 1990s, five companies were charged in a lysine price-fixing conspiracy and were fined $105 million; in the 2000s, 21 airlines colluded on the price of shipping international air cargo and were fined $2 billion; and in the 2010s, 26 companies were involved in the price-fixing of car parts and were fined over $3 billion. )

Truth No. 5: One Person’s Battle Can Set a Precedent

Though laws and regulations can shift based on the whims and follies of Wall Street’s big players, Brooks writes that even one individual can change the legal landscape. In this essay, he discusses a landmark case involving a man named Donald W. Wohlgemuth, whose employer tried to prevent him from accepting another job offer because he had knowledge of trade secrets. The case generated a lot of interest as its outcome would influence other people’s employment terms—if they knew trade secrets, did that mean that they were tied to their employer for life?

The case centered around Wohlgemuth, who was working as a manager of the B.F. Goodrich Company’s department of space-suit engineering in 1962. Dissatisfied with his job at Goodrich and enticed by higher pay, he accepted a job offer from the International Latex Corporation, one of Goodrich’s main competitors.

When Wohlgemuth told his bosses that he was leaving for Latex, they worried that he would reveal trade secrets to a direct competitor. They threatened to sue, reminding Wohlgemuth that he had signed a contract that kept him from divulging confidential information. Wohlgemuth called their bluff and quit; Goodrich sued—the company wanted an injunction that would prevent Wohlgemuth from working for any other space-suit engineering department.

At the trial, Latex argued that the company wanted Wohlgemuth for his abilities, not for his knowledge of trade secrets. The case hinged on the question: Could one company prevent an employee from working for another because of the mere possibility that he might spill secrets, even if he didn’t intend to?

The judge ruled in favor of Wohlgemuth, saying that the only time an injunction could be issued against him was if he had actually disclosed trade secrets, not when there was merely a risk of him doing so. With this ruling, those who were in similar situations could breathe a collective sigh of relief—they were assured that they were free to look for other employment opportunities.

Protecting Trade Secrets

Some might argue that Goodrich should have just applied for a patent to legally protect its space-suit information instead of trying to prevent Wohlgemuth from seeking other opportunities. However, patents and trade secrets have their respective advantages and disadvantages, so companies have to carefully consider whether they should make use of one or the other.

Patents provide much stronger legal protection, because they grant a company exclusivity—other companies aren’t allowed to replicate or reverse-engineer a patented product. However, patents come with three downsides: First, they’re more expensive; second, they require a company to disclose important details about the product; and third, they only last for 20 years. This means that when the patent expires, anyone can use the information that the company disclosed.

On the other hand, trade secrets allow a company to keep information confidential indefinitely. Coca-Cola, for example, has kept its recipe a secret for over a hundred years, allegedly by storing it in a vault, allowing access to only a few executives, and hiring different contractors to prepare various parts of the product so that no outside party would be in possession of the complete formula. The downside to trade secrets is that others are free to copy or reverse-engineer the product. Companies that have a high turnover rate also run a bigger risk of their trade secrets being leaked.

Companies that go the trade secret route thus have to find ways to keep information confidential, which includes requiring employees to sign a nondisclosure or non-compete agreement (as Goodrich required Wohlgemuth). Such agreements bar employees from working for competing companies, typically for a specified amount of time. However, some contend that a number of companies have taken this practice too far, preventing workers who earn low wages from seeking better employment. Hoping to address such abuses, President Biden issued an Executive Order in 2021, which aims to restrict the use of these agreements.

Truth No. 6: People Can Be Good, Too

The previous essays illustrate how people on Wall Street and the larger financial world sometimes engage in unscrupulous behavior, but Brooks also writes about a few cases when institutions and individuals acted for good.

Financial Institutions Are Willing to Absorb a Loss for the Sake of the Greater Good

Brooks writes about two instances when institutions came together and funded what amounted to bailouts to prevent financial crises. The first case was when the NYSE rescued one of its member firms from the brink of insolvency; the second case was when some of the world’s biggest central banks tried to save the pound sterling from devaluation.

1) NYSE Bails Out a Member Firm

In the first case, Brooks narrates that in November 1963, one of the NYSE’s member firms was in dire straits: Ira Haupt & Co. had borrowed millions from various US and UK banks to invest in Allied Crude Vegetable Oil & Refining Co., a company involved in the speculation of commodity futures contracts, particularly in cottonseed and soybean oil. (Shortform note: A commodity futures contract is an agreement to buy or sell commodities—food, energy, or metals—at a specific price on a specified future date. Cottonseed and soybean oil are important ingredients in salad oil, and so this case came to be known as the “Salad Oil Scandal.”)

The firm used Allied’s warehouse receipts as collateral; however, when oil prices dropped and Ira Haupt & Co. attempted to sell the Allied contract, the firm discovered that the receipts—amounting to $22.5 million—were counterfeit and, therefore, worthless. (Shortform note: A man named Anthony “Tino” De Angelis owned Allied, and the salad oil scandal wasn’t his first scam. He had previously defrauded the U.S. government through the National School Lunch Act. De Angelis served a seven-year jail term for the Allied affair and, upon his release, started an unsuccessful Ponzi scheme.)

With massive debts and insufficient capital reserves, Ira Haupt & Co. was on the brink of insolvency; its 20,000 stock market customers were in danger of losing their money due to the firm’s reckless investment in a fraudulent company. The situation was exacerbated by news of JFK’s assassination, which sent the market into a tailspin. NYSE officials worried that the combined effect of the death of a president, the news of innocent investors losing millions, and the potential loss of public trust in the Exchange might lead to an unmitigated financial disaster.

(Shortform note: This perfect storm of unfortunate events is what former options trader Nassim Nicholas Taleb might classify as a “black swan.” He writes that black swans are extremely unpredictable events that are rare and disproportionately impactful. While some people—like Bridgewater’s Ray Dalio—believe that studying history helps us predict future events, Taleb argues that some events are completely random and, thus, inherently unpredictable.)

Brooks writes that the NYSE convinced its member firms to put up a total of $9.5 million to reimburse Ira Haupt & Co.’s customers’ investments. As the market was closed for a day for JFK’s funeral, NYSE officials also had enough time to negotiate with Ira Haupt & Co.’s U.S. and U.K. creditor-banks for more manageable terms. The banks agreed to cut their losses, eventually recovering only about half of what they were owed.

(Shortform note: While the NYSE insisted that its rescue of Ira Haupt & Co. shouldn’t set a precedent, it did put new measures in place: The NYSE assigned a committee to determine how to better prepare for similar scenarios in the future and considered establishing a reserve fund to help other insolvent member firms. Such plans had their pros—protecting small investors—as well as their cons—potentially encouraging member firms to take even bigger risks. )

2) Central Banks Unite to Protect the Pound Sterling

Another instance when various bodies united for a common cause was when an alliance of central banks tried to save the British pound sterling from devaluation.

Brooks writes that in 1964, Britain was running a deficit in its balance of payments, meaning the country was spending more on imports than it was earning on exports. Consequently, the price of the pound was decreasing relative to the dollar. (Shortform note: A TIME Magazine article blamed this deficit on the British government’s resistance to investing in industrialization, which meant that Britain couldn’t keep up with its competitors in terms of production and pricing. The country also had to import a lot of its food and raw materials for production.)

Based on international monetary rules set by the Bretton Woods System, the pound was allowed to fluctuate only between $2.78 and $2.82. (Shortform note: The Bretton Woods System was instituted in 1944, when 44 countries met to create an efficient foreign exchange system. The conference also led to the creation of the International Monetary Fund and the World Bank.)

If the price dipped close to the lower limit, the system required the Bank of England to purchase pounds using gold or dollars to help get the price back up. If the price fell below $2.78, the pound would have to be devalued. (Shortform note: Devaluation means a government deliberately lowers the value of the country’s currency. Governments normally do this to boost exports, improve balance of payments, and manage sovereign debt.)

Brooks explains that governments went to great lengths to prevent devaluation—for example, they imposed austerity measures and froze wages. This is because devaluation made goods more expensive at home, consequently lowering the country’s standard of living. Central bankers likewise considered devaluation a nightmare, because its effects could reverberate through markets worldwide, resulting in a global financial crisis. So, when the pound came under threat, the Federal Reserve Bank of New York rallied central banks of Europe, Canada, and Japan to come to Britain’s aid.

(Shortform note: While governments generally try to prevent their currency from devaluing, sometimes they encourage devaluation. A strong currency doesn’t always help a country’s economy, as it makes its goods more expensive to sell abroad, hurting its exports industries which in turn hurts its domestic industry. Therefore, central bankers try to strike a balance between strengthening and devaluing their currencies, in order to benefit as many sides of their economy as possible.)

The threat to the pound came from speculators who were mounting a bear raid; just as stock market speculators might pounce on a struggling company and force the price of a stock down, currency speculators and hedgers were betting against the pound, selling the currency in the hopes of making a profit later on. This meant that the Bank of England was using up its dollar and gold reserves to buy up pounds to preserve its value. As the Bank of England was quickly running out of resources, the alliance of central banks pooled together $2.85 billion to provide a line of credit, helping Britain fend off the speculators.

(Shortform note: This type of bear run on a currency is called a speculative attack—when a large group of investors sells a country’s currency to its own government in exchange for the country’s reserve currency in the hope that the country will eventually run out of reserve currency, forcing the currency to collapse. Investors can profit off these attacks not only by shorting them, and they would when cornering the market (as we discussed earlier), but also by taking out loans in the target country’s currency, exchanging them for a foreign currency, and then converting the loan back into the target country’s currency once that currency has been devalued, pocketing a profit by doing so.)

The move worked, but only temporarily—Brooks writes that the speculators resumed their attacks within a month. Aside from trying to stave off these continued assaults, Britain also had to contend with other unfortunate events such as a seaman’s strike in 1966 and the closing of the Suez Canal in 1967, both of which greatly affected British trade. All these proved too overwhelming, and Britain was forced to devalue the pound in November 1967. Fortunately, the devaluation only affected a few small governments abroad and didn’t result in an international crisis. Some central bankers assert that, despite the eventual devaluation, their efforts weren’t in vain—had they not intervened three years earlier, there could have been more disastrous consequences.

(Shortform note: The devaluation of the pound was just one of the incidents that shed light on the inadequacies of the Bretton Woods System. The system, which obligated the U.S. to redeem foreign-held dollars with its gold reserves at a fixed price of $35 an ounce, was eventually found to be unsustainable. It effectively collapsed in 1971 when President Richard Nixon suspended the dollar’s convertibility to gold to address the country’s own balance-of-payment deficits.)

Some People on Wall Street Aren’t Purely Profit-Driven

The people of Wall Street may have a reputation for pursuing profits at all costs, but Brooks says that there are those who’ve managed to balance this pursuit with a sense of purpose. In this essay, he profiles David E. Lilienthal, former chairman of the Tennessee Valley Authority (TVA) and, later, chairman and CEO of the Development & Resources Corporation (D & R). He traces Lilienthal’s career trajectory and how he navigated the transition from public servant to big businessman. (Shortform note: The original essay was published in the 1961 issue of the New Yorker and concluded with snippets of Brooks’s interviews with Lilienthal’s peers. In the version that appears in Business Adventures, Brooks replaces the original ending with an update on Lilienthal based on a follow-up interview in 1968.)

Public Service Career

A lawyer by profession, Lilienthal became the chairman of the TVA—a government-owned electric power company, bigger than any private power company in the US—in 1941. During this period, the government and Wall Street were constantly at odds, so businessmen tended to view Lilienthal as a big-business antagonist. He was appointed by New Deal architect Franklin D. Roosevelt, solidifying his image as a New Dealer. (Shortform note: The New Deal was a series of projects, reforms, and regulations that aimed to alleviate unemployment, get the economy back on track, and institute reforms to prevent another economic depression. Conservatives viewed the progressive reforms as socialist.)

After his stint at the TVA, Lilienthal was appointed chairman of the Atomic Energy Commission, where he served from 1946-1950. He revealed to Brooks that he had a number of reasons for retiring, but one factor was timing—he left at a time when there were no issues hounding him. (Shortform note: While working for the federal government, Lilienthal was a controversial figure who had to attend his fair share of Congressional hearings. Among the accusations he faced were charges of communism and mismanagement.)

Moving on to the Private Sector

Lilienthal admitted to Brooks that he was worried about his ability to make enough money in the private sector. These worries were put to rest when he received offers to practice law again and to teach at Harvard, but neither option appealed to him. He instead decided to work as a consultant for various companies, including Minerals Separation North American Corporation, of which he eventually became president. Under his leadership, the company flourished and he became a millionaire.

How to Make the Transition to Another Career

Lilienthal had made a name for himself in public service, so he was fairly in demand after retirement. Not everyone has a resume comparable to Lilienthal’s, so transitioning to a second career might be more challenging. Experts recommend the following tips to help you make your move:

1. Reflect. Determine what you like and don’t like about your current career. List all your skills and consider whether any of them are transferable to your next career; if not, figure out what kind of training you’ll need to improve your skills in preparation for your next phase.

2. Research. Find out if your desired industry has a future and if you’ll have opportunities for advancement.

3. Take your time. Don’t quit your job and jump into a new one on a whim. It might be best to keep working at your current job while using your free time to prepare for your next career by training or doing volunteer work.

Lilienthal also published a book called Big Business, where he shared some of his ideas about industry. Old associates labeled him a sellout—the one-time New Dealer was now engaged in, and defending, big business. But, in speaking to Brooks, Lilienthal maintained that he already had the views he expressed in the book even when he worked in public service. (Shortform note: Lilienthal was somewhat defensive when it came to this particular topic, but he remained steadfast in his views. If, unlike Lilienthal, you have a hard time dealing with unfair criticism, experts recommend evaluating the feedback and seeing if you can learn and grow from it.)

Despite his success in the private sector, Lilienthal was dissatisfied—he missed the impact he made as a public servant. This led him and some former TVA colleagues to establish D & R in 1955. The organization had a dual purpose: to develop rural places outside the US and to make a profit in the process. (Shortform note: As Lilienthal discovered, pursuing measurable goals like money rarely leads to personal fulfillment. As such, experts recommend two ways to feel satisfied: First, work on mastery over something you enjoy; and second, help others to give you a greater sense of purpose.)

D & R’s chief client was the Iranian government, which granted a contract to aid in the development of an area called Khuzistan. D & R also worked on programs for such countries as Italy, Colombia, the Ivory Coast, and the Philippines. In Brooks’s follow-up visit in 1968, he observed that Lilienthal finally seemed content; he had found a way to make an impact on society while still making money.

(Shortform note: The year after Brooks’s follow-up visit, D & R suffered its first loss since it was established. It continued to decline over the following years with a series of unsuccessful projects and a dearth of clients. Lilienthal decided to dissolve D & R in 1979, then published a book entitled Atomic Energy, a New Start in 1980. He died of a heart attack in 1981. He was such a well-known personality that his death made the front page of The New York Times.)