The King of Oil: The Secret Lives of Marc Rich

the wildest optimists at Marc Rich + Co. had expected that the company would enjoy such success. Five years previously, Rich’s legal difficulties and the fact that he was living in exile had led commentatorsand businesspeople alike to practically write Rich off. One of his partners from the very beginning, Jacques Hachuel, was convinced that the end was nigh and decided to leave the company. The two traders have not spoken a word since. All told, Rich’s unlikely comeback made a huge impact on the world of commodities trading.
    How did he do it? How was he able to beat the competition? What did he do differently? Why was he better? These are the most important questions when it comes to unveiling the secrets of Rich’s success. To get to the bottom of this untold story of success, I interviewed dozens of commodities traders from five continents over the past three years. In these three years (2006–2008) the world—and particularly the United States—experienced the kind of dramatic changes that have not been seen in decades. The financial crisis that began in 2008 led to developments that only the gloomiest of pessimists previously believed possible. Lehman Brothers, a traditional banking powerhouse founded in 1850, collapsed, making for the largest bankruptcy in the history of the United States. Goldman Sachs and Morgan Stanley gave up their status as investment banks. It was the end of an era.
It’s the Long Term, Stupid
     
    When we look back at these crazy times in search of the deep-rooted causes of the worst financial crisis in generations, one answer will most certainly stand out: the short-term thinking that has held sway among the managers of listed companies since the 1980s. Nothing seemed more important than quarterly profits. The economic common sense that had developed over the course of decades was no longer viewed as important. Equity returns of 20 to 30 percent? Double-digit profit growth? Quick profits from risky leveraged investments? Extravagant salaries? All that was once considered extraordinary seemed routine. It was, as history has shown time and again, too good to be true. What does this have to do with Marc Rich? More than one might believe at first glance.As we have seen, his company is in many ways the antithesis of the fallen business elite that does not seem capable of looking past the next quarter. An era in which oil prices reached new records saw the reemergence of the myth of the commodities trader as a man who could make millions of dollars in seconds with a single telephone call. The reality is something entirely different. The commodities trade is a hard, capital-intensive business with tight margins. Profits of 2 to 3 percent are considered quite satisfactory in normal times. It is only during unsteady times, such as the oil crises of 1973–74 and 1979–80, that profits are significantly higher.
    In the cyclical business of the commodities trade, successful traders always have to look far ahead into the future. “The key to success—and to real wealth—is long-term thinking,” Rich says. Six months in South Africa in order to negotiate the purchase of a mine? Six months in Cuba in order to ensure a loan is paid back? Advance financing of a smelter that will not be completed for years to come? Such actions are nearly unthinkable for listed companies obsessed with quarterly returns. In some businesses, long-term thinking has been virtually forgotten. On the other hand, it is the traditional virtue of family businesses in which one generation always has its children in mind. It is my belief that this long-term way of thinking is the most important secret of Rich’s success and can explain many of the strategies and courses of action he has followed over the years.
    Rich was always interested in obtaining long-term contracts with his clients. In economic terms, the development of new markets, making business contacts, and negotiating contracts cost a lot of money. Once a business relationship has been established, many of the so-called transaction costs no longer apply. The longer the relationship, the lower the marginal costs and the higher the potential profits. “We didn’t get into a new country to make a million dollars and then go home. We went to stay there,” said a trader who had opened African markets while working for Rich in the 1970s. “We wanted to convince them we were there to stay. This was a very important basis for our success.”
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