Daniel Drew

Daniel Drew (1797-1879) was a legendary 19th-century American financier, speculator, and one of Wall Street's original `Robber Baron`s. Far from a builder of enterprises, Drew was a master manipulator, infamous for his cunning and often unethical tactics. He specialized in speculating on railroad stocks, most notably the Erie Railroad, which he treated as his personal piggy bank. His primary methods included issuing `Watered Stock` to dilute shareholder value, engaging in `Short Selling`, and orchestrating elaborate market corners and squeezes. While a titan of finance in his day, his career is a classic cautionary tale for modern investors. He amassed a great fortune through trickery rather than by creating genuine business value, a stark contrast to the principles of `Value Investing`. His ultimate downfall into bankruptcy serves as a timeless reminder of the dangers of speculation, `Leverage`, and putting greed before sound business practice. He is a historical figure whose story offers more lessons in what not to do than in what to emulate.

Before becoming a feared name in finance, Daniel Drew started as a cattle drover. It was here he reportedly developed one of his signature tricks: before taking his cattle to market, he would have them eat salt to make them thirsty, causing them to drink enormous amounts of water and appear heavier at sale time. This practice of “watering stock” became his trademark when he moved into the world of finance. After a stint in the steamboat business, where he regularly clashed with his rival `Cornelius Vanderbilt`, Drew set his sights on Wall Street. He became a director and treasurer of the Erie Railroad, not to run a successful railway, but to manipulate its stock for personal profit. He was known as the “Great Bear,” a master of betting against companies (short selling) and profiting from their decline—a decline he was often instrumental in creating.

Drew's methods were creative, ruthless, and highly effective in the unregulated markets of his time. He was a pioneer of market manipulation, and his tactics are still studied today as examples of what to watch out for.

The term “watered stock” moved from the cattle yard to Wall Street thanks to Daniel Drew. In finance, it refers to the practice of a company issuing new shares without a corresponding increase in the company's assets or earning power. Drew, as treasurer of the Erie Railroad, had access to the company's stock certificate book and printing press. Whenever his rival Vanderbilt or other speculators tried to `Corner the Market` by buying up all available Erie shares, Drew would simply print thousands of new, often unauthorized, certificates. He would then flood the market with this new stock, causing a sudden price collapse. This `Share Dilution` on a massive scale would crush the speculators attempting the corner and enrich Drew, who had typically shorted the stock in anticipation of the fall.

Drew's most famous exploit was the `Erie War` of 1868. Teaming up with fellow manipulators `Jay Gould` and `Jim Fisk`, he took on the formidable Cornelius Vanderbilt.

1. Vanderbilt, determined to take control of the Erie Railroad, began buying every share he could find.
2. In response, Drew, Gould, and Fisk locked themselves in the Erie headquarters and used a printing press to create over 100,000 new shares of Erie stock.
3. They dumped these counterfeit shares onto the market, which Vanderbilt's unsuspecting brokers dutifully bought up.
4. The stock price cratered, Vanderbilt's corner was broken, and he lost millions. Drew and his partners, having bet against the stock, made a fortune.
5. To escape legal action for their fraudulent share issuance, the trio famously fled across the Hudson River to New Jersey with bags of cash, temporarily setting up their “Erie headquarters” in a hotel until they could bribe New York legislators to legalize their actions.

For a value investor, Daniel Drew's story is not a “how-to” guide but a “what-to-avoid” manual. His career provides timeless wisdom on the difference between speculation and investment.

• Speculator vs. Investor: Drew was the quintessential speculator. His profits came from outsmarting other market participants and manipulating stock prices, not from the operational success or `Intrinsic Value` of the Erie Railroad. A value investor, by contrast, focuses on a business's long-term health, profitability, and management quality.
• Management Matters Most: Would you invest in a company where the treasurer was secretly printing stock in the basement to crash the price for his own benefit? Drew's story is an extreme but powerful reminder to always investigate a company's leadership. Honest and competent management that acts in the interests of all shareholders is a cornerstone of any sound investment.
• A Warning on Short Selling: Drew famously coined the phrase: “He who sells what isn't his'n, must buy it back or go to pris'n.” This little rhyme perfectly captures the immense risk of short selling. While Drew was a master of it, the practice ultimately contributed to his downfall, proving that even for the experts, betting against a stock carries the potential for unlimited losses.
• The Ultimate Cautionary Tale: Despite his brilliance as a manipulator, Drew's story doesn't have a happy ending. He was caught on the wrong side of the market during the Panic of 1873, a crisis he helped precipitate. He was wiped out, declared bankruptcy, and died in relative poverty. His fate is a stark warning that fortunes built on pure speculation and excessive leverage are often fleeting.