The impulse to read this book came from Patrick O’Shaugnessy’s Invest like the Best podcast’s episode with the author William Thorndike.
Note: I highly recommend Patrick’s reading list, and of course his podcast on which he manages to pull off great interviews by asking great questions to many quality guests.
Mr. Thorndike owns a private equity company and wrote this book after finishing a project at Harvard Business School to characterize CEOs with tenures that enriched all shareholders.
The book starts by quoting Sir John Templeton:
It is impossible to produce superior results unless you do something different. – John Templeton
The aim of the book is to paint a picture of the iconoclastic CEO’s behind some of the companies with the highest returns in the last decades. Each chapter is a case study of one such individual’s history and lessons.
In this summary, I will not go into each case, but the CEO’s discussed were: Tom Murphy (Capital Cities), Henry Singleton (Teledyne), Bill Anders (General Dynamics), John Malone (TCI), Kathy Graham (Washington Post Co.), Bill Stiritz (Ralston Purina), Dick Smith (General Cinema) and Warren Buffett (Berkshire Hathaway).
One remarkable point as I was reading the book was how similar the philosophies of the CEO’s were to that of Warren Buffett. This point was emphasized by the author ending his book with a case study on Warren.
The common treats among all these remarkable Outsiders were:
- Single-minded, not obedient to “the institutional imperative”
- willing to invent new metrics which are now famous (e.g. John Malone’s EBITDA, Smith’s self-defined cash earnings, Buffett’s pioneering focus on the advantages of float)
- first-time CEO’s (Kathy Graham was 70 years old when she was ‘forced’ in the position of CEO of the Washington Post and had no prior corporate experience!)
- using almost no outside advisers such as bankers and consultants (e.g. when John Malone’s did his multibillion sale of TCI to AT&T in 1999 he showed up alone with a notepad while the buyer side sat down with an army of advisers)
- Numerate, cool and rational thinkers
- doing the math on M&A, buybacks, organic growth, sales themselves with back-of-the-envelope simple models to take ultimate decision
- looking at all options available
- Preference for decentralized operations
- leading conglomerates of 10 000’s of people with only <10 people in headquarters
- “hire well, manage little”: willingness to give CEO subsidiaries management freedom (e.g. Warren Buffett and Singleton are the extreme specimen here)
- Preference for centralized capital allocation
- cash from subsidiaries had to pass via HQ’s before being reallocated after having made significant capital allocation decisions. Cash flow budgets were strictly enforced
- Heavy focus on minimizing – that which is a guaranteed loss if not optimized – taxes
- no / very little dividends, as share buybacks are more tax efficient
- Crocodile temperament
- willingness to be patient when peers are impatient
- willing to invest big opportunistically
- invest in … [pick anything from M&A, share buybacks, organic investments] when that market is depressed
- not willing to pay for paint on the HQ’s side which does not face the public
- unwillingness to issue new shares: the EPS denominator matters
I compiled this overview from two tables in the last chapter.
|CEO Experience||Capital returns|
|First-time CEO||Dividends||>30% float buybacks||Acquisitions >25% of mkt cap||Decentralized org||Wall Street Guidance||Idiosyncratic metric||Tax focus|
|Henry Singleton||Yes||No||Yes||Yes||Yes||No||Teledyne return||High|
|Warren Buffett||Yes||No||No||Yes||Yes||No||Float||Medium high|
|Tom Murphy||Yes||Low||Yes||Yes||Yes||No||Cash flow margins||Medium high|
|Dick Smith||Yes||Low||Yes||Yes||Yes||No||Cash earnings||High|
|Bill Anders||Yes||Low/special||Yes||Yes||Yes||No||Cash ROI ‘CFROIC’||High|
|Kathy Graham||Yes||Low||Yes||Yes||Yes||No||Cash IRR||Medium high|
|“Institutional imperative”||Malcolm Gladwell’s ’10 000 hours’||Primary activity: operations management and communication||“Growth”, “Revenues”, “Net income”|
If you appreciate the learning potential from case studies (like me), you’ll love this book.
What is still a bit unclear to me is to what extent these characters were chosen to be features in the book because they shared these special character treats, and to what extent they belong together because they belong to the general group of CEO’s with tenures of great total shareholder returns. The rationale for picking these personalities is not discussed and this is my main criticism.
On the upside, as an investor I ideally want to know about CEO’s with characters and behaviors that go against the ‘Institutional imperative’, as the probability that their companies are misunderstood and hence undervalued is much larger. The book satisfied that demand very well.