Outsiders - Eight Unconventional CEOs and their Radically Rational Blueprint for

[stylized_fact]

Thanks for the book recommendation. It was absolutely fantastic.

 

On a different note, who are the current CEO's who can fill in the next great CEO's book?

 

Let me nominate Ebix Raina.

 

There's a passage in the chapter on Malone that describes TCI's land-grab for cable subscribers.  As they increased their market share they turned this into negotiating leverage with content providers, driving margin expansion on each subscriber.  They then used this to negotiate better terms from their lenders.

 

This sounds a lot like what Bezos is trying to do with Amazon.  Developing a payment schedule to rival the reliability of cable subscriptions during the 70's and 80's seems like a bigger challenge today, though.

[greenwave]

[amazonsearch]Outsiders - Eight Unconventional CEO's[/amazonsearch]

 

The book is by William Thorndike of the Harvard Business Review and is essentially case studies on 8 successful CEO’s:

 

1) Tom Murphy Capital Cities

2) Henry Singleton Teledyne

3) Bill Anders General Dynamics

4) John Malone TCI

5) Katherine Graham Washington Post

6) Bill Stiritz Ralston Purina

7) Dick Smith General Cinema

8) Warren Buffett Berkshire Hathaway

 

According to the author, over a 25 year period, $1 invested in this group of CEO’s would be worth $30 compared to $5 for the S&P 500.  The basic premise of the book is that not only did these CEO’s run their operations efficiently, but they were also master allocators of capital and that’s what allowed them to achieve this superior performance.

 

Here are a few excerpts to give you a sense of the book:

 

“Basically, CEOs have five essential choices for deploying capital— investing in existing operations, acquiring other businesses, issuing dividends, paying down debt, or repurchasing stock— and three alternatives for raising it— tapping internal cash flow, issuing debt, or raising equity. Think of these options collectively as a tool kit. Over the long term, returns for shareholders will be determined largely by the decisions a CEO makes in choosing which tools to use (and which to avoid) among these various options. Stated simply, two companies with identical operating results and different approaches to allocating capital will derive two very different long-term outcomes for shareholders. Essentially, capital allocation is investment, and as a result all CEOs are both capital allocators and investors. In fact, this role just might be the most important responsibility any CEO has, and yet despite its importance, there are no courses on capital allocation at the top business schools.

 

As Warren Buffett has observed, very few CEOs come prepared for this critical task: The heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration, or sometimes, institutional politics. Once they become CEOs, they now must make capital allocation decisions, a critical job that they may have never tackled and that is not easily mastered. To stretch the point, it’s as if the final step for a highly talented musician was not to perform at Carnegie Hall, but instead, to be named Chairman of the Federal Reserve. 1 This inexperience has a direct and significant impact on investor returns. Buffett stressed the potential impact of this skill gap, pointing out that “after ten years on the job, a CEO whose company annually retains earnings equal to 10 percent of net worth will have been responsible for the deployment of more than 60 percent of all the capital at work in the business.”

 

“The metric that the press usually focuses on is growth in revenues and profits. It’s the increase in a company’s per share value, however, not growth in sales or earnings or employees, that offers the ultimate barometer of a CEO’s greatness. It’s as if Sports Illustrated put only the tallest pitchers and widest goalies on its cover. In assessing performance, what matters isn’t the absolute rate of return but the return relative to peers and the market. You really only need to know three things to evaluate a CEO’s greatness: the compound annual return to shareholders during his or her tenure and the return over the same period for peer companies and for the broader market (usually measured by the S& P 500).”

 

“They seemed to operate in a parallel universe, one defined by devotion to a shared set of principles, a worldview, which gave them citizenship in a tiny intellectual village. A very select group of men and women who understood, among other things, that:

• Capital allocation is a CEO’s most important job.

• What counts in the long run is the increase in per share value, not overall growth or size.

• Cash flow, not reported earnings, is what determines longterm value.

• Decentralized organizations release entrepreneurial energy and keep both costs and “rancor” down.

• Independent thinking is essential to long-term success, and interactions with outside advisers (Wall Street, the press, etc.) can be distracting and time-consuming.

• Sometimes the best investment opportunity is your own stock.

• With acquisitions, patience is a virtue . .  . as is occasional boldness.”

-------------------

 

jtvalue--

 

Thank you for taking the time to post your very interesting overview of the book .

 

I was just reading that Charlie Munger referred to this book at the Daily Journal Company Annual meeting a few weeks ago ,..... in response to a shareholder's question  about Charlie's  current book recommendations.

 

I intend to read the book soon .

 

Thanks again !

 

Greenwave

[mikazo]

I just finished this book this morning, and really enjoyed it. I like the checklist at the end of qualities to look for in an "outsider" CEO. The author even made a prediction that cheap tech companies like Cisco, Dell and Microsoft had a long runway for share buybacks, since they have so much cash and such low P/E ratios. I found that interesting because I came to the same conclusion about Cisco.

[augustabound]

I see "Uncle Warren" has recommended this in his letter also, time to spend the $4 for the kindle version I guess.  ;D

Nah, for $18 I'll buy the hardcover.

 

I'm finding that I really enjoy the book in my hand rather than an electronic device.  They also look great on the bookshelf which seems to be a relic of the past.

[Uccmal]

I enjoyed the book. 

 

It is well written and exposed me to some interesting companies.  I learned alot about John Malone I didn't know, and Cap Cities.  It is somewhat of a Buffett book in disguise though since 3 of the eight CEOs were Berkshire controlled/influenced. 

 

The trick I guess is to find the CEOs who buy back stock when its cheap, in large amounts, dont award themselves excessive stock, dont go in for overpriced acquisitions etc. 

 

There cant be too many of these out there.  1 in 100000 perhaps, many of which this board has already identified. 

 

A good leisurely read. 

 

I too bought the hard cover.  I buy about 5 real books a year for when I am on vacation or travelling.

Prefer them to the Ipad for reading. 

[wescobrk]

Has anyone read the other book he mentioned reading between the lines? If so, thoughts?

[giofranchi]

Has anyone read the other book he mentioned reading between the lines? If so, thoughts?

 

I don’t know: just purchased it, after reading Buffett’s letter.

I have read “Trust: Do Business with People You Can Trust” by Mrs. Rittenhouse and I liked it a lot.  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[wescobrk]

Quote from: wescobrk on Today at 06:07:13 AM

Has anyone read the other book he mentioned reading between the lines? If so, thoughts?

 

I don’t know: just purchased it, after reading Buffett’s letter.

I have read “Trust: Do Business with People You Can Trust” by Mrs. Rittenhouse and I liked it a lot. 

 

giofranchi

 

Great minds think alike. I purchased the hard copy on amazon last night. I'll receive it Tues via prime. I guess it was partly rhetorical as I've never been disappointed by a book Buffett recommended although I seem to recall the book he mentioned he read about the gentleman that started state farm (had farmer in the title?) seemed me to boring but maybe that's just me. In buffets defense I don't think he recommended that one he just mentioned that he read it.

[txlaw]

I just finished reading this book (Kindle edition).  It's excellent and definitely worth reading.

[SwedishValue]

This is the first and will probably be the last book that I have read and recommended to people before Buffett recommends it in his letter.

 

I read the book from cover to cover, it's the best investing book I read during the last 12 months. There really is a huge difference between the return a manager can give his shareholders through opportunisitc capital allocation, rather than just being a good manager.

 

I think it's fascinating that not more management from where I live (Sweden) make use of opportunistic buybacks of own stock.

[giofranchi]

This is the first and will probably be the last book that I have read and recommended to people before Buffett recommends it in his letter.

 

I read the book from cover to cover, it's the best investing book I read during the last 12 months. There really is a huge difference between the return a manager can give his shareholders through opportunisitc capital allocation, rather than just being a good manager.

 

I think it's fascinating that not more management from where I live (Sweden) make use of opportunistic buybacks of own stock.

 

I agree 100% SwedishValue,

and welcome to the board!!  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[Liberty]

Finished reading this one on the train ride to the FFH Dinner/AGM, and it was excellent! Highly recommended to those who still haven't picked it up.

[ASTA]

SwedishValue

Its because of the Swedish tax code that for example Investor doesn't want to buy back stock as explained buy Third Avenue. And maybe Wallenberg wants dividends instead of paying higher taxes on income in sweden :D 

[alwaysinvert]

SwedishValue

Its because of the Swedish tax code that for example Investor doesn't want to buy back stock as explained buy Third Avenue. And maybe Wallenberg wants dividends instead of paying higher taxes on income in sweden :D

Dividends are taxfree for owners with 10% or more, so there is quite a substantial misalignment of interest between larger and smaller shareholders when it comes to capital allocation. On the other hand, cap gains are also taxfree for those lucky few, so for savvy owners of that kind, with the right incentives, there shouldn't be a bias towards dividends. Problem is hardly any are savvy and even fewer are properly incentivized (most certainly not the Wallenbergs).

[Kraven]

I read this recently and while I did enjoy it very much, I am not sure it's in the category of "best" books.  Don't get me wrong, it's very entertaining and worth reading, but it's essentially just a collection of profiles of the type one would see in Fortune or Forbes or something when they do a long article.  Nothing wrong with that, but there's nothing ground breaking about anything here.  It's a good and quick read and does provide good background on some interesting people, but I don't think it does much more than that.

[ASTA]

Thanks for clearing that up alwaysinvert. As a fellow swede its good to know. But my business experience in Sweden is zero USA and gaap my circle of competence :D

Sometime in the future I should add Sweden to my knowledge base but as I don't live there anymore its hard with America being easier and bigger too master.   

[Liberty]

I read this recently and while I did enjoy it very much, I am not sure it's in the category of "best" books.  Don't get me wrong, it's very entertaining and worth reading, but it's essentially just a collection of profiles of the type one would see in Fortune or Forbes or something when they do a long article.  Nothing wrong with that, but there's nothing ground breaking about anything here.  It's a good and quick read and does provide good background on some interesting people, but I don't think it does much more than that.

 

I agree, but I don't hold it against the book. Most of the important things in investing are really obvious ("simple, but hard to do", as Munger would say), so after a while, it seems like everything I read is kind of redundant. But I still feel like I get value out of it because it reinforces what I already know and keeps me on the right path (at least, I hope).

 

It's a bit like Free Capital. Another book of profiles that I quite enjoyed, but if you're looking for lots of non-obvious investing concepts, probably not the place to look.

[Kraven]

I read this recently and while I did enjoy it very much, I am not sure it's in the category of "best" books.  Don't get me wrong, it's very entertaining and worth reading, but it's essentially just a collection of profiles of the type one would see in Fortune or Forbes or something when they do a long article.  Nothing wrong with that, but there's nothing ground breaking about anything here.  It's a good and quick read and does provide good background on some interesting people, but I don't think it does much more than that.

 

I agree, but I don't hold it against the book. Most of the important things in investing are really obvious ("simple, but hard to do", as Munger would say), so after a while, it seems like everything I read is kind of redundant. But I still feel like I get value out of it because it reinforces what I already know and keeps me on the right path (at least, I hope).

 

It's a bit like Free Capital. Another book of profiles that I quite enjoyed, but if you're looking for lots of non-obvious investing concepts, probably not the place to look.

 

I disagree with nothing you said.  I did enjoy the book and think people will get something out of it and enjoy it.  I just don't think it's a "best" book.  Agreed that it's like Free Capital.  All these books of profiles are similar.  Nothing wrong with that.  I did think that the chapter on Buffett was gratuitous and after some pretty good profiles seemed to be thrown together at the last minute to attach his name to it.

[Liberty]

I disagree with nothing you said.  I did enjoy the book and think people will get something out of it and enjoy it.  I just don't think it's a "best" book.  Agreed that it's like Free Capital.  All these books of profiles are similar.  Nothing wrong with that.  I did think that the chapter on Buffett was gratuitous and after some pretty good profiles seemed to be thrown together at the last minute to attach his name to it.

 

Agreed on the Buffett chapter. I think it's probably been put in there because some of the book's readers won't be Buffett disciples, so it can serve as an introduction. But for anyone who's been following Buffett, it was pretty unsatisfying. I kind of wish they had a chapter on Prem Watsa instead. Maybe in the next edition :)

[stahleyp]

Drokes,

 

Thanks for the idea with ENDP. Do you think the odds of a takeover are likely? I know next to nothing about the company but this article suggests a takeover is likely.

 

http://seekingalpha.com/article/1255471-new-ceo-from-valeant-may-mean-endo-takeover-imminent

[cubsfan]

Valeant is also influenced by Jeffrey Ubben of ValueAct Capital.

ValueAct holds a board seat, was instrumental in some of their larger acquisitions,

also involved in the current CEO selection - and influences the capital allocation process.

VRX is ValueAct's 3rd largest holding at 14% - and continue to buy shares themselves,

whilst the company executes on aggressive acquisition strategy.

 

http://articles.marketwatch.com/2011-03-30/investing/30680551_1_valeant-shares-ubben-michael-pearson

 

http://www.dataroma.com/m/holdings.php?m=VA

 

 

 

[Drokos]

No, I think there is no chance of a takeover now. I am hesitant to put on a full position now, because it seems some people are (IMO foolishly) still expecting a take over. The CEO left Valeant on good terms in late 2012 and said he was leaving because he always wanted to be a CEO. He told Valeant's Pearson he would work for him for 3-5 years helping to build Valeant, then he will move on and build his own legacy somewhere as a CEO.

 

Since ENDP's CEO resigned a few months back there have been rumors the company was being shopped around and large shareholders were pushing for a sale, it probably was, but IMO De Silva(the new ENDP CEO) would only take the job if the board was not looking to sell the firm. He is a turnaround specialist, wants to build his own legacy, and these Valeant guys are looking for multibaggers, not to join the firm and then sell it for a 10% premium after a month on the job. I dont think he was taking this job to make a quick buck, he had something like $30-40m of Valeant stock and I'm sure would have made much more by staying.

 

 

 

[Drokos]

Cubs fan,

 

That's true. Although I do believe Valeant bought back some shares from ValueAct in early 2011 somewhere around $40 a share. Looks like ValueAct regretted that and bought some more in 2012.

[giofranchi]

I read this recently and while I did enjoy it very much, I am not sure it's in the category of "best" books.  Don't get me wrong, it's very entertaining and worth reading, but it's essentially just a collection of profiles of the type one would see in Fortune or Forbes or something when they do a long article.  Nothing wrong with that, but there's nothing ground breaking about anything here.  It's a good and quick read and does provide good background on some interesting people, but I don't think it does much more than that.

 

I agree, but I don't hold it against the book. Most of the important things in investing are really obvious ("simple, but hard to do", as Munger would say), so after a while, it seems like everything I read is kind of redundant. But I still feel like I get value out of it because it reinforces what I already know and keeps me on the right path (at least, I hope).

 

It's a bit like Free Capital. Another book of profiles that I quite enjoyed, but if you're looking for lots of non-obvious investing concepts, probably not the place to look.

 

I disagree with nothing you said.  I did enjoy the book and think people will get something out of it and enjoy it.  I just don't think it's a "best" book.  Agreed that it's like Free Capital.  All these books of profiles are similar.  Nothing wrong with that.  I did think that the chapter on Buffett was gratuitous and after some pretty good profiles seemed to be thrown together at the last minute to attach his name to it.

 

Hi Kraven, Hi Liberty!

I am not sure I would call the lessons in “Outsiders” obvious…

From the chapter about Dick Smith:

Smith succeeded in creating an environment where this talented group of executives was given autonomy and felt like owners.

The theme of decentralization is common to all the profiles in the book. Yet decentralization requires trust. To give autonomy, you must first trust someone. We have talked about trust before, and we know it is not easy, and it is a risk not everybody is willing to run. So, I wouldn’t call it obvious…  :)

And again:

They were also very large bets relative to the company’s size, ranging from 22 percent to a remarkable 62 percent of the company’s enterprise value at the time they were made.

Also a way of investing this much concentrated on just a few big, no… huge!, ideas in 4 decades is something almost nobody is comfortable with. So, I wouldn’t call it obvious…  :)

Finally:

The company paid minimal dividends and was notable for its willingness to hold large cash balances while waiting for attractive investment opportunities to emerge.

Also the willingness to hold large amount of cash is a practice many investors on the board reckon to be a mistake, instead of a virtue. So, I wouldn’t call it obvious…  :)

 

If by "obvious" we mean something everybody might agree with.

 

giofranchi

[Hubris]

Great book read it cover to cover... Couldn't put it down! My favorite current OUTSIDER is Mike White (DTV). Grew up in the Cola Wars era is very intent of not replicating the experience with Pay TV. Astounding capital allocation with a ROIC of 23% last year and excess cash and some leverage for buy backs.

DTV would certainly qualify for some serious buy backs like this book covers if you look at it now they've bought back about 59% of their stock since 2005. (Credit for the find goes to Mr. Weschler.)

 

 

Who would you guys view as a similar outsider in a good business?