Outsiders - Eight Unconventional CEOs and their Radically Rational Blueprint for

[giofranchi]

I think it is a very popular paper, but I hadn’t read it till now. Maybe, someone else on this board hasn’t read it yet! So, please, find it in attachment. :)

 

giofranchi

Founder-CEOs-Investment-Decisions-and-Stock-Market-Performance.pdf

[nkp007]

Did anyone catch the tone Buffett and Munger used when discussing Henry Singleton at the annual meeting?

 

They mentioned how he took advantage of shareholders and it seemed to irk them greatly. I think it's safe to say they would at the very least view him as borderline unethical.

[Hielko]

I think it is a very popular paper, but I hadn’t read it till now. Maybe, someone else on this board hasn’t read it yet! So, please, find it in attachment. :)

 

giofranchi

I'm reading it now, but I'm wondering if the methodology that has been used to test the effect is correct. He's using a lot of data sources, so easy to introduce some form of look ahead bias if it's not carefully constructed and there is no discussion on how for example this potential problem is tackled.

[netnet]

Did anyone catch the tone Buffett and Munger used when discussing Henry Singleton at the annual meeting?

 

They mentioned how he took advantage of shareholders and it seemed to irk them greatly. I think it's safe to say they would at the very least view him as borderline unethical.

 

That is one reading of what they said.  I think that they were most irked that

[*]They were compared to Singleton

[*]And that they were being prodded to follow Singleton example, i.e. to breakup BRK, when in fact they are playing a different game.

[xo 1]

I agree the discussion of Henry Singleton at the meeting was interesting.  I generally follow netnet's interpretation, but found it to contain further insight into how WEB views his shareholders and, more significantly for the future, how BRK's culture is different from other companies.  WEB has said and written it hundreds of times, but it wasn't until reading the transcript from this year's meeting that I realized how significant it is that WEB views his shareholders as partners.  It caused me to understand better BRK's reluctance to buyback stock.  It also caused me to rethink the significance of WEB knowing personally many (most?) of longtime shareholders.  It may be as well that the stability of the Class A shareholder base is significant to WEB, allow BRK to take the outsized insurance risks without fear of the Street's reaction.  Of course, given the liquidity of the Class B shares, I'm not sure that the duty WEB evidently feels to his shareholders is reciprocated by Class B. 

 

I was also struck by Charlie's remark that Singleton wanted BRK to buy Teledyne.  That would have been quite a mouthful for BRK back then. 

[jtvalue]

Bill Stiritz, one of the CEO's mentioned in the book, makes a big bet on Herbalife with his personal money

 

http://www.bloomberg.com/news/2013-09-18/stiritz-sides-with-icahn-for-22-surge-in-herbalife-bet-retail.html

[ASTA]

Thanks jtvalue nice article did not know of post holdings.

[giofranchi]

Very good paper by Prof. Sanjay Bakshi on Indian Family-Owned Business: A Framework for Classifying Types of Owner-Operated Businesses.

 

 

giofranchi

Corporate_Governance_in_Indian_Family-Owned_Businesses.pdf

[premfan]

Very good paper by Prof. Sanjay Bakshi on Indian Family-Owned Business: A Framework for Classifying Types of Owner-Operated Businesses.

 

 

giofranchi

 

Half way through the paper. Excellent paper! Thank you for posting!

[giofranchi]

Very good paper by Prof. Sanjay Bakshi on Indian Family-Owned Business: A Framework for Classifying Types of Owner-Operated Businesses.

 

 

giofranchi

 

Half way through the paper. Excellent paper! Thank you for posting!

 

My pleasure! :)

Cheers,

 

giofranchi

[Liberty]

http://brooklyninvestor.blogspot.ca/2013/10/a-really-great-book-outsiders.html

 

This was linked elsewhere, but should be here too as reference for people finding this thread.

[Guest hellsten]

http://brooklyninvestor.blogspot.ca/2013/10/a-really-great-book-outsiders.html

 

This was linked elsewhere, but should be here too as reference for people finding this thread.

 

Thanks. Interesting discussion after the article:

 

Ben: I ran into Thorndike at a work-related event and asked him. The ninth company was Leucadia. Steinberg & Cumming had no interest in talking with him and thus he never wrote the chapter. Extensive communications with the management teams and people at the companies was an important part of the process of writing the book. Two other companies he mentioned of interest were Valeant Pharmaceuticals and Constellation Software.

 

Anyone here following Constellation Software?

 

Mark: Eddie Lampert will be included on this list when all is said and done.

 

kk: I agree Lampert is on this track, but then all must be said and done first...

[Liberty]

Anyone here following Constellation Software?

 

No, but I'd also be curious to know if others have been following it.

 

I've put it on my list of things to check out, along with CFX, DHR and TDY. In the outsider vein, I already had VRX and TDG, and the whole Malone complex (LMCA/LINTA/etc). I'll be busy for the next year or two...

[Spekulatius]

I agree that it's a great book, probably an investment classic. It emphasizes the importance of the capital allocation skills of the CEO. I made me look at some of my stocks with a whole new lens.

 

I borrowed it at my local library, but I really think it should be on the shelf in my room.

[Dustin T]

My favorite part of this book was the introduction to Henry Singleton of Teledyne. I'd heard of him and the company before but didn't realize his significance. The way he made wise capital allocation decisions based on the market climate and whims of the age made me realize how important it is to have a CEO that thinks for himself and like an owner.

 

Using his ability to print money via stock to buy companies when Conglomerates were in vogue and traded at a premium. Then turning around and buying back shares once conglomerates fell out of favor almost seems obvious in retrospect, but it took courage to go against the conventional wisdom of his age. I truly don't believe conventional business wisdom has gained much true wisdom in the years since.

[Guest hellsten]

My favorite part of this book was the introduction to Henry Singleton of Teledyne. I'd heard of him and the company before but didn't realize his significance. The way he made wise capital allocation decisions based on the market climate and whims of the age made me realize how important it is to have a CEO that thinks for himself and like an owner.

 

Using his ability to print money via stock to buy companies when Conglomerates were in vogue and traded at a premium. Then turning around and buying back shares once conglomerates fell out of favor almost seems obvious in retrospect, but it took courage to go against the conventional wisdom of his age. I truly don't believe conventional business wisdom has gained much true wisdom in the years since.

 

Although cannibals are nice, I need to remind myself to not look at an increase in share count too much, especially if shares are issued because the stock is overvalued and the company is run by a great capital allocator (e.g. IEP).

[ItsAValueTrap]

The book is very clearly biased in favour of good capital allocation.  But the author never inverts and looks at CEOs where "good" capital allocation didn't work out.  He also doesn't consider the dangers of debt.

 

According to the data presented in the book, it looks like the competitor to Bill Anders/General Dynamics was just as good if not better.  His competitor used less debt for similar performance.

[Dustin T]

My favorite part of this book was the introduction to Henry Singleton of Teledyne. I'd heard of him and the company before but didn't realize his significance. The way he made wise capital allocation decisions based on the market climate and whims of the age made me realize how important it is to have a CEO that thinks for himself and like an owner.

 

Using his ability to print money via stock to buy companies when Conglomerates were in vogue and traded at a premium. Then turning around and buying back shares once conglomerates fell out of favor almost seems obvious in retrospect, but it took courage to go against the conventional wisdom of his age. I truly don't believe conventional business wisdom has gained much true wisdom in the years since.

 

Although cannibals are nice, I need to remind myself to not look at an increase in share count too much, especially if shares are issued because the stock is overvalued and the company is run by a great capital allocator (e.g. IEP).

 

Totally agree, I always look at the share count history and try to discern what the CEO is doing with them. I also want to thank you for helping to bring FRMO to my attention. I'm wondering if Mr. Stahl will take advantage of FRMO's elevated stock price. I tend to think he will if the situation persists and the price get's high enough.

[no_free_lunch]

But the author never inverts and looks at CEOs where "good" capital allocation didn't work out.

 

+1  A great book, a great read, but hardly scientific.  I wonder how many CEOs there were over the period who also went against the grain but still got burned.

[Liberty]

More outsider discussion:

 

http://brooklyninvestor.blogspot.ca/2013/11/what-to-do-in-this-market.html

[Liberty]

The book is very clearly biased in favour of good capital allocation.  But the author never inverts and looks at CEOs where "good" capital allocation didn't work out.  He also doesn't consider the dangers of debt.

 

Well, "good" capital allocation is tautologically good, so all else being equal, it's always good to have.

 

I think the point that shouldn't be forgotten is that everything else that is important about a good business still applies. The moat, the price you pay, the cash generation ability, the reinvestment opportunities, etc. Put a good capital allocator in charge of a terrible business, and you probably won't get good results, though maybe (like Buffett) he'll at least be able to expand energy in switching boats rather than plugging the leaky one...

 

The book did look at successful good capital allocators, so they pretty much all had good businesses to work with. I'm not sure if it's a fault of the book. It certainly would make for an interesting - but different - book to look at what kind of things tripped up good capital allocators and made them unsuccessful. The mistakes of smart, successful investors and businessmen are always great to learn about, IMO.

 

As for the dangers of debt, I think most of the outsiders in the book who used lots of debt did it because they were in businesses that could handle it. That's part of being a good capital allocator, to know how much debt to safely use... Of course, as investors we all have our own risk tolerance which might not match a certain CEO's, and we might be proven right or wrong over time, but that's a different question IMO.

[ItsAValueTrap]

There's way to test his theories about good capital allocation.

 

There are probably net nets out there that are buying back shares.  Or closed end funds that are buying back shares.  You can look at their performance and see how well they do.  Obviously I think that this is a good idea.  But maybe it doesn't do a very good job at explaining the unusual returns of these CEOs.  For example, Buffett doesn't aggressively buy back his stock (even though he "should" have).  *In a few cases, Buffett issued Berkshire stock.

 

You can try to prove something by trying to find evidence to support the opposite argument.  I don't think that the author has done this.  His arguments are rather one-sided.

 

2- I think that being a good operator is better than good capital allocation.  Maybe that should have been the lesson.

 

3-

As for the dangers of debt, I think most of the outsiders in the book who used lots of debt did it because they were in businesses that could handle it.

I don't think that Malone's business can handle it.

 

TCI came close to going bankrupt when Malone ran it.

Malone got margin called in 08/09.

Malone bought a stake in Charter... a cable operator that emerged from bankruptcy.

[Liberty]

There's way to test his theories about good capital allocation.

 

There are probably net nets out there that are buying back shares.  Or closed end funds that are buying back shares.  You can look at their performance and see how well they do.  Obviously I think that this is a good idea.  But maybe it doesn't do a very good job at explaining the unusual returns of these CEOs.  For example, Buffett doesn't aggressively buy back his stock (even though he "should" have).  *In a few cases, Buffett issued Berkshire stock.

 

You can try to prove something by trying to find evidence to support the opposite argument.  I don't think that the author has done this.  His arguments are rather one-sided.

 

I don't think his argument is just that buying back shares is the secret, though. The outsider CEOs all had many other tricks in their bags and knew when and how to use them. The best tool for the job depends on the state of the business; what's best to do in your examples would depend on why the net-net is a net-net and what its prospects are. You can't just abstract it all to just "net-net + buybacks = outsider performance?".

 

2- I think that being a good operator is better than good capital allocation.  Maybe that should have been the lesson.

 

I think it depends on the business, but of course being both is even better, and I never got the feeling from the book that being a good operator (of having them under the CEO) wasn't important.

 

TCI came close to going bankrupt when Malone ran it.

 

Only at the very beginning, though, right? That's not Malone's fault at all. In fact, he's the one who was brought in to solve the problem and without him it probably would've gone BK.

 

Malone got margin called in 08/09.

 

Indeed, but the real question is, was his strategy best for the long-term, and was he ever in danger of totally blowing up. I don't know the details, so maybe he did come close, or maybe he just had to sell some stuff that he didn't want to sell, but he was still fine (and a few years later, he's definitely fine). You can look at this a bit like volatility. Even a company as safe as Berkshire went down by 50% at least three times. The quoted value of Malone's stuff will go down too, and because of his strategy, he might sometimes be forced to sell some to meet margin calls, but if overall that means he makes 30% a year over the long-term with billions relatively safely, it might be a valid strategy.

 

Malone bought a stake in Charter... a cable operator that emerged from bankruptcy.

 

The BK is not Malone's fault, though, is it? Charter was mismanaged for years and Paul Allen paid way too much to build it up in the early days. Malone's just value investing by picking up an asset with a high replacement value for a low cost and then running it with the best operator in the business.

[ItsAValueTrap]

The outsider CEOs all had many other tricks in their bags and knew when and how to use them.

Then it starts to become a circular argument- these CEOs are good because they are good.

 

I think that you have to be careful with well-written books because some of the ideas may be false.  You should try to look at the opposite side of their arguments.  Strong ideas are ones where it's hard to argue for the opposite side.  I'll leave it at that.

[premfan]

The outsider CEOs all had many other tricks in their bags and knew when and how to use them.

Then it starts to become a circular argument- these CEOs are good because they are good.

 

I think that you have to be careful with well-written books because some of the ideas may be false.  You should try to look at the opposite side of their arguments.  Strong ideas are ones where it's hard to argue for the opposite side.  I'll leave it at that.

 

I'm thinking you are "inverting" too much. Its always great to invert but, too much leads to hyperinvertion which leads to being skeptical of everything maybe even fat pitches. The optimist are always the rich ones. The book was great. Talent is talent and all the ceos were extremely talented in allocating capital. Some people have a gift for this stuff and are really that good.