The Outsiders

The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, by William Thorndike is one of the best books that I’ve read this year.

Warren Buffett praised the book in his 2012 Berkshire Hathaway annual shareholder letter.

The Outsiders, by William Thorndike, Jr., is an outstanding book about CEOs who excelled at capital allocation. It has an insightful chapter on our director, Tom Murphy, overall the best business manager I’ve ever met.

The book considers the careers of 8 unconventional CEOs:

  • Tom Murphy of Capital Cities Broadcasting
  • Henry Singleton of Teledyne
  • Bill Anders of General Dynamics
  • John Malone of TCI
  • Katharine Graham of The Washington Post Company
  • Bill Stiritz of Ralston Purina
  • Dick Smith of General Cinema
  • Warren Buffett of Berkshire Hathaway

These CEOs were selected by Thorndike because they had each passed the “Buffet test” – creating at least a dollar of value for dollar of retained earnings over the course of their tenure. Additionally, they all had relatively long tenures (decades not years) which encompassed a variety of economic conditions, including unfavorable periods.

The 8 CEOs were all very, very different from each other and yet they shared several common attributes.

  • Focus on returns – They saw themselves as capital allocators and not business managers. Projects were taken on only if returns exceeded the cost of capital by a comfortable margin.
  • Focus on the denominator – Each CEO aggressively bought back their own shares when they were cheap (and not just to support earnings).
  • Independence – They avoided advisors, brokers and consultants. They also represented themselves in M&A negotiations.
  • Substance not style – The CEOs generally avoided the media, preferring to let their results speak for themselves. They never provided earnings guidance.
  • Patience – Many of them waited years between deals, waiting for opportunities to present themselves, rather than chase fads or participate in auctions.
  • Occasional bold action – Each CEO acted quickly and decisively when opportunities presented themselves, making “bet the company” acquisitions. They avoided traditional due diligence, relying instead on common sense.
  • Consistent, rational approach to decisions both large and small – Rather than seek to grow at all costs, they refused to invest if the return on an investment was unsatisfactory. Business units were sold, spun-off or closed down as necessary. They returned capital to shareholders if profitable investments were unavailable.
  • A long term perspective

Here are a few quotes from the book:

What separated these CEOs (and the performance of their companies) was two distinctly different mind-sets. The outside CEOs… tended to dance when everyone else was on the sidelines and to cling shyly to the periphery when the music was loudest. They were  intelligent contrarians willing to lean against the wall indefinitely when returns were uninteresting.

They disdained dividends, made disciplined (occasionally large) acquisitions, used leverage selectively, bought back a lot of stock, minimized taxes, ran decentralized organization, and focused on cash flow over reported net income.

There is no formula here, no hard-and-fast rules – it does not always make sense to repurchase your own stock or to make acquisitions or to sit on the sidelines. The right capital allocation decision varies depending on the situation at any given point in time… As a group, these CEOs faced the inherent uncertainty of the business world with a patient, rational, pragmatic opportunism, not a detailed set of strategic plans.

Page 209 has a the following table entitled: “A profile in iconoclasm”.

Outsider CEOs Peer CEOs
Experience 1st time CEOs with little prior managerial experience Experienced managers with Gladwell’s 10,000 hours
Primary activity Capital allocation Operations management and external communication
Objective Optimize long-term value per share Growth
Key metrics Margins, returns, free cash flow Revenues, reported net income
Personal qualities Analytical, frugal, independent Charismatic, extroverted
Orientation Long-term Short-term
Furry Animal Fox Hedgehog

 

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2 comments

    • @Capital Markets Guy. Great question. Fortunately the book has the answer. The compound annual growth rate in share price for each of these companies was a multiple of both the S&P 500 and a basket of comparable companies.

      For example, from 1963 through to 1990, Harry Singleton of Teledyne delivered CAGR of 20.4%. The CAGR of the S&P 500 was 8% over the same period, while the CAGR of the basket of comparable companies was 11.6%.

      If you had invested $1 with Tom Murphy of Capital Cities in 1966, it would have become $204 by the time he sold the business to Disney – a 19.9% CAGR over 29 years. Meanwhile the CAGR of the S&P 500 was 10.1% and the CAGR of similar media companies was 13.2%.

      Murphy outperformed the S&P 500 by 16.7 times and his peers by almost fourfold!

      Like

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