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Who is Henry Singleton? And why should a Fairfax shareholder care? “The failure of business schools to study men like (Henry) Singleton is a crime." Warren Buffett (quote from John Train’s book The Money Masters) Fairfax’s business model has been inspired by many great businesspeople/investors over the years. Who are some that immediately come to mind? Here is my top 3 list: Ben Graham - Value investing framework. Warren Buffett - P/C insurance model (float); operating structure. John Templeton - Go international; buy at the point of maximum pessimism. Did I get the top 3 right? Let me know what you think. Who should be #4 on the list? I think it might be Henry Singleton. What did Fairfax learn from Henry Singleton? How to think about - and do - capital allocation. The big picture part of capital allocation. Use all the available tools (both ‘sources of cash’ and ‘uses of cash’) and use them at the right time. And go big when appropriate. (Another more recent thing is optimizing the cash that is being earned by the operating businesses.) Who is Henry Singleton? Henry Singleton is an individual who is not well followed. That is interesting given his amazing accomplishments over his lifetime. Below is a short biography from Wikipedia: “Henry Earl Singleton (November 27, 1916 – August 31, 1999) was an American electrical engineer, business executive, and rancher/land owner. Singleton made significant contributions to aircraft inertial guidance and was elected to the National Academy of Engineering. He co-founded Teledyne, Inc., one of America's most successful conglomerates, and was its chief executive officer for three decades. Late in life, Singleton became one of the largest holders of ranchland in the United States.” https://en.wikipedia.org/wiki/Henry_Earl_Singleton What was Henry Singleton’s track record? Here is how William Thorndike, author of The Outsiders, sums up Henry Singleton’s track record: “Singleton left behind an extraordinary record, dwarfing both his peers and the market. From 1963 (the first year for which we have reliable stock data) to 1990, when he stepped down as chairman, Singleton delivered a remarkable 20.4 percent compound annual return to his shareholders (including spin-offs), compared to an 8.0 percent return for the S&P 500 over the same period and an 11.6 percent return for the other major conglomerate stocks. “A dollar invested with Henry Singleton in 1963 would have been worth $180.94 by 1990, an almost ninefold outperformance versus his peers and a more than twelvefold outperformance versus the S&P 500…” William Thorndike - The Outsiders Here is what Warren Buffett, a pretty hard marker, had to say about Henry Singleton: "Henry Singleton of Teledyne has the single best operating and capital deployment record in American business." Warren Buffett Bottom line, when it comes to building long term per share value for shareholders, Henry Singleton is one of the all-time greats. What were Henry Singleton’s greatest strengths? Singleton was exceptional at both core jobs of a CEO: Operating the business Capital allocation Singleton’s overarching objective was to maximizing long term per share value for shareholders. Corporate structure A key part of Singleton’s success was the corporate structure / operating model he set up at Teledyne: Operating businesses Decentralized Entrepreneurial Capital allocation Centralized Small head office Does this structure look familiar? The inspiration for Berkshire Hathaway’s corporate structure likely came from Henry Singleton and Teledyne. Fairfax also employs this same structure. Operating businesses Singleton was very good at operating businesses - putting in place the right structure, incentives and people. And the focus of the operating businesses was on cash generation, especially when the company completed the acquisition phase of its growth in the late 1960’s. This last point is critically important because optimizing cash feeds the ‘sources of cash’ part of capital allocation. Capital allocation In the rest of this post we are going to focus on the greatest strength of Singleton - capital allocation - because it is not well understood. And because it perhaps offers great insight into how Fairfax operates today. Singleton’s Capital allocation framework Singleton was a trailblazer when it came to capital allocation. What made Singleton stand out from peers at the time? Open minded/range - he was open to using all tools in the capital allocation toolbox (for both ‘sources of cash ‘ and ‘uses of cash’). Flexible - he was open minded / he adapted to changing circumstances. Rational/analytical - he used the right tool for the right job at the right time. Opportunistic/conviction - big opportunities were exploited very aggressively (he had a temperament that allowed him to do this). Independent thinker/contrarian - he often did the opposite of what conventional wisdom suggested was the right thing to do at the time. Unconventional - it did not matter to him that Wall Street did not/frowned on some of his methods / the use of certain tools. Control: it is important to note that Singleton was firmly in control of Teledyne. This control gave him the freedom to execute his unconventional approach to running Teledyne. Shareholders’ Equity - the genius of Henry Singleton We are going to focus on what Henry Singleton is known for most - his aggressive/prolific management of the company’s stock - both in issuing stock and buying it back. Singleton followed a pretty simple playbook: When stock is overvalued - aggressively issue stock and use it as currency to grow the business (buying other companies when they are available at much lower valuations). When stock is undervalued - use much higher cash flow from the business to aggressively buy back shares. Singleton had two distinct phases: 1.) Aggressively issue Teledyne stock (1960 to 1968) - executed at an average PE of 25x Allowed Teledyne to get much more back (value of companies being purchased) than what he was giving up (value of Teledyne’s stock). Singleton bought 128 companies using Teledyne’s stock; he massively expanded the size and scale of the company. 2.) Aggressively buy back Teledyne stock (1971 to 1984) - executed at an average PE of 8x Allowed Teledyne to get much more back (value of Teledyne’s stock) than what he was giving up (using cash in some other way). He bought back stock using tender offers (not open market purchases). Reduced shares outstanding at Teledyne by 90% by the time he was done. Unlike today, in the 1970’s buying back stock was viewed very negatively by Wall Street - it was viewed as a sign of weak/poor business prospects/management. What really stands out with Singleton is: The scale in which he operated when executing a winning strategy - both the massive number of shares he issued and the massive number of shares he then repurchased. Each phase lasted/was executed over a full decade. The discipline he demonstrated: shares were only issued at a premium valuation and repurchased at a low valuation. Singleton had an unfair advantage ‘Good artists borrow. Great artists steal.’ Picasso/Steve Jobs What company did Singleton understand better than any other? Teledyne - his own company. He also understood the company much better than Mr. Market and Wall Street. Singleton took Benjamin Graham’s insight on Mr. Market and the stock market in general and applied a unique twist - he applied it to Teledyne’s stock. The end result was amazing per share value creation for long term shareholders. Was Singleton taking advantage of Teledyne’s shareholders? Warren Buffett often talks about buybacks along moral lines - at least when it comes to Berkshire Hathaway and how the company thinks about its own shareholders. My view is this is more good marketing from Buffett than anything else. Buffett loves it when companies he owns buy back a bunch of their own stock - Apple is a great current example. And we know he thinks very highly of Henry Singleton. In recent years, Buffett has relented and has started buying back Berkshire Hathaway stock in meaningful quantities. The truth is long term shareholders of Teledyne made out exceptionally well - they made a fortune holding Teledyne stock over the decades. Bottom line, shareholders’ equity is an exceptionally important tool in the capital allocation toolbox that management teams can use to grow per share value for shareholders. If it is such a good idea why is it not used more? The interesting thing is most management teams are terrible in their execution of this strategy: they tend to issue their own stock at low valuations and buy back their stock at high valuations. These activities destroy long term per share value for shareholders. Most companies don’t utilize this strategy more aggressively because they are terrible at it. What does all this have to with Fairfax? Not all companies are terrible at executing this strategy. That is what we will explore in our next post. —————- Twenty Punch Investments https://www.twentypunchinvestments.com/p/henry-singleton-and-teledyne —————- A Case Study in Financial Brilliance - Teledyne by Leon Coopermam https://fundamentalfinanceplaybook.com/wp-content/uploads/2019/02/leon-cooperman-case-study-henry-singleton-teledyne.pdf —————- Henry Singleton: A Capital Allocation Masterclass in Three Acts by Kingswell https://www.kingswell.io/p/henry-singleton-a-capital-allocation —————- The Outsiders | William Thorndike | Talks at Google

I like the investment. Analysts aren’t modeling income from non-fixed income sources very well but they are growing and are becoming less cyclical. If that eventually translates to expected increases in annual earnings then it will allow more quants to buy the shares which will help with multiple expansion. Every investment deal where the expected returns are > 5% increases the odds of the company as a whole earning a 15% return given the leverage.