Outsiders - Eight Unconventional CEOs and their Radically Rational Blueprint for

[jtvalue]

[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.”

 

[xo 1]

Thanks for the heads up.  Two chapters in and I can't put it down.  The book is fascinating and thought provoking. 

[Liberty]

Thanks, I added it to the list.

 

At first I expected this to be just a 'halo effect' thing, but I think they've got a great list of people, and just any info about their career should be very interesting, so I'll def. pick it up at some point.

[orion]

+1

 

feared also some kind of "halo effect" but it indeed looks promising.

[nkp007]

Almost done reading it. IT IS GREAT

[ScottHall]

I will second that. This is an excellent book and a great read. The chapters on Singleton and especially Malone are by themselves worth the price.

[dcollon]

Thanks for the recommendation of this book.  I really enjoyed it.  I was not aware of the story behind General Cinemas.  I always enjoy reading more about Singleton, Buffett & Malone. 

 

We need someone to write a book on Mr. Malone.

[mevsemt]

Book on John Malone: "Cable Cowboy: John Malone and the Rise of the Modern Cable Business"

[giofranchi]

Thanks for the recommendation of this book.  I really enjoyed it.  I was not aware of the story behind General Cinemas.  I always enjoy reading more about Singleton, Buffett & Malone. 

 

Yes! Thank you very much for this recommendation. I have bought the book right away and I am positive I will enjoy reading it very much! :)

 

giofranchi

[dcollon]

mevsemt,

 

You're the best!  Thank you for pointing that out. Is it a good book?

 

 

[giofranchi]

mevsemt,

 

You're the best!  Thank you for pointing that out. Is it a good book?

 

dcollon,

I have ordered it, but haven’t read it yet. Christopher1, instead, has already read “Cable Cowboy” (he is always one step ahead of me!! ;D ) and told me it is very interesting: for instance, he found that from 1974 Mr. Malone returned 91,000% for his shareholders! That’s better than Mr. Buffett and a result even our star ERICOPOLY could envy…!!  ;D  I really look forward to reading it!

 

giofranchi

[dcollon]

Thanks giofranchi, that's a good enough recommendation for me to buy it. :)

 

 

 

[Christopher1]

giofranchi is too kind  :)

I strongly recommend Cable Cowboys. There are some good insights about John Malone way of thinking and you can have a nice overview of the cable industry history and the relationship among its main players (i.e. Murdoch, Ergen, Roberts, Turner, etc.). Moreover it helped me to have more info about the shareholder value creation that Mr. Malone delivered first at TCI from 1973 to 1999, and then at Liberty from 1991 to 1993 (info about Liberty post 1995 are available on its website).

One more curiosity, when Mr. Malone started working at McKinsey he shared the desk with Lou Gerstner, and years later the IBM board offered the CEO position to Malone before hiring Mr. Gerstner.

Hope it helps,

Christopher1

[giofranchi]

giofranchi is too kind  :)

I strongly recommend Cable Cowboys. There are some good insights about John Malone way of thinking and you can have a nice overview of the cable industry history and the relationship among its main players (i.e. Murdoch, Ergen, Roberts, Turner, etc.). Moreover it helped me to have more info about the shareholder value creation that Mr. Malone delivered first at TCI from 1973 to 1999, and then at Liberty from 1991 to 1993 (info about Liberty post 1995 are available on its website).

One more curiosity, when Mr. Malone started working at McKinsey he shared the desk with Lou Gerstner, and years later the IBM board offered the CEO position to Malone before hiring Mr. Gerstner.

Hope it helps,

Christopher1

 

Great! Thank you, Christopher1!

Cannot wait to put my hands on this one! :)

 

giofranchi

[dcollon]

Thanks Christopher1.  I'm going to start it tonight.

 

[ASTA]

Great book read it in 2 days great short fun read.

[Kuhndan]

Like others on the board here, I read this in two days and couldn't put it down. A couple of the stories I knew well but the author is a great storyteller. I highly recommend it.

[Liberty]

Got it as a gift, can't wait to dig into it. thanks for the rec!

[mankap]

I just finished it and thoroughly enjoyed it.

Thanks for posting it on the board.

[Vish_ram]

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.

[ExpectedValue]

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.

 

Eddie Lampert deserves a mention here. Barring what has happened with Sears, AutoZone is a pretty clear example of what can happen when a company with pretty good underlying fundamentals is then influenced into making good capital allocation decisions. AN seems to be using buybacks intelligently too.

 

I think over the last 10 years, AZO has reduced shares outstanding by 2/3rds which is pretty staggering.

 

 

[Yours Truly]

mevsemt,

 

You're the best!  Thank you for pointing that out. Is it a good book?

 

dcollon,

I have ordered it, but haven’t read it yet. Christopher1, instead, has already read “Cable Cowboy” (he is always one step ahead of me!! ;D ) and told me it is very interesting: for instance, he found that from 1974 Mr. Malone returned 91,000% for his shareholders! That’s better than Mr. Buffett and a result even our star ERICOPOLY could envy…!!  ;D  I really look forward to reading it!

 

giofranchi

 

Are you sure it's 91,000%? In the intro chapter of Cable Cowboys, it says Malone was responsible for 5,500% raise in TCI's stock since taking the helm..

[Christopher1]

It says 5578 fold increase. The source is Paul Kagan Associates that in a different article states that through 1989, spin off included, returns are 91000%.

http://money.cnn.com/magazines/fortune/fortune_archive/1989/07/31/72300/index.htm

[jtvalue]

Apparently Charlie Munger enthusiastically recommended "Outsiders" by Thorndike at his Daily Journal shareholder meeting

[giofranchi]

“It is almost impossible to overpay the truly extraordinary CEO… but the species is rare.”

- Warren E. Buffett

 

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