Outsiders - Eight Unconventional CEOs and their Radically Rational Blueprint for

[Liberty]

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 on board with the 'halo effect' and I know it's dangerous to look after the fact at how management is described. Something to be very careful about.

 

But I'm also on board with Buffett and Munger and I know that it's possible to identify good businesses and good management. They've done it pretty consistently, and they've said a lot of what they look for.

 

I agree with your approach, I just don't think it's as simple as taking one aspect and grafting it to another random business to see how it does. A lot of these things work together (nobody said it was simple).

 

To me, the book was interesting because it feeds the pattern recognition engine and reinforces a lot of what Buffett has been saying. Good management is long-term oriented, it looks for businesses that throw off a lot of free cash flow that can be re-invested opportunistically for good returns (that can be buybacks if your stock is undervalued and you have a good business, it can be acquisitions if you're in an industry where scale gives big advantages, or a portfolio approach to investments, buying unrelated businesses that have certain characteristics, etc), it requires patience and discipline, independent thinking, the ability to be misunderstood for a long period of time, etc.

 

Nothing that was a secret to anyone before, just some nice case studies.

[Liberty]

http://studentofvalue.com/notes-on-the-outsider-ceos/

 

Some notes on the book.

[Liberty]

Thorndike on buybacks:

 

https://hbr.org/2014/11/when-stock-buybacks-are-not-a-waste-of-money/

[Liberty]

For those who haven't had Outsider overload yet, here's William Thorndike speaking at Google:

 

[rishig]

For those who haven't had Outsider overload yet, here's William Thorndike speaking at Google:

 

 

Interestingly, Thorndike came to Google just a few days before the big fall at Valeant started when it was around $150. He thought that Pearson was an outsider CEO despite all the controversy. I personally have no dog in this fight and find the Valeant situation too hard to act on. May be every such outsider CEO run business were too hard to act on in foresight. May be the framework is nice to have but too hard to act on in? Look at the two names he mentioned - Colfax, Valeant.

[Gopinath]

Saurabh, You are doing a great job with these interviews. I applaud you for your efforts! Of course I am benefiting enormously!

[rishig]

Sourabh, You are doing a great job with these interviews. I applaud you for your efforts! Of course I am benefiting enormously!

 

Not sure if Saurabh is on the forum, but I will convey the message to him. Yes, I applaud him for his efforts, it is not easy to get these wonderful speakers to come visit Google.

[Liberty]

Sourabh, You are doing a great job with these interviews. I applaud you for your efforts! Of course I am benefiting enormously!

 

Not sure if Saurabh is on the forum, but I will convey the message to him. Yes, I applaud him for his efforts, it is not easy to get these wonderful speakers to come visit Google.

 

Yes, I also thank him for his efforts, and thank you rishi for your inside perspective on these and your useful questions on MA/V ;)

[dcollon]

Great interview with Thorndike. 

 

Thank you so much for posting.

[JayGatsby]

Just finished this (the book). Thanks for the recommendation. Great read.

[Jurgis]

Did Thorndike ever talk about survivorship bias?

 

I.e. it seems that it's tough to identify Outsider CEOs during their tenure ( e.g. the company that won't be mentioned - hint it has one of the longest threads on CoBF ;) Oh, hey, there's at least three such companies... ). Is there a tendency for them to blow up - or succeed enormously?

[racemize]

Did Thorndike ever talk about survivorship bias?

 

I.e. it seems that it's tough to identify Outsider CEOs during their tenure ( e.g. the company that won't be mentioned - hint it has one of the longest threads on CoBF ;) Oh, hey, there's at least three such companies... ). Is there a tendency for them to blow up - or succeed enormously?

 

Yeah, I think this is a big issue.  I don't think it is as bad as most of the management books (e.g., Good to Great), as capital allocation is clearly important.  It may just turn out to really say, "pay attention to capital allocation!", which we pretty much already know.

 

Not to denigrate the book, I enjoyed it a lot.

[giofranchi]

Did Thorndike ever talk about survivorship bias?

 

I.e. it seems that it's tough to identify Outsider CEOs during their tenure ( e.g. the company that won't be mentioned - hint it has one of the longest threads on CoBF ;) Oh, hey, there's at least three such companies... ). Is there a tendency for them to blow up - or succeed enormously?

 

Yeah, I think this is a big issue.  I don't think it is as bad as most of the management books (e.g., Good to Great), as capital allocation is clearly important.  It may just turn out to really say, "pay attention to capital allocation!", which we pretty much already know.

 

Not to denigrate the book, I enjoyed it a lot.

 

What about sticking with those who have at least a 15 years track record of being great at allocating capital? Who are at the helm of great businesses with favorable secular trends as tailwinds, in industries where competition is kept at bay?

 

How much is survivorship bias going to render the final outcome unpredictable then?

 

Cheers,

 

Gio

 

[racemize]

I generally agree with the strategy (and myself am implementing it), but I think if you have a portfolio of them and just a few that don't compound as they have in the past, you may get into trouble.  Of course, it depends on whether the other ones outperformed enough...?  e.g., if you had BRK, MKL, FFH, and LUK, which all had those characteristics, starting in say 2010, would you have outperformed?  FFH and LUK haven't done much.  BRK and MKL have done pretty well, but BRK has had trouble in the last five years (book value to S&P comparison, not price).  Of course a five year time period probably isn't enough, but the possibility is there.

[giofranchi]

I generally agree with the strategy (and myself am implementing it), but I think if you have a portfolio of them and just a few that don't compound as they have in the past, you may get into trouble.  Of course, it depends on whether the other ones outperformed enough...?  e.g., if you had BRK, MKL, FFH, and LUK, which all had those characteristics, starting in say 2010, would you have outperformed?  FFH and LUK haven't done much.  BRK and MKL have done pretty well, but BRK has had trouble in the last five years (book value to S&P comparison, not price).  Of course a five year time period probably isn't enough, but the possibility is there.

 

+1!

 

No guarantees in business nor investing, of course.

 

I just wanted to point out that survivorship bias might be a much larger issue when you decide to invest with “outsiders” who have not actually proven to be “outsiders” yet! ;)

 

Cheers,

 

Gio

 

[Jurgis]

OK, so somebody explain Bill Anders and GD chapter to me.

 

Anders comes in. Engineers turnaround by selling divisions, reigning in costs, returning cash as divvies. Retires in 3 years (4 if you count a year as a chairman). How the heck is he considered an outsider CEO and responsible for 17 years of outperformance? OK, I get it, he did a great turnaround and I applaud his work there. But isn't the book about CEOs who had outstanding long-term performance? Hand waving that his successors were picked by Anders is not the same as him having the record himself. Anders wasn't even involved with the company after 1994. If we allow for "outsider" CEOs with 3 year records, this book would be 10 times thicker (and less interesting I'd say). Also what about acknowledging Mellor and Chabraja - how do we know that they are somehow "lesser" because of the Anders' shadow (although Mellor's tenure was also short; Chabraja might be the only one who would stand as a real "outsider" CEO with 11 years longevity).

 

I understand the attractiveness of writing about Anders. There's the Army/NASA fighter pilot angle, there's the Buffett angle, there's the turnaround angle, there's the cold war angle. I'd salivate when writing this chapter too. But isn't consistency more important? ;)  8)

[JayGatsby]

OK, so somebody explain Bill Anders and GD chapter to me.

 

Anders comes in. Engineers turnaround by selling divisions, reigning in costs, returning cash as divvies. Retires in 3 years (4 if you count a year as a chairman). How the heck is he considered an outsider CEO and responsible for 17 years of outperformance? OK, I get it, he did a great turnaround and I applaud his work there. But isn't the book about CEOs who had outstanding long-term performance? Hand waving that his successors were picked by Anders is not the same as him having the record himself. Anders wasn't even involved with the company after 1994. If we allow for "outsider" CEOs with 3 year records, this book would be 10 times thicker (and less interesting I'd say). Also what about acknowledging Mellor and Chabraja - how do we know that they are somehow "lesser" because of the Anders' shadow (although Mellor's tenure was also short; Chabraja might be the only one who would stand as a real "outsider" CEO with 11 years longevity).

 

I understand the attractiveness of writing about Anders. There's the Army/NASA fighter pilot angle, there's the Buffett angle, there's the turnaround angle, there's the cold war angle. I'd salivate when writing this chapter too. But isn't consistency more important? ;)  8)

Of the companies/leaders in the book GD is the one that I remember the clearest of a less can be more strategy. I think the speed and aggressiveness with which he went about it was what left such a strong impression on me. It's an important point, so maybe that's part of why he chose that example.

[Jurgis]

OK, so somebody explain Bill Anders and GD chapter to me.

 

Anders comes in. Engineers turnaround by selling divisions, reigning in costs, returning cash as divvies. Retires in 3 years (4 if you count a year as a chairman). How the heck is he considered an outsider CEO and responsible for 17 years of outperformance? OK, I get it, he did a great turnaround and I applaud his work there. But isn't the book about CEOs who had outstanding long-term performance? Hand waving that his successors were picked by Anders is not the same as him having the record himself. Anders wasn't even involved with the company after 1994. If we allow for "outsider" CEOs with 3 year records, this book would be 10 times thicker (and less interesting I'd say). Also what about acknowledging Mellor and Chabraja - how do we know that they are somehow "lesser" because of the Anders' shadow (although Mellor's tenure was also short; Chabraja might be the only one who would stand as a real "outsider" CEO with 11 years longevity).

 

I understand the attractiveness of writing about Anders. There's the Army/NASA fighter pilot angle, there's the Buffett angle, there's the turnaround angle, there's the cold war angle. I'd salivate when writing this chapter too. But isn't consistency more important? ;)  8)

Of the companies/leaders in the book GD is the one that I remember the clearest of a less can be more strategy. I think the speed and aggressiveness with which he went about it was what left such a strong impression on me. It's an important point, so maybe that's part of why he chose that example.

 

Yeah, OK.

 

But. :)

 

It seems rather messy as a lesson for investors. :)

What is exactly the lesson here?

- Bet on a CEO who comes to do a turnaround, sells a bunch of businesses and improves efficiency in remaining ones? Wouldn't you have ended with Chainsaw Al Dunlap with this strategy? https://en.wikipedia.org/wiki/Albert_J._Dunlap

- Get rid of the CEO who does the turnaround as soon as turnaround is finished? (In 3 years)

- Bet on the next CEO who comes after him?

- And then the next one after? ;)

 

BTW, looking at Buffett's behavior is a bit instructive here. He bought when Anders was on the turnaround way, so he either knew/liked Anders and/or saw the results of what he was doing. He sold when Anders left - so he was not sure CEOs after Anders will do well.

 

So it seems that Buffett also bought into Anders-as-outsider-CEO figure (while kinda dismissing CEOs who came after).

 

But that's still tough to learn something from. In other words, if you see a company that brings Joe Ceo for turnaround, how do you know if he's Bill Anders or if he's Al Dunlap? Note that you don't have 10 or 5 years to decide, since he's gone in 3. Doesn't that sound like "too hard" situation?

 

Anyway, just my thoughts on this. ;)

[JayGatsby]

It seems rather messy as a lesson for investors. :)

What is exactly the lesson here?

- Bet on a CEO who comes to do a turnaround, sells a bunch of businesses and improves efficiency in remaining ones? Wouldn't you have ended with Chainsaw Al Dunlap with this strategy? https://en.wikipedia.org/wiki/Albert_J._Dunlap

- Get rid of the CEO who does the turnaround as soon as turnaround is finished? (In 3 years)

- Bet on the next CEO who comes after him?

- And then the next one after? ;)

 

BTW, looking at Buffett's behavior is a bit instructive here. He bought when Anders was on the turnaround way, so he either knew/liked Anders and/or saw the results of what he was doing. He sold when Anders left - so he was not sure CEOs after Anders will do well.

 

So it seems that Buffett also bought into Anders-as-outsider-CEO figure (while kinda dismissing CEOs who came after).

 

But that's still tough to learn something from. In other words, if you see a company that brings Joe Ceo for turnaround, how do you know if he's Bill Anders or if he's Al Dunlap? Note that you don't have 10 or 5 years to decide, since he's gone in 3. Doesn't that sound like "too hard" situation?

 

Anyway, just my thoughts on this. ;)

Short answer, I'm not sure. Long answer, one of the things I liked about the book was there was no one-size-fits-all strategy. Each CEO had to respond to a unique set of capital allocation decisions and be willing to make tough decisions to maximize value. After reading the book, when I'm looking at a specific situation I'm not looking for any specific strategy but looking at the way the CEO talks and thinks about situations. So not that he/she acts like one of the specific outsider CEOs, but that he/she thinks like the collective outsider CEOs. To use a specific turnaround example, one of the things I like about John Chen at Blackberry is he keeps a very open mind about the future. He's investing in handsets while also looking for other profitable applications of that technology while also being willing to scrap the flagship product if it doesn't make money soon. Another example I like is Klaus Kleinfeld at Alcoa; he's been sytematically evaluating the business lines, closing the ones that aren't competitive on the cost curve, selling the ones that are competitive but are higher valued by other (hydroelectricity), and aggressively investing in others. Of course, both of those situations will require time to see how effective they turn out to be. Their approaches are different in some ways, but their mindset is the same.

 

I also found the book helpful in thinking about my own capital allocation decisions (both in personal investments and at work). It's easy to find an ok rate of return, but the challenge is to constantly be refocusing on the best rate of return.

 

Guess I never really answered the question ;) Hope that helps. It helped me to think through it, so appreciate the question.

[DooDiligence]

This book makes me want to go back & get an accounting / biz management degree & a CFM & then go do something besides run a boat...

[JayGatsby]

This book makes me want to go back & get an accounting / biz management degree & a CFM & then go do something besides run a boat...

Funny thing is most of the people with that degree would consider it a successful end point to be running a boat!

[DooDiligence]

This book makes me want to go back & get an accounting / biz management degree & a CFM & then go do something besides run a boat...

Funny thing is most of the people with that degree would consider it a successful end point to be running a boat!

 

Hahahahaha!!!

 

If I was running an 80' Somethingorother in Sint Maarten I wouldn't be whining...