This note is one of a series about the books that have informed and inspired my life and work.
It is impossible to produce superior performance unless you do something different. - John Templeton
What makes a successful CEO? Most people call to mind a familiar definition: "a seasoned manager with deep industry expertise." Others might point to the qualities of today's so-called celebrity CEOs-charisma, virtuoso communication skills, and a confident management style. But what really matters when you run an organization? What is the hallmark of exceptional CEO performance? Quite simply, it is the returns for the shareholders of that company over the long term.
In this refreshing, counterintuitive book, author Will Thorndike brings to bear the analytical wisdom of a successful career in investing, closely evaluating the performance of companies and their leaders. You will meet eight individualistic CEOs whose firms' average returns outperformed the S&P 500 by a factor of twenty-in other words, an investment of $10,000 with each of these CEOs, on average, would have been worth over $1.5 million twenty-five years later. You may not know all their names, but you will recognize their companies: General Cinema, Ralston Purina, The Washington Post Company (WPO), Berkshire Hathaway (BRK.A/BRK.B), General Dynamics (GD), Capital Cities Broadcasting, TCI, and Teledyne (TDY). In The Outsiders, you'll learn the traits and methods-striking for their consistency and relentless rationality-that helped these unique leaders achieve such exceptional performance.
Conversation with Will Thorndike on The Outsiders.
Chris DeMuth Jr:
What has changed about how you think about business leaders during the process of writing this terrific book?
The biggest surprise in the research process for the book was the strength of the pattern across the 8 CEOs - the uniformity of specific decisions/actions relating to buybacks, dividend policy, approach to acquisitions, focus on taxes, etc. I had expected the book to evolve more as a loose group biography, more along the lines of John Train's Money Masters (or JFK's Profiles in Courage or Hofstadter's American Political Tradition)…
No major changes at this point (although interesting to see the recent Virgin Media and Heinz deals in the last week from Malone and Buffett…)
Chris DeMuth Jr:
Are there any specific investments that you have made or would make today as a result of your ideas? What does this book teach the investor to look for?
I hope the book will be helpful, particularly for the long term-oriented public market investor, as a field guide to attributes that correlate highly with exceptional relative long term results, hopefully it will aid in lucrative pattern recognition for that group.
What was most applicable?
This was such a well-written, enjoyable, edifying book that I would have happily read it without any narrowly applicable lessons. Fortunately, it was also highly useful and applicable to my work. Who are the outsiders and what are the common attributes of these stellar corporate managers?
Always Do the Math
The outsider CEOs always started by asking what the return was.
What does it cost and what is it worth? For value investors and for the outsider CEOs, the return calculation comes first. A justifiable investment can work even with conservative assumptions. Security comes from price-sensitivity and a margin of safety, not from sophisticated modeling that gives the appearance of extreme precision.
The Denominator Matters
These CEOs shared an intense focus on maximizing value per share.
There is a moral as well as practical aspect to intelligent buybacks and careful financing. These steps can be accretive to the amount of cash and asset value represented by one's equity stake. Morally, these steps signify a management team that lives up to their fiduciary duty to maximize their shareholders' wealth. Such a duty might come at the expense of maximizing their personal fame, importance, or compensation if it means an overall smaller corporate empire. That is why outsider CEOs are all too rare a breed.
A Feisty Independence
The outsider CEOs were master delegators, running highly decentralized organizations and pushing operating decisions down to the lowest, most local levels in their organizations. They did not, however, delegate capital allocation decisions.
Many corporate functions can be outsourced or delegated by the CEO. Each function should be optimized by placing responsibility in the hands of those with a comparative advantage. What can't be optimally outsourced or delegated? The outsider CEOs were still left with responsibility for allocating assets and managing risk. The same operations managers who can be counted on to maximize cash flow can often be suboptimal in their ability to impartially judge the amount of capital that should be reinvested in their given business. They are often enthusiasts of their respective operations and that can be perfectly fine… as long as they have to return capital to headquarters.
Charisma is Overrated
The outsider CEOs were also distinctly unpromotional and spent considerably less time on investor relations than their peers.
While Thorndike did not specifically present the Tisch family and their management of Loews Corporation (L), I consider Loews to be the least promoted of the large publicly-traded stocks and the best example of this virtue. The Tischs appear to be utterly indifferent to whether they are underrated or whether their company is ignored. As far as they are concerned, that just allows them to buyback more shares and adds value to Loews' owners. In fact, if any part of their business ever manages to get overvalued, they immediately sell it off. There is absolutely nothing wrong with being underestimated. Most managements are in a frenzy to hype the value of their stock. Not the outsiders.
A Crocodile-Like Temperament That Mixes Patience…
Armed with their return calculators all… were willing to wait long periods of time… for the right opportunity to emerge.
While a given asset allocator might possess some brains and judgment, so does the competition. While some brains and judgment are necessary, they are not sufficient to form a durable edge over the competition. Such an edge also requires a rather extreme selectivity. That selectivity typically means that it can take a long time between worthy targets.
…With Occasional Bold Action
Interestingly, as we've seen, this penchant for empiricism and analysis did not result in timidity.
If your standards are consistently high, the world can offer no opportunities on some days and tons on other days. Because they said "no" to so many mediocre opportunities, the outsider CEOs were liquid and nimble enough to pounce when terrific opportunities arose.
The Consistent Application of a Rational, Analytical Approach to Decisions Large and Small
These executives were capital surgeons, consistently directing available capital toward the most efficient, highest-returning projects.
They did not comingle their great investments with too many lousy ones. They rarely lost much money. They almost never wasted any.
A Long-Term Perspective
Although frugal by nature, the outsider CEOs were also willing to invest in their businesses to build long-term value.
Short-term earnings, Wall Street analysts and the financial media were essentially ignored by the outsider CEOs. This time horizon arbitrage led these CEOs to behave almost completely different from their peers. Among people with a reasonable amount of good will and intellect, a core distinction is between those on the one hand who are trying to make sense and those on the other hand who are trying to look good and sound smart. The outsider CEOs simply put all of their efforts into making sense and gave up on trying to look good and sound smart. They were all competitive, but they judged themselves on winning over the long-term.