Tuesday, October 22, 2013

A Really Great Book: The Outsiders

This is old news as this book was recommended by Warren Buffett in Berkshire Hathaway's 2012 annual report.  I knew it was going to be a great book, but it was sitting in my big pile all year until this past weekend.  Once I started reading it, I couldn't put it down.  Not surprisingly, it is a really, really good book.

I'm sure many of you have already read it, but if not, stop what you're doing right now.  Go to the library and get this, or you can order it here:  The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success (by William M. Thorndike, Jr.)

Here is the list of the unconventional CEOs (and how they did versus the S&P 500 index):

1.  Tom Murphy (Capital Cities Broadcasting):
    +19.9%/year over 29 years versus +10.1%/year for the S&P 500 index
2.  Henry Singleton (Teledyne):
    +20.3%/year over 27 years versus +8.0%/year for the S&P 500 index
3.  Bill Anders (General Dynamics)
    +23.3%/year over 17 years versus +8.9%/year for the S&P 500 index
4.  John Malone (TCI)
    +30.3%/year over 25 years (up to ATT acquisition) versus +14.3%/year for the S&P 500 index
5.  Katharine Graham (The Washington Post)
    +22.3%/year over 22 years (since IPO) versus 7.4%/year for the S&P 500 index
6.  Bill Stiritz (Ralston Purina)
    +20.0%/year over 19 years versus +14.7%/year for the S&P 500 index
7.  Dick Smith (General Cinema)
    +16.1%/year over 43 years versus +9%/year for the S&P 500 index
8.  Warren Buffett (Berkshire Hathaway)
    +20.7%/year over 46 years (through 2011) versus 9.3% for the S&P 500 index

These are amazing figures.  We financial people tend to focus on fund managers and people like Warren Buffett, but there are tremendous value creators in the business world too. 

And this lead to another thought that connects to what I always try to tell people.   If you own a business with good, rational managers, then you shouldn't worry too much about what is going on in the stock market; they will do what makes sense and increase value (without shareholders having to get in and out based on all sorts of indicators and prognostications). 

Instead of worrying about what will happen to the stock market or the economy going forward, the more rational question would be, "which companies have a lot of cash flow and can take advantage of any volatility in the market or economy going forward?  Who is going to survive and come through the other end stronger?".  If this question is taken care of, then one needn't worry about much else (except for maybe how much volatility you can stomach).

This leads to the question who the "outsiders" are today.  So far, most of the businesses that I have mentioned on this blog I would consider "outsiders".  They are very focused on shareholder value.  While the "outsiders" in the book focused on cash flow, I have tended to write about financials so the focus has been on earnings and book value per share.  But still, they tend to focus not on accounting profits and losses but on increasing intrinsic value per share.

Thorndike mentions Transdigm as a "contemporary analog for Capital Cities" and mentions Exxon Mobile as a current example of a company similar to the above list (emphasis on rational capital allocation with a 20% return hurdle).

If you asked Buffett right now which company he feels fits the bill of an outsider, he would probably tell you IBM (well, and all of the other companies he owns).   Analysts sounded pretty upset in the recent conference call and the stock took a dive.  Are the analysts too impatient? Will IBM pull through?  If IBM's problems are short term as management claims, then IBM can be a great buy today.  We have to keep in mind that analysts are under tremendous pressure.  If they like a stock and recommend it to clients, they take a lot of heat if the company doesn't perform.   When analysts are frustrated, it may be a good time to buy the stock.

Eight Years in the Making
This book took eight years to write.  They spent one year studying each CEO in detail (the author with the help of Harvard Business School students).    One semester was devoted to researching financial details of the companies (and peers) including financial reports, books, magazine articles and videos and the other was spent interviewing  analysts, employees, investors, bankers etc.

So think about that.  Eight years of hard, detailed work summed up in a single book for $27.00 (list price, which nobody pays anymore).  That's a bargain.

Anyway, I don't really do book reviews here too much but I felt compelled to write this post since this book really is that good.  This belongs on every investor's bookshelf, right next to The Intelligent Investor (The Intelligent Investor will tell you how to think about the markets, and maybe this book will tell you how to think about businesses).  I feel it's really important to understand how value is created at the business level.  The more people understand how business works and how good ones can create value, the less they will worry about the stock market or the stock price.  If people can really think about the stock they own as part of a business, then I think they will tend to do better.

Some Other Books
OK, so some other books I just finished reading:

Cable Cowboy: John Malone and the Rise of the Modern Cable Business
This books is just what it says; a business biography of John Malone and the cable business.  It's very timely to read now with the recent Charter Communications deal.  We know something is brewing here, and Malone is getting back into the business that got him started.  It's also a good read because Malone is one of the "outsiders" from the above book.  This book goes into much more detail, obviously, than the single chapter in the "Outsider" book.

Anyway, from reading this you will see how immensely rational Malone is.  It's a fun read too.  

King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone
This was also a pretty good read.  I don't have any problem with the private equity industry.  I know they are not very popular (and Buffett / Munger often takes shots at them too), but I've never really had a problem.  

Anyway, this is not just the history of Blackstone and Schwarzman, but does cover the history of the industry so it was very interesting.

Schwarzman has some issues, I suppose, with his tremendous ego and things like that, but what you realize is just how good Schwarzman really is.  You may not like the guy and may not ever want to work for him, but he is really good. 

I've spent time looking at Blackstone over the past few years and I always thought that.  Go look at the Blackstone investor presentations at their website.  They are really well done.  The earnings slides are really good too.  And when you listen to the conference calls, Schwarzman is there taking questions and answering them.  If I recall correctly, they didn't just shut down the call after an hour.

Some may say that's just Schwarzman loving the sound of his own voice or whatever, but who cares.  He is there answering questions.  It's actually a good thing for investors (and the public) when the CEO likes to talk; we can learn a lot from listening (even if you are not a Blackstone or private equity fund investor).

So anyway, I am really impressed with Schwarzman and Blackstone but don't own any stock.  Why?  I was going to make a post about that (and still might eventually), but the short answer is that I just think they are getting too big for my taste.

I know that is a common criticism and Schwarzman addresses it in the presentations; they have continued to do well despite their size. Too, they grow by adding strategies and products so it's not like their private equity business is ever expanding.

A lot of the growth is from new business lines, like real estate and hedge funds (or fund of funds).  

But still, when you look at the presentations of the big, listed private equity firms, their AUMs are just exploding to the upside.  It makes you wonder how they will make high returns with so much capital sloshing around in the industry (even if they are across different strategies).

I do understand that allocations to alternative investments are rising for a reason, and this may not be a fad but a permanent reallocation similar to what happened when institutions shifted allocations into equities decades ago (the reallocation to equities was permanent and not a one-time event).

But still, when I see the trajectory of the AUM trends in ALL of these alternative managers, it makes me nervous. 

Anyway, again, maybe that's a topic for another post.  But for now, I just wanted to say that I enjoyed this book.  I think there is something to learn from these guys for any serious investor.


  1. I read the book last week as well and its been in my book pile for a while. Had the same experience, couldn't put it down. A truly great book. Thanks for the other tips!

  2. I had this book on my Amazon wishlist for quite a while. Time to buy it...


  3. Thanks. Could you recommend a book about Goldman Sachs? Also could you recommend another 50 books when you have the time :) (worth a try...)

    1. Hi,

      I liked the Ellis book:

      I set up a bookstore on Amazon for books I like:

      You can also click on the Brooklyn Investor Store at the bottom of this blog...

      Thanks for reading.

  4. Eddie Lampert will be included on this list when all is said and done.

    1. I agree Lampert is on this track, but then all must be said and done first...

  5. I read that Thorndike had another chapter he wanted to include in the book but it was never written because management refused to talk to him. Guessing that was Leucadia.

    1. That's very interesting. Maybe it was LUK. This may be a more interesting parlor game than guessing Buffett's next big one (as it would not be size constrained and would probably have better return prospects going forward!).

      Thanks for posting.

    2. I ran into Thorndike at a work-related event and asked him. The ninth company was Leucadia. Steinberg & Cumming had no interest in talking with him and thus he never wrote the chapter. Extensive communications with the management teams and people at the companies was an important part of the process of writing the book. Two other companies he mentioned of interest were Valeant Pharmaceuticals and Constellation Software.

    3. Thanks! LUK would have definitely fit the bill. VRX is a Sequoia favorite and Valueact owns it, so I guess that's three reasons why I have to take a closer look at it now. Constellation Software is something I've never looked at.

      Thanks again for commenting.

    4. Constellation Software is a Canadian rollup of niche software verticals. The founder & CEO is Mark Leonard and his shareholder letters are remarkably good.


    5. Thanks. I will definitely look at it. I think some of us have software phobia after watching CSC implode... but again, it's about the management; implosions can happen anywhere.

  6. Very interesting article. Previously I passed over this book thinking it was a management "puff piece". I'll definitely have to take a closer look. Thanks!

  7. Stay golden, pony boy.

  8. i love this book. it's all about how whats on the inside that matters. I also like how S. E. Hinton uses word from that era, and describes everything so you can see it!

  9. Have you looked at Oracle in any detail? Larry Ellison seems to fit the Outsider's bill, albeit with some differences. Oracle a high margin, high switching cost business, decent repurchases etc owned by Lou Simpson and Glenn Greenberg at more than 10% of portfolio's respectively. Just a thought.. Cheers

    1. Hi,

      Yes, Oracle is an interesting owner-operator situation but I'm not really too familiar with it. I've looked at it off and on over the years and really couldn't come up with a strong opinion either way.

  10. Hi KK - i don't get the sense that you have any interest in plugging events etc, but i thought this might interest you and your NY based audience. http://www.nyssa.org/programs/conferencesseminars/ctl/viewdetail/mid/754/itemid/2153/d/20141030.aspx

    Thorndike will be at a NYSSA event just chatting about capital allocation etc. if you want to post this info to spread the word, that would be great! if not, you yourself may want to attend, so also great!

    1. Hi, Thanks for the info/invite. But yes, I don't post or promote events here. It looks very interesting for sure, but if I start to post some events, then it becomes why not this event too. And then pretty soon I'll end up having to post all sorts of events etc...

      Thanks for understanding.

  11. Do you have a compiled list anywhere of all of the "outsider" type companies/ceos that you've come across?

    1. Hi,
      Actually, that would make a great post. But at this point, I don't really have a list of such companies.

    2. Hope you decide to make one.


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