By the way, there is a lot of talk now again about zero-based budgeting because of the Kraft-Heinz merger. Some view cost-cutters as people who just come in and blow-torch the place, take out short-term profits and destroy the business. Maybe this was done in the 1980's.
But there is a lot more to it than that these days, especially when folks like 3G / Buffett are involved. They want to create value in the long term.
Anyway, this book, How to Double Your Profits in 6 Months or Less is apparently the 'bible' at 3G and is handed out to managers at their companies. Zero-based budgeting is a lot older than this book, though, so the title of this post might be a little misleading.
It's an awful book title, like, How to Lose 50 pounds in Three Days! but it really is a good book. It's a quick read too.
There are things that will make you cringe. I don't agree with all of it. Like not paying bills until you are billed for it twice and things like that.
But most of the other things are really sensible.
For employees, he doesn't advocate just firing everyone left and right and cutting salaries. Fifer actually advocates paying productive employees more and paying less productive employees less (or getting rid of them). He says that most companies pay based on seniority so the old guys are happy and the young, productive guys are unhappy. You should do the opposite; make the young, productive guys happy and the old, unproductive guys unhappy. This will lead to better results.
I've worked in a large, bloated, bureaucratic organization and saw this first hand. Pay was based mostly on seniority and competence had nothing to do with anything. So what happened? The young, capable people left for higher paying jobs elsewhere (at companies that paid for performance), and the unskilled, unmotivated and not-so-competent stayed. And they got pay raises every year. This continued for years until you had this huge, bloated middle of people getting paid a lot of money for doing nothing and an unhappy work force at the bottom who didn't stay long.
The funny thing about these companies is that since they don't like to fire people, and only one person can be CEO, the pyramid just keeps getting bigger and bigger.
I have seen first hand how someone gets old enough to become a head of a division, but all current divisions already have heads. So what do they do? They create another one. And if more people reach a certain age and are eligible for a promotion to division or section head, they will just create another division or section.
And this goes on and on.
I imagine the big food companies like BUD, HNZ and KRFT are (or were) like this too; that's why it's so easy for outsiders to come in and boost margins by 8% in such a short period of time. I bet the rest of the companies (KO etc.) are in the exact same position.
And it will usually take outsiders (I don't mean outsider in the Thorndike (Really Great Book) sense, but outsider in the sense of not being a lifer at the company).
Lifers and long-time employees can't do what 3G does. If you work at a company for a long time, you know a lot of people. You have mentors and mentees. You've done favors and received favors from people in the company. You've encouraged people to stay at the company. Encouraged them to join. Helped them start divisions and new businesses, supported new ideas which might have lead to creation of new sections/divisions etc. You've been to weddings and bar mitzvahs. You just know too many people. So it will basically be impossible for a normal human being to make rational decisions.
Maybe someone can, but I think it's hard.
Anyway, it's a really good read. Again, you won't agree with everything in there (but then again, when was the last time you read a book and agreed with everything in it?), but there are a lot of great ideas. And you will see that what 3G is doing is not so one-dimensional and simple. It's not just firing people for the sake of firing people. It's not about cutting costs for the sake of cutting costs. It's not either/or or a transfer of wealth from the middle class to the top 1% (which is the way the mainstream press likes to present these things).
Other Books I've Read Recently
I do read a lot but most of the time, I don't want to bother with 'reviewing' any book properly. But I do mention books that I really like here. If I had a lot to say about any particular book, they will be their own separate post, of course. I've done that in the past.
But since this is sort of a book post, I thought I'd just mention some books I read recently:
Marissa Mayer and the Fight to Save Yahoo!
This was actually a lot better than I thought. I only read it because of the current situation with Alibaba and Yahoo. I've owned Yahoo for a long time (mostly as an Alibaba stub trade), but I wanted to get more of a sense of what's going on there in the Mayer era.
The book title is a little misleading as this book is almost a history of Yahoo and the internet itself. It gives a really good, broad overview of the internet era.
There are a lot of interesting things about the previous CEO's too which to me were a little eye-opening. Maybe not for some people who follow the industry closely. But it was definitely interesting, with a lot of inside views too. There is some detail on the interaction with Loeb and his involvement etc.
This is also a quick read and I found it definitely worth my time.
Setting the Table: The Transforming Power of Hospitality in Business
This is a book written by the Shake Shack founder Danny Meyer. I am a sucker for books written by people who have done interesting things. Think about it. Most books are written by people who have never done what they write about. That's not necessarily bad. Journalists never do things they write about, but they write great books too.
Danny Meyer is someone who has created something really great, so it's great to hear what he has to say about his experience. I enjoyed it.
Haunted Empire: Apple After Steve Jobs
This is a book that was widely panned. I didn't have any interest in it either until, frankly, Tim Cook mentioned it. That was when I decided I had to read it. If a CEO is going to go out of his way to respond to a book, I figured, there must be something interesting in there. If a book is really totally off and is nonsense, they are usually ignored.
The Amazon reviews, predictably, form a barbell shape. They are either one star or five star. If you love Apple, then you rate it one star. If you don't like Apple it's five stars.
Some of the criticism is valid. A lot of these stories are nothing new (labor practices in China), but there is plenty of other stuff in there that caught my interest.
My view on Apple hasn't really changed. It's a great company with great products, but to me it's still a Steve Jobs company and Apple has been putting out iterations and updates to his creation. I don't really have any faith that Apple will do anything as groundbreaking in any other area to the same degree.
This has nothing to do with my view of current management, which I think is as good as there is. I wonder if even Steve Jobs can keep coming up with world-changing things. At some point, no matter how innovative and earth-shattering, eventually you become the 'establishment'. You become the target.
Apple will continue to innovate and make great products, I'm sure. But what I don't have confidence in is that the next product will have the same sort of magnitude of growth for Apple that the others have had. If you look at how the iPod went to the iPhone, that's a huge leap. The iPhone is a huge product. The next thing has to be even bigger, or just as big just for Apple to stay in place. This is the part I have a question about.
And sure, the iPhone upgrades may keep going for another cycle or two. But at some point, as Clayton Christensen points out in the Innovator's Dilemma, the incremental improvement will exceed the needs of the consumer, at which point the product cycle will end (opening up an opportunity for alternatives).
But again, who the heck knows what will happen with Apple.
Netflixed: The Epic Battle for America's Eyeballs
This is also a great read on the story of Netflix, definitely a game-changing company. Of course, one thing that sticks to me is how Blockbuster passed up an opportunity to buy Netflix early on for $40 million, I think it was. Talk about an error of omission!
This is also a great read because it's not only about Netflix, but about business in general and how businesses can go wrong. This book is almost as much about Blockbuster as it is about Netflix. So it's almost a text book on "how to fail".
Blockbuster's mistakes are obviously being made today by many. So it's good to learn about what went wrong there.
Showing posts with label books. Show all posts
Showing posts with label books. Show all posts
Thursday, March 26, 2015
Friday, October 10, 2014
The Halo Effect
After posting about the Collins book, Good to Great, some people mentioned the book The Halo Effect: . . . and the Eight Other Business Delusions That Deceive Managers by Phil Rosenzweig as a counter to it.
So of course, I got it and read it right away. And it's a really good book. I agree with a lot of what Rosenzweig says and this is one of the reasons why I generally don't read management "how-to" books. If I do read them, I read them quickly and don't think much of them either way because, frankly, I have never really been all that interested in management. I have never wanted to be a manager or CEO or anything like that at all. Mostly, I read it to get corporate histories especially if they include case studies. Ironically, I actually read them precisely for the "stories". How to improve a business or build a great corporation, to me, is secondary and not all that important. It's the stories that I want to read. And it's this "story-telling" that Rosenzweig criticizes. He says that many of these management books (like the Collins books) are not scientific studies but are just a bunch of great stories. That's actually totally fine with me.
In any case, I enjoyed reading Good to Great, and think it was useful.
Amazon/Bezos Book
I also just finished reading The Everything Store: Jeff Bezos and the Age of Amazon. This is a really good read and I think everyone should read it, even people who don't invest in internet companies. The way Amazon is changing the world goes way beyond internet businesses so I think it's an important piece of the puzzle for anyone who wants to understand business and what's going on in the world now.
This is a really well-researched book and one of the better business profile books. There are a lot of books that seem to have been thrown together over a single weekend with sources/information seemingly acquired in a bar nearby a company headquarters. When Apple got hot, a few books came out that were like this; very little new or interesting information and anonymous sources spewing gossip (as if the author hung out in a bar for a few nights and talked to some lower level employees), but no real, substantive information. (The Walter Isaacson book on Steve Jobs was really good, though).
This one is not like that at all.
One thing that is scary is that it seems like Bezos doesn't even want to raise prices at all. Some people expected Amazon to lower prices and put everyone out of business and then later raise prices to make a ton of money. But that seems not to be the case. At one point in Amazon's history, they were actually contemplating raising prices. But Bezos' model for Amazon was Sam Walton. He really dug into his book, Sam Walton: Made in America. Around the time Amazon was thinking about raising prices, Bezos met with Jim Sinegal of Costco and heard that they won't raise prices to make more money. Apparently, after this meeting, he resolved never to raise prices for the sake of making money. I did scratch my head at this part in the book thinking that Costco actually makes money and has a decent return on capital; why won't Amazon raise prices enough to at least make a little bit of money?
Bezos / Good to Great
Anyway, I went off on this tangent for a reason. As I was reading the Bezos book, I was surprised that Bezos was deeply into Jim Collins and even had him come to Amazon to show them how Amazon can become a great company.
Apparently, a light went on at Amazon due to Collins' presentation (which was based on the then yet-to-be-released book, Good to Great). The part that clicked with them was finding out what they were really good at and then developing it and get the flywheel moving.
Back to the book.
So what is the Halo Effect?
The Halo Effect
There is a good summary of the book on Wikipedia: Wiki: Halo Effect.
I agree for the most part with what the book says about these cognitive biases and delusions, but I wouldn't go as far as to say that these biases make Collin's book and many business press articles worthless. Rosenzweig doesn't go that far, but comes pretty close.
Any time someone says they want to investigate why some companies succeed and why others fail, I am going to be interested. The methodology may not be perfect and there may be flaws in the assumptions. But that doesn't really matter so much as just reading about what people did over the years; what worked and what hasn't can be interesting on it's own and you can make your own adjustments about the respective biases. Rosenzweig uses Cisco as an example of how everyone thought it was such a wonderful company during the internet bubble (great customer service) and then the very same reporters talked about how lousy Cisco is (with horrible customer service) after the bubble popped (I think most of us, though, recognized Cisco as a huge beneficiary of the internet bubble in a virtuous circle and had no doubt it would eventually reverse).
If you had access to some of the top CEO's in the country and you were able to have lunch or dinner with them, wouldn't you do it? Of course you would. And of course you would learn something from doing that a lot.
And of course you would be subject to all of the same biases discussed in Rosenzweig's book. You would be talking to people you see as successful, and they will tell you what they have done, but there is no way to tell what the cause and effect was (were employees happy because the company was successful and the stock prices (and therefore their 401-k's and stock options) were up a lot, or did happy employees create the success?
But you would still do it. And you would still ask the same sort of questions. And then you would make adjustments to what you hear (and even those adjustments would reflect your own biases).
I guess what Rosenzweig has a problem with is how Collins simplifies and distills all of the case studies into a simple formula, but I think most readers read these books to get ideas and inspiration more than any sure-fire, fool-proof method of eternal success.
Managements Don't Matter / Nothing is Forever
Rosenzweig also presents a study that shows that CEO's don't really matter as much as we think. This may be true, but taking that to the extreme is not so great either because I don't think anyone would agree that the CEO doesn't matter. I do think there are good CEO's and bad ones. But that is not to say that good CEO's can't have bad results and vice versa. He also points out that it is impossible to build a great company to stay great forever. You can't build something to last. He shows that previous excellent companies, companies built to last and good to great companies have done worse than the S&P 500 index, and the less favorable comps did better. All companies go through a life cycle. I agree with that too.
I personally believe more in CEO's than corporate cultures. I would rather invest in a CEO I truly believe in (Warren Buffett, Jamie Dimon etc.) than a company known to have a strong culture of success (even though Goldman Sachs is one that I believe in strongly).
As an investor, I am highly skeptical of corporate cultures in general, unless it has been proven over multiple generations (like Goldman Sachs). The fact that firms like Starbucks, Uniqlo (Fast Retailing), Dell and others floundered after their founders left (and they had to come back) makes me wonder about the importance of cultures versus CEO's.
Efficient Markets
Anyway, all this talk of CEO's not mattering too much and nothing can be built to last reminds me of the efficient market theory. In the pure form of efficient market theory, the markets are too efficient for anyone to outperform.
That would make books like Intelligent Investor and Securities Analysis meaningless. And all those Superinvestors (of Graham and Doddsville), Money Masters, the New Money Masters and the managers/traders in the various Market Wizards books by Jack Schwager would all be monkeys that just happened to flip a few heads in a row.
I haven't checked, but I tend to think that most of the managers covered in these books have done well over time, even after being featured in them (OK, maybe I said that about Good to Great and Rosenzweig has proven otherwise). Sure, Tiger, Steinhardt and others closed shop after a bad year or two, but they closed out their careers with incredible track records. I think there might have been some blowups in the commodities trading world (Richard Dennis?), but most people in the above books have gone on with great records (although increased size have lowered returns for many of them; the more common lesson in outperforming managers is that size kills performance).
Markets are Efficient Because Mutual Funds Don't Outperform?
One thing people keep pointing out is that markets are efficient because most mutual funds don't outperform. This is something that I've been thinking about on and off for years. Why do some people outperform while others don't?
Most mutual fund companies are asset gatherers. Their primary goal is to increase earnings of the management company. And we all know that increasing asset size makes it harder to outperform the market.
So at the asset management company level, they are incentivized to increase AUM. They are paid a percentage of AUM so this makes sense. If you want to increase earnings, you have to increase AUM. It doesn't matter if it gets harder to manage as they don't get paid on performance.
At the fund manager level, managers don't want to diverge too much from the index. If they stay more or less within a reasonable range of the index, they will be fine and won't get fired. The risk/return is asymmetric in this case if you want to take big risk to outperform (OK to fail conventionally etc.).
So the asset management industry is often not even trying to outperform. They are trying to maximize earnings to the management company.
Missing the Trees for the Forest
Anyway, I brought up this efficient market argument because the "CEO's don't matter" argument sort of reminds me of it. When you look at the data overall, you might find that CEO's actually don't matter, just as if you looked at the performance of mutual fund managers (or research analyst buy/sell recommendations), you would think the market is efficient and fund managers don't matter.
Oftentimes, the big figure can obscure the little facts.
For example, back in 2000 when the stock market was trading at 30x p/e (or whatever it was), people concluded that stocks were not good investments. That's sort of missing the trees for the forest because BRK and many other value stocks were trading at attractive levels.
CALPERs recently decided not to invest in hedge funds. This may be the right choice for them; it seems like they couldn't allocate a meaningful amount to hedge funds and the cost of maintaining such a small percentage of the portfolio just didn't make sense. That's totally reasonable.
On the other hand, I always hear figures about some hedge fund index and how that hasn't done too well. There are a lot of hedge funds out there and most of them are probably no good. But there are really good ones. The problem with hedge funds, usually, is that the good ones are closed. So again, I wouldn't look at the hedge fund index to decide whether hedge funds are good or not. I would just look at funds individually and if there is a good one, invest in that and otherwise don't. A lot of information is lost when you look at the various indices.
Likewise, if a study shows that the CEO doesn't really matter too much, that doesn't mean that much to me. If you look at a big enough group, then bad industries or bad cycles can easily offset good CEO's and the sum of everything might make it look like CEO's don't matter.
Conclusion
Well, I don't know that there is a conclusion to this post. I think the Halo book is a good one and very interesting. The arguments make sense. But on the other hand, there is a bit of an "efficient market" sort of thing going on there too.
I like "stories" and I don't think there is anything particularly wrong with reading them as long as we understand the context and limitations of those stories. I know I will keep reading articles in the business press, business books (not "how-to" books, but books about businesses and biographies of business people).
So of course, I got it and read it right away. And it's a really good book. I agree with a lot of what Rosenzweig says and this is one of the reasons why I generally don't read management "how-to" books. If I do read them, I read them quickly and don't think much of them either way because, frankly, I have never really been all that interested in management. I have never wanted to be a manager or CEO or anything like that at all. Mostly, I read it to get corporate histories especially if they include case studies. Ironically, I actually read them precisely for the "stories". How to improve a business or build a great corporation, to me, is secondary and not all that important. It's the stories that I want to read. And it's this "story-telling" that Rosenzweig criticizes. He says that many of these management books (like the Collins books) are not scientific studies but are just a bunch of great stories. That's actually totally fine with me.
In any case, I enjoyed reading Good to Great, and think it was useful.
Amazon/Bezos Book
I also just finished reading The Everything Store: Jeff Bezos and the Age of Amazon. This is a really good read and I think everyone should read it, even people who don't invest in internet companies. The way Amazon is changing the world goes way beyond internet businesses so I think it's an important piece of the puzzle for anyone who wants to understand business and what's going on in the world now.
This is a really well-researched book and one of the better business profile books. There are a lot of books that seem to have been thrown together over a single weekend with sources/information seemingly acquired in a bar nearby a company headquarters. When Apple got hot, a few books came out that were like this; very little new or interesting information and anonymous sources spewing gossip (as if the author hung out in a bar for a few nights and talked to some lower level employees), but no real, substantive information. (The Walter Isaacson book on Steve Jobs was really good, though).
This one is not like that at all.
One thing that is scary is that it seems like Bezos doesn't even want to raise prices at all. Some people expected Amazon to lower prices and put everyone out of business and then later raise prices to make a ton of money. But that seems not to be the case. At one point in Amazon's history, they were actually contemplating raising prices. But Bezos' model for Amazon was Sam Walton. He really dug into his book, Sam Walton: Made in America. Around the time Amazon was thinking about raising prices, Bezos met with Jim Sinegal of Costco and heard that they won't raise prices to make more money. Apparently, after this meeting, he resolved never to raise prices for the sake of making money. I did scratch my head at this part in the book thinking that Costco actually makes money and has a decent return on capital; why won't Amazon raise prices enough to at least make a little bit of money?
Bezos / Good to Great
Anyway, I went off on this tangent for a reason. As I was reading the Bezos book, I was surprised that Bezos was deeply into Jim Collins and even had him come to Amazon to show them how Amazon can become a great company.
Apparently, a light went on at Amazon due to Collins' presentation (which was based on the then yet-to-be-released book, Good to Great). The part that clicked with them was finding out what they were really good at and then developing it and get the flywheel moving.
Back to the book.
So what is the Halo Effect?
The Halo Effect
There is a good summary of the book on Wikipedia: Wiki: Halo Effect.
There are other delusions (nine in total) that are summarized on the Wiki page.
- The Halo Effect of the book's title refers to the cognitive bias in which the perception of one quality is contaminated by a more readily available quality (for example good-looking people being rated as more intelligent).[6] In the context of business, observers think they are making judgements of a company's customer-focus, quality of leadership or other virtues, but their judgement is contaminated by indicators of company performance such as share price or profitability. Correlations of, for example, customer-focus with business success then become meaningless, because success was the basis for the measure of customer focus.
I agree for the most part with what the book says about these cognitive biases and delusions, but I wouldn't go as far as to say that these biases make Collin's book and many business press articles worthless. Rosenzweig doesn't go that far, but comes pretty close.
Any time someone says they want to investigate why some companies succeed and why others fail, I am going to be interested. The methodology may not be perfect and there may be flaws in the assumptions. But that doesn't really matter so much as just reading about what people did over the years; what worked and what hasn't can be interesting on it's own and you can make your own adjustments about the respective biases. Rosenzweig uses Cisco as an example of how everyone thought it was such a wonderful company during the internet bubble (great customer service) and then the very same reporters talked about how lousy Cisco is (with horrible customer service) after the bubble popped (I think most of us, though, recognized Cisco as a huge beneficiary of the internet bubble in a virtuous circle and had no doubt it would eventually reverse).
If you had access to some of the top CEO's in the country and you were able to have lunch or dinner with them, wouldn't you do it? Of course you would. And of course you would learn something from doing that a lot.
And of course you would be subject to all of the same biases discussed in Rosenzweig's book. You would be talking to people you see as successful, and they will tell you what they have done, but there is no way to tell what the cause and effect was (were employees happy because the company was successful and the stock prices (and therefore their 401-k's and stock options) were up a lot, or did happy employees create the success?
But you would still do it. And you would still ask the same sort of questions. And then you would make adjustments to what you hear (and even those adjustments would reflect your own biases).
I guess what Rosenzweig has a problem with is how Collins simplifies and distills all of the case studies into a simple formula, but I think most readers read these books to get ideas and inspiration more than any sure-fire, fool-proof method of eternal success.
Managements Don't Matter / Nothing is Forever
Rosenzweig also presents a study that shows that CEO's don't really matter as much as we think. This may be true, but taking that to the extreme is not so great either because I don't think anyone would agree that the CEO doesn't matter. I do think there are good CEO's and bad ones. But that is not to say that good CEO's can't have bad results and vice versa. He also points out that it is impossible to build a great company to stay great forever. You can't build something to last. He shows that previous excellent companies, companies built to last and good to great companies have done worse than the S&P 500 index, and the less favorable comps did better. All companies go through a life cycle. I agree with that too.
I personally believe more in CEO's than corporate cultures. I would rather invest in a CEO I truly believe in (Warren Buffett, Jamie Dimon etc.) than a company known to have a strong culture of success (even though Goldman Sachs is one that I believe in strongly).
As an investor, I am highly skeptical of corporate cultures in general, unless it has been proven over multiple generations (like Goldman Sachs). The fact that firms like Starbucks, Uniqlo (Fast Retailing), Dell and others floundered after their founders left (and they had to come back) makes me wonder about the importance of cultures versus CEO's.
Efficient Markets
Anyway, all this talk of CEO's not mattering too much and nothing can be built to last reminds me of the efficient market theory. In the pure form of efficient market theory, the markets are too efficient for anyone to outperform.
That would make books like Intelligent Investor and Securities Analysis meaningless. And all those Superinvestors (of Graham and Doddsville), Money Masters, the New Money Masters and the managers/traders in the various Market Wizards books by Jack Schwager would all be monkeys that just happened to flip a few heads in a row.
I haven't checked, but I tend to think that most of the managers covered in these books have done well over time, even after being featured in them (OK, maybe I said that about Good to Great and Rosenzweig has proven otherwise). Sure, Tiger, Steinhardt and others closed shop after a bad year or two, but they closed out their careers with incredible track records. I think there might have been some blowups in the commodities trading world (Richard Dennis?), but most people in the above books have gone on with great records (although increased size have lowered returns for many of them; the more common lesson in outperforming managers is that size kills performance).
Markets are Efficient Because Mutual Funds Don't Outperform?
One thing people keep pointing out is that markets are efficient because most mutual funds don't outperform. This is something that I've been thinking about on and off for years. Why do some people outperform while others don't?
Most mutual fund companies are asset gatherers. Their primary goal is to increase earnings of the management company. And we all know that increasing asset size makes it harder to outperform the market.
So at the asset management company level, they are incentivized to increase AUM. They are paid a percentage of AUM so this makes sense. If you want to increase earnings, you have to increase AUM. It doesn't matter if it gets harder to manage as they don't get paid on performance.
At the fund manager level, managers don't want to diverge too much from the index. If they stay more or less within a reasonable range of the index, they will be fine and won't get fired. The risk/return is asymmetric in this case if you want to take big risk to outperform (OK to fail conventionally etc.).
So the asset management industry is often not even trying to outperform. They are trying to maximize earnings to the management company.
Missing the Trees for the Forest
Anyway, I brought up this efficient market argument because the "CEO's don't matter" argument sort of reminds me of it. When you look at the data overall, you might find that CEO's actually don't matter, just as if you looked at the performance of mutual fund managers (or research analyst buy/sell recommendations), you would think the market is efficient and fund managers don't matter.
Oftentimes, the big figure can obscure the little facts.
For example, back in 2000 when the stock market was trading at 30x p/e (or whatever it was), people concluded that stocks were not good investments. That's sort of missing the trees for the forest because BRK and many other value stocks were trading at attractive levels.
CALPERs recently decided not to invest in hedge funds. This may be the right choice for them; it seems like they couldn't allocate a meaningful amount to hedge funds and the cost of maintaining such a small percentage of the portfolio just didn't make sense. That's totally reasonable.
On the other hand, I always hear figures about some hedge fund index and how that hasn't done too well. There are a lot of hedge funds out there and most of them are probably no good. But there are really good ones. The problem with hedge funds, usually, is that the good ones are closed. So again, I wouldn't look at the hedge fund index to decide whether hedge funds are good or not. I would just look at funds individually and if there is a good one, invest in that and otherwise don't. A lot of information is lost when you look at the various indices.
Likewise, if a study shows that the CEO doesn't really matter too much, that doesn't mean that much to me. If you look at a big enough group, then bad industries or bad cycles can easily offset good CEO's and the sum of everything might make it look like CEO's don't matter.
Conclusion
Well, I don't know that there is a conclusion to this post. I think the Halo book is a good one and very interesting. The arguments make sense. But on the other hand, there is a bit of an "efficient market" sort of thing going on there too.
I like "stories" and I don't think there is anything particularly wrong with reading them as long as we understand the context and limitations of those stories. I know I will keep reading articles in the business press, business books (not "how-to" books, but books about businesses and biographies of business people).
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.
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.
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