The Outsiders
William N. Thorndike Jr.  

Summary

This book looks at the careers of 8 great CEOs throughout the 1900s who created more value for their shareholders than any other CEO. Businesses ultimately come down to the people who run them and these ones were the best over decades.

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Notes

CEOs are capital allocators and investors

Cash flow not earnings determines value

Independent thinking is essential to long term success

All had offices away from epicentres. Focus on small hubs

All had values like frugality, humility, independence and combo of conservatism/boldness

Key to longer term value creation is optimize cash flow, not earnings

‘The goal is not to have the largest train, but to arrive at the station with the least fuel’

Decentralization is the cornerstone. Let managers think for themselves

Look for talented younger foxes with fresh perspectives

Henry singleton and teledyne

• Share repurchases in large amounts when the stock is too low

Cash return on capital is the key metric

At their core, rational, pragmatic, agnostic and clear eyed

Most CEOs grade themselves on size/growth, but the important is shareholder returns

Malone and TCI (John malone)

• Ignored EPS and used pretax cash flow to grow and acquire subscribers
• He invented the term EBITDA
• Never paid significant taxes
• Bought and sold companies through stock instead of cash to avoid cap gains

‘Establishing and maintaining an unconventional approach requires frequently appearing imprudent in the eyes of conventional wisdom.’ - David Swanson

Stintz used cash for share repurchases or acquisitions

Smith (CEO of Cinemas) used cash earnings (net earnings + depreciation), not net income when evaluating a business

Buffet’s 3 approaches: cheap capital generation, capital allocation and management of operations

Portfolio mgmt: how many stocks an investor owns and how long he owns them

• High degree of concentration and extremely long holding periods

Always do the math, the denominator matters

Feisty independence/charisma is overrated

Crocodile-like temperament that mixes patience with occasional bold action

Long term perspective

Didn’t like dividends, disciplined and sometimes large transactions, used leverage selectively, bought back stock, minimized taxes, ran decentralized organizations and focused on cash flow over reported net income

Outsider checklist

• Allocation process should be CEO led
• Start by determining the hurdle rate - minimum acceptable return on investment

• Should be determined in reference to other opportunities and be in mid teens or higher

• Calculate returns for all internal and external investment alternatives and rank them by return/risk. Use conservative assumptions

• Projects with higher risk (acquisitions) should require higher returns

• Calculate return for stock repurchases. Require the acquisitions, returns meaningfully exceed this benchmark
• Focus on after tax returns and run transactions by tax counsel
• Determine acceptable, conservative cash and debt levels
• Consider deceentralized organization model
• Retain capital in the business only if you have confidence you can generate returns over time that are above the hurdle rate
• Consider a dividend but be careful (tax inefficient) if you don’t have high ROI projects
• When prices are high, consider selling a business or stock

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