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Readings and musings

Notes on The Outsiders by William Thorndike

5/8/2015

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I hadn't read a business book in a while, so when Ryan Holiday recommended The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William Thorndike, I decided to check it out.


It was a quick, enjoyable read. It reminded me of The Millionaire Next Door, which I read in 2011.


It's interesting how some of the best CEOs (by performance against peers) have a lot in common, and these common behaviors are NOT well known (or common) outside their group. Their contrarianism helped them succeed, and they shied away fame on purpose.

My biggest takeaways:

  • Independent thinking, not relying on advisors
  • Simple, rational calculations of returns instead of driven by hype
  • The power of frugality
  • Patience in waiting for the right opportunity (reminds me of surfing!)


Preface
Better performance than peers
Jack welch not best Ceo
Context matters
Capital allocation and business operations top jobs 
Conventional CEOs rarely beat their peers
What counts is per share value growth not overall
Cash flow matters more than reported earnings
Decentralized organizations keep entrepreneurial energy up and costs down
In acquisitions, patience is a virtue as well as boldness
Value investing
Share buybacks
Independent thinking, not advisors or consultants or Wall Street
Nondescript locations
Frugal
Humble
Devoted to families
Quiet
Not famous or charismatic
Did not write books
Outperformed peers by 20X

Intro
Positive deviants
First time CEOs
New to their industry 
Old fashioned values
Iconoclasts
Low or no dividends
Thinking more like investors than managers
When ur own stock cheap buy it yourself
When expensive use it to buy other companies
Greedy when others fearful
Mastery is different from innovation
Simplicity of focus
Optimize long term value per share
Trying to shrink share bases through repurchases
Growth doesn't go with maximizing share value
Key is cash flow

1 perpetual motion machine for returns: Tom Murphy (capital cities broadcasting)
Opportunistically buying companies
Don't diversify into unrelated businesses
Don't build up fancy hq
No former broadcast experience
Removed limos and perks and did layoffs at acquisitions
Flat organization
Local managers with power
Long periods of inactivity with periodic big acquisitions
Eschew diversification
No investment bankers
No delegating investing or buying decisions
Sourcing deals from direct contact with sellers
Self deprecating style
Pricing discipline
Manager autonomy my

2 Henry singleton and teledyne
No dividends
Decentralized operations
No Wall Street discussions
Math and chess background
Focused on cash flow not reported earnings
Investor relations or guidance poor use of time
No conferences
Board consists of owners
Tender offers

3 turnaround, bill Anders, general dynamics 
Engineering degree
Should only be in business where can be number 1 or 2
Rational
Asset sales

4 value creation, John Malone, tci
Tax minimization focus
Simple rule to buy companies only if price no more than 5X; no projections

5 widow, Katherine graham, Washington post
Dividends tax inefficient because double taxed
Lots of acquisitions and diversification
Brought on Buffett as mentor to board when he was unknown

6 public lbo, bill sturitz, ralston purina
Grassroots experience
Leverage to boost returns
Spin offs

7 optimizing the family firm, dick smith, general cinemas
Diversifying acquisitions 

8 investor as CEO, Buffett
Switch in philosophy from net capital value investing to brand names
Cigar butts to franchises
Decide which businesses best to get rid of
If in chronically leaking boat, devote energy to changing vessels than patching leaks
Investment concentration
Long holding periods
Hire well, manage little
Blank calendar
No computer
Reading 5 newspapers
Detailed annual reports

9 radical rationality 
Introversion
Humility
Patience for right opportunity 
Long term perspective

Epilogue
Outsider's checklist
Allocation process Ceo led
Start by determining hurdle rate
Calculate expected return for all internal and external projects
Calculate return for stock repurchase
Focus on after tax returns
Calculate conservative cash and debt levels and stay within them
Consider decentralized org model
Retain capital in business if confident can maintain return above hurdle rate
If do not have high return projects consider paying dividend but hard to reverse and tax inefficient
Ok to sell business when prices high. Ok to close bad businesses without required return.

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