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The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success Hardcover – October 23, 2012
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One of the Most Important Business Books in America.” Forbes
This book completely changed my business life... If you want to build a company that generates incredible returns, this book should be on your required reading list.” Dave Morin, Founder & Partner, Slow Ventures as seen on Medium
easily the best investment or business book published in the past few years ” Brendan Matthews, Motley Fool
an important insider’s perspective, an unapologetic glimpse into the hard-core investor view of what success looks like.” Forbes.com
"It focuses on the less sexy but equally important job of a CEOcapital allocation." Mebane Faber, CIO and portfolio manager at Cambria Investment Management (Business Insider’s Wall Street Reading List for 2014)
Thorndike wants to give any manager or business owner the confidence to occasionally do things differently from your peers to make the most of the cards they’re dealt and to delight their shareholders.” Financial Times
[Thorndike's] findings turn received wisdom about CEO success on its head. It’s not revenue and profit growth, but the increase in a company’s per share value that offers the ultimate barometer of a CEO’s greatness Thorndike may have discovered an alchemic formula for CEO success. But will existing CEOs listen?” economia
Thorndike has done extensive research on each of the people features, and their success story makes for an inspiring and most definitely, compelling read.” The Hindu (India)
An extremely instructive read well worth the effort.” Business Traveller magazine
This is an eminently readable volume with plenty of lessons.” The Irish Times
ADVANCE PRAISE for The Outsiders:
Jim Collins, author, Good to Great; coauthor, Built to Last and Great by Choice
Will Thorndike dissects an eclectic and fascinating group of business leaders who created exceptional long-term value. He takes the unique angle of examining great CEOs as chief allocators of capital, so disciplined in their empirical rationality as to be nonconformists in the very best sense. Thorndike’s take is fresh, smart, and provocativeand well worth learning.”
Michael J. Mauboussin, Chief Investment Strategist, Legg Mason Capital Management; author, The Success Equation
Will Thorndike provides management principles that are as rock solid as they are rare and shares the engaging stories of eight CEOs who lived by them. The ideas in this book provide both executives and investors with the North Star of value. Follow it and prosper.”
Mason Hawkins, Chairman and CEO, Southeastern Asset Management
The Outsiders is a must-read for leadersand aspiring leadersstriving to become exceptional CEOs, and for investors interested in partnering with exceptional stewards of corporate capital.”
Walter Kiechel, author, The Lords of Strategy
If creating wealth for shareholders is the ultimate test of a CEO, meet the champions. The names of these outsiders’ may come as a surprise, but you will learn valuable strategic lessons from their iconoclastic ways.”
Thomas A. Russo, Partner, Gardner Russo & Gardner
The Outsiders celebrates leaders who kept their firms focused, rewarded their management despite long periods of inactivity, andby keeping their companies out of troublefound themselves free to pounce when compelling opportunities arose. A highly effective playbook for excellence.”
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Capital allocation uber alles
"The Outsiders" rests on a premise, that the increase in a public company's per share value is the best metric for measuring the success of a given CEO, which lends itself to the book's major thesis: that superior capital allocation is what sets apart the best CEOs from the rest, and that most modern CEOs seem to be only partially aware, if at all, of its critical performance to their companies long-term business success.
Notice! This book is examining the efforts and measurements of CEOs of public companies, not all businesses (public and private), so as a result in comes up a bit short in the "universal application" department. Yes, capital allocation is still critical even in a private business, but you can not measure a private business's per share value (because there isn't a marketable security price to reference) and the CEO of a private company is missing one of the most powerful capital allocation tools available to public CEOs, the share buyback (because there is no free float for them to get their hands on at periodically irrational prices).
The CEO capital allocation toolkit
Thorndike describes five capital allocation choices CEOs have:
--invest in existing operations
--acquire other businesses
--pay down debt
Along with this, they have three means of generating capital:
--internal/operational cash flow
With this framework, Thorndike proceeds to review the business decisions of 8 different "outsider" CEOs, so labeled because they tended to use these tools in a contrary fashion to the mainstream wisdom of their time and to much improved effect as per comparison to their benchmarks. Some of the CEOs are well known and oft mentioned and studied (Warren Buffett, John Malone, Kay Graham, Tom Murphy) and a few are known to the value cognoscenti but may have managed to escape notice of the wider public, academic or otherwise (Henry Singleton, Bill Anders, Bill Stirlitz and Dick Smith).
The author tries to tie together the various common threads, such as how,
"All were first-time CEOs, most with very little prior management experience"
and many of which (such as Singleton, Buffett and Graham) were large or majority equity holders in their companies, making them part of the vaunted owner-operator club with its resulting beneficial incentives.
Thorndike also tries to use the hedgehog vs. fox metaphor, claiming,
"They had familiarity with other companies and industries and disciplines, and this ranginess translated into new perspectives, which in turn helped them to develop new approaches that eventually translated into exceptional results"
Interestingly, the share buyback stands out as a particularly effective capital allocation tool for all and the author claims that during the difficult inflationary conditions and market depression of the 1974-1982 period,
"every single one [emphasis in the original] was engaged in either a significant share repurchase program or a series of large acquisitions"
In broad strokes, Thorndike's efforts to paint these CEOs with a common brush works, but there are numerous times where his attempt to establish commonality in genius comes across as forced and unworkable. Often, one of these CEOs will operate in a way inconsistent with Thorndike's major thesis and yet he'll end up praising the CEO anyway. In poker, we'd call this the "won, didn't it?" fallacy-- judging a process by the specific, short-term result accomplished rather than examining the long-term result of multiple iterations of the process over time.
This is actually one of the things that rubbed me rather raw as I read the book. In every chapter, Thorndike manages to strike a rather breathless, hagiographic tone where these CEOs can do no wrong and everything they do is "great", "fantastic," etc. Unfortunately, this kind of hyperbolic language gets used over and over without any variety to the point it's quite noticeable how lacking in detail and critical analysis Thorndike's approach is at points.
Eventually, I reached a point where I almost wanted to set the book down, take a deep breath and say, "Okay... I get it, this guy is absolutely amazing... can we move on now?"
The editing seemed a bit sloppy, too. Thorndike is a graduate of Stanford and Harvard and runs his own financial advisory. He's obviously an accomplished, intellectual person. Yet his prose often reads like an immature blog post. It's too familiar and casual for the subject matter and the credentials of the author. I'm surprised they left those parts in during the editing process. I think it makes Thorndike's thesis harder to take seriously when, in all likelihood, it'd probably be quite convincing if you happened to chat with the author on an airplane.
From vice to virtue
Something I liked about "The Outsiders" was the fact that there were 8 profiles, rather than one. It was reinforcing to see that the same principles and attitudes toward business and management were carried out by many different individuals who didn't all know each other (though some did) and ALL had huge outperformance compared to their benchmark.
And I think for someone who is just jumping into the investing, management and agency problem literature, "The Outsiders" is a good place to start to get a broad outline of the major thesis which is that companies that are run by owner-operators, or by people who think like them, where the top management focuses on intelligently allocating capital to its highest use (which, oftentimes when the company's stock remains stubbornly low compared to its estimated intrinsic value, makes buybacks in the public market the most intelligent option versus low margin growth) consistently outperform their peers and their benchmarks on a financial basis.
I think if this was one of the first books I had read on this theme, I would've found it quite illuminating and exciting, a real eye-opener experience. As it were, I read this book after reading a long train of other, often times significantly more comprehensive and detailed literature, so my personal experience was rather flat-- I came away thinking I hadn't learned much.
More to the story
There's more to this story in two senses.
In the first sense, I actually highlighted many little comments or ideas throughout the book that are either helpful reminders or concepts I hadn't fully considered myself yet, pertaining to best operational and management practices for businesses and the people who invest in them. In other words, the book is a little deeper than I bothered to share here. As a collection of anecdotes and principles for mastering the concept of capital allocation, it's a good resource.
In the second sense, I think there's a lot more to the success of the businessmen and their companies profiled (along with many others) than just good capital allocation. The text alludes to this with quotes from various figures about how they operated their businesses and managed people aside from the specific challenges of capital allocation. But it never goes into it because that isn't in focus.
And as a business person myself, I know from my own reading, thinking and personal experience that capital allocation IS a critical factor in successfully managing and growing a business over the long-term -- after all, if you can't find good places to put your cash, you'll inevitably end up wasting a lot of it -- but you won't have capital to allocate if you aren't operating your business and managing your relationships with employees and customers well, in addition. The book just doesn't do much in the way of explaining how it was that Ralston Purina, or General Dynamics or Teledyne or what have you, had so much capital to allocate in the first place.
Thorndike's pre-conceived hypothesis is this: 'outsider' CEOs are independent thinkers who buy back shares, focus on cash flow, and run lean organizations. Great. Except, there are about 500 companies beyond the 8 featured here that do all three of those things... without 'outsider' type results. And... when you really get into the meat of Thorndike's examples, you realize that his 'outsider' CEOs can issue shares too! As long as they do it smartly! And they can make giant acquisitions and expand their organizations massively, as long as it is smart!
There's no way companies like General Dynamics or the Washington Post are run by 'outsiders', even by Thorndike's own definition. In the case of General Dynamics for instance, each of THREE CEOs profiled came from military backgrounds, each was groomed for the post, and then they all did completely different things! One made a lot of acquisitions, another did a bunch of divestitures; one wanted to grow laterally by acquiring Gulfstream (to mitigate the ups and downs of the defense business?! -- as if that's a good, 'outsider' reason?), the other wanted to shrink and be very focused on doing a few things well; one issued stock, the other bought it back... so, is the reader to assume that all of these behaviors are characteristic of "outsider" CEOs? Wait... let me get this straight... an outsider CEO can do acquisitions, not do acquisitions, buy back stock, issue stock, have a conventional background, or have an unconventional background, lead from ahead, or lead from behind... So basically an outsider CEO can do anything, and be anything... as long as in 20 years, when we look back at the stock price, it has compounded at a rate that is way better than the market and peers.
Instead of writing a whole book with a bunch of weak 'theory' behind it, couldn't we just have said -- outsider CEOs are the smart ones that make good decisions about shareholder value?
What use is the book then? All of these fluffy management books follow the same process. Screen the universe of stocks over the last 20-30 years, find a handful of extraordinary examples (with perfect 20/20 hindsight), and look for correlations between the examples to 'explain' the success. This is exactly the process of "Good to Great" by Jim Collins, which has since been de-bunked by various academic studies (not only that -- many of the "great" companies Collins highlighted in that book ended up being mediocre over the next 20 years!)
The KEY is that this book does nothing to help an investment analyst identify FUTURE outsider CEOs and/or companies. That's because there are too many exceptions to the rules. There are tons of companies who have bought back stock, with leverage, to disastrous results, because the underlying core business is shrinking (see value traps galore like Best Buy or Bed Bath and Beyond). There are tons of companies who have made large, game-changing acquisitions, that then changed the game for the worse rather than the better. There's tons of companies that have run their business in a totally decentralized way only to create various fiefdoms fighting against each other. So... for every Kay Graham or John Malone or any of the three CEOs of General Dynamics... there are 100 managers who have done the exact same things but haven't had nearly the same result. So are we talking about correlation here or causation?
It would have been a far more interesting book if Thorndike put himself out there and tried to identify 'outsider' CEOs that didn't yet have a 20-year track record of perfection. And then we could see in real-time if those CEOs actually turned into superstars decades later, by doing the things that Thorndike claims only outsider CEOs do. But of course he didn't do that, because by the skimpy theory espoused in the book, it would be basically impossible.
In fact, there's no guarantee that even the outsider companies ALREADY FEATURED in the book will remain any good! For instance, the Washington Post's returns for the last 10 years have been mediocre under Don Graham. The education business has been a disaster, the newspaper was sold for pittance, etc. Wouldn't a true outsider CEO (or outsider company culture) have seen the disruptive threat of the Internet coming decades ago, and sold Washington Post at the peak... rather than to Bezos for pittance?
Overall, I think that The Outsiders is HIGHLY overrated, just like "Good to Great". It confuses correlation with causation, and ends up just reading like a compilation of magazine puff-pieces, profiling CEOs whose stocks have done well looking backwards. But of course readers love to read this kind of stuff because it makes them feel nice and warm inside! Good luck identifying future 'outsiders' with these rules that are rules except when they aren't.