TIP108: THE OUTSIDERS

8 CEOS WITH HUGE RETURNS

15 October 2016

When investors and leaders think about the best CEO’s in the world, many might name people like Jack Welch or Tim Cook. Although these individuals have had amazing returns and huge impacts, there are other CEO’s that aren’t as famous, but with huge returns. In this episode, Preston and Stig talk about the amazing returns of Tom Murphy, George Kozmetzky, Bill Anders, John Malone, Katherine Graham, Bill Stiritz, and Dick Smith. These individuals are the CEO’s highlighted in William Thorndike’s amazing book, Outsiders. The book came highly recommended by Warren Buffett in his annual shareholder letters.

If you would like to read a more detailed overview of William’s book, please checkout our free executive summary of The Outsiders.

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IN THIS EPISODE, YOU’LL LEARN:

  • Why you want the CEO to think more like a capital allocator than a traditional CEO.
  • How the best capital allocators create arbitrage on their own stocks.
  • Use to use debt intelligently when growing your company.
  • How and why the most profitable companies does not compete on price.

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TRANSCRIPT

Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Preston Pysh  1:04  

Hey, how’s everybody doing out there? This is Preston Pysh, and I’m your host for The Investor’s Podcast. And as usual, I’m accompanied by my co-host Stig Brodersen out in Seoul, South Korea. 

Today, we’ve got a book for you, and this one was recommended by Warren Buffett back in his 2012 shareholder letters. This was number one on his recommended reading list for the 2012 meeting. And the name of the book is, “The Outsiders”. This was written by William Thorndike, Jr. The subtitle of this book is, “Eight Unconventional CEOs and Their Radically Rational Blueprint for Success”. So this was a really, really fun read, especially if you’re a value investor, I think you’d thoroughly enjoy this book.

Stig Brodersen  1:45  

Yeah, I think it’s interesting. We talked so much about capital allocation, and we talked so much about leadership. And this book was just perfect in terms of merging those two concepts. So, I’m really happy about that. And I just want to give a quick shout out to Rich Shane who actually recommended this book. Preston and I met Rich here at the Berkshire meeting this year. So, that was really awesome. So, thank you so much for recommending that book to us.

Preston Pysh  2:10  

The book starts off with a really interesting opening, especially considering the last book that we read was all about Jack Welch. And the author starts off by saying, so everybody knows Jack Welch and how great of a leader he was and how awesome he led General Electric (GE) and the returns were phenomenal. And he uses Jack Welch mainly because he’s so well known. And he’s this kind of authority in business leadership and great returns. And he says, he’s done really well. But the thing that a lot of people don’t realize is that there’s other people out there that are performing at an even better level than  Jack Welch. And the returns for the time that they led these organizations will far exceed anything that Jack Welch had while he was managing General Electric. 

He starts off using Jack Welch as the baseline, as being a great leader, and then he says, “hey, check out these other eight guys, and how much more superior they were than Jack Welch”. So I kind of liked that spin. It was an interesting start to the book. And he jumps right into it, right out of the gate. The first chapter is called, “A Perpetual Motion Machine for Returns”, and this profiles a gentleman called Tom Murphy. And so Tom was the CEO of the company for 29 years that he was in the job. And that’s something else that’s a common theme throughout the book is every one of these people that he’s profiling in the book, it wasn’t like they were in the job for five years, and they had like, amazing returns. Most of these people were in the job for at least 25 years, even like a lot more than that. So there was a track record. There was a long period of performance where they were getting, I think, like some of the smallest returns were like 18% annually for some of these folks. When some of them were in excess of 20%. It just talks about how he took CBS (CBS Corporation) and all this media company and how he was able to grow it

Stig Brodersen  4:00  

It’s interesting how he actually did his comparison because one thing was that he compared it to the S&P 500. So that’s okay. And like if the stock market has been good, and they’re looking at their stock returns, clearly you should see that in comparison. But he was also looking at the industry. So it was not enough that they were outperforming S&P 500. If he was a media company, he would say, well how did the other media companies do within that quarter, 29 years. 

And I think that was really neat comparison, because what you also saw was that the industries that were typically leaning in, they were actually typical, also doing better than the stock market. So that is not really my way of saying you shouldn’t appreciate what they’re doing. But I think it’s really important for comparison, that sometimes it’s just easier if you can use that word to get better returns than the other time period. The author had a tremendous respect in terms of saying that these guys have done good, but we need to have the right comparison.

Preston Pysh  4:58  

He always used it as if these guys are swimming with the current in order to get their returns. And a lot of the times they were not. They’re actually swimming into the current and they were still able to get just tremendous returns.

Stig Brodersen  5:10  

And I think it’s interesting what you said before, Preston, in terms of how long that they were CEOs of these companies. It was clear that all of them are thinking like owners and not employees. Let me give you an example. He’s talking about how Tom Murphy stopped the practice of the management driving around limousines. And that just shows that well, first of all, I think it shows that he was thinking like an owner. That’s one thing. But another thing was that he was passionate about the business. He was not passionate about the perks. The fall of being a manager. The whole title didn’t seem to influence Tom Murphy’s decisions at all, that was really not interesting. 

And another thing that was interesting, not only about Tom Murphy, but also I think seven of the eight guys was that he actually knew very little about the industry that he was working in. I mean, you would think that someone like Tom Murphy, that was like one of the big personalities in media. He would know something about media, but he did not. He was the top guy in terms of capital allocation. And then he hired someone else. I can’t remember his name, but he was actually to manage the day-to-day operations. And he had no clue either about media. They were just very, very business savvy. And I think that was really interesting.

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