The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success

Rated this 5-star book for the following reasons: 1. Book addresses a key question I had: "Given the exorbitant cost of acquiring an MBA, are they a pre-requisite to becoming an excellent CEO?". Mr. Thorndike provides detailed case studies that answer "NO" to the question above. More importantly, Thorndike provides the learning tools for readers to emulate the examples. 2. Value investors know Buffett's recommended authors include Graham & Dodd (intrinsic value), Fisher (business economics), Munger (excellent companies at fair prices). However, none of the books above address what Buffett looks for when analyzing company's management. Thorndike received the glowing endorsement when Warren mentioned this book in his 2012 Berkshire Hathaway shareholder letter where he stated: "The Outsiders, by William Thorndike, Jr., is an outstanding book about CEOs who excelled at capital allocation. It has an insightful chapter on our director, Tom Murphy, overall the best business manager I've ever met." 3. Addresses what each superstar CEO made different, that yielded spectacular results. Most suggestions could be applied by small-business owners, as the purpose of the book is to slowly change your mindset and approach towards those applied by Tom Murphy, Harry Singleton and others. 4. Other books may be a collection of BRK annual reports, great Buffett wisdom. However, Thorndike starts each chapter with Buffett quotes praising the CEO addressed in each book. Suspect Buffett interviews were performed for this book, either in person or by reading previous interviews. Great time-saving, and worth studying each case. 5. Challenges many management dogmas taught by MBA and Wall Street. For example: idea that diversification is the best approach; cash-flow analysis superior indicator than many popular financial ratios; autonomy and performance monitoring combined yield superior results than constant memos and micromanagement.

If you never picked up a book and only got information through financial media outlets you would think the best CEO’s ever were Jack Welch, Donald Trump, Mark Cuban, and a few others that love media attention. I’ve always been obsessed with reading business biographies, especially on those CEO’s that are rarely interviewed on CNBC. Often times these less visible CEO’s have track records far greater than their counterparts. I want to learn how they grew their companies and built shareholder value. The Outsiders is a great book that looks at eight CEO’s who produced above average returns for shareholders over the long term. In most cases these CEO’s were not attention junkies and were not only great capital allocators but also time allocators. Over 29 years Tom Murphy of Capital Cities produced a 19.9% compounded annual return. Over 27 years Henry Singleton of Teledyne produced a 20.4% compounded annual return. Over 17 years Nick Chabraja of General Dynamics produced a 23.3% compounded annual return. Over 46 years (to 2011) Warren Buffett of Berkshire Hathaway produced 20.7% compounded annual returns for shareholders. These CEO’s as well as four others in the book were not your cookie cutter capital allocators and did not fit the mold of most business books you read today. Every one of the CEO’s was a first time CEO (no past history of success) and more than half had very little industry experience before taking over as CEO. I found these two things very interesting especially has it relates to microcap investing. So often I’m trying to find great management in microcap, which can be difficult if there is no prior resume. In all instances the Outsider CEO’s led decentralized organizations empowering others to make decisions and they were great capital allocators. Outsider CEO’s ran high cash flowing businesses, which allowed them to take on debt (few ever issued equity) to make the strategic acquisition or to buy back stock when it was historically cheap. All but one of the eight companies bought back 30%+ of outstanding shares over a period of time. Some took on debt to buy back shares at depressed levels. For those that did use equity to make acquisitions they always knew when to do it (when the stock was expensive). There are many more takeaways from the book, but you’ll just have to read it. I found the book very easy to read and in many cases reinforced management principles I’ve always felt were important. You will enjoy The Outsiders.

In my opinion, this is a book on Applied Corporate Finance. As those who ever took a Corporate Finance class know, the basic premise on which that discipline is built is Maximization of Shareholder Value. Well, this book is about exactly that. According to Corporate Finance theory, the maximization of shareholder value is achieved by following three principles -the Investment Principle, the Financing Principle, and the Dividends Principle. The Investment and Dividends Principles are what in the book the author calls Uses of Cash (Capital Allocation). The Financing Principle has more to do with what the author refers to as the Sources of Cash (asset divestitures, issues of equity/debt, etc). Questions related to operations efficiency are only covered superficially, but that's fine. From the get go, the author is honest about the focus and scope of the book. The book is unique in the sense that there are not many books on Corporate Finance case studies. This book is exactly that. Each of the CEOs/Companies profiled here is a separate case, dealt with in separate chapters. I like that. It is also a well-written, well-researched book. It is an entertaining read and, on top of everything, it has the endorsement of Warren Buffett. You cannot ask for much more than that. Oh wait! Yeah, the presentation is pretty nice. I like good looking, elegant hardcover books. Now, why am I holding back one star? See below: 1- The book is kind of dogmatic about certain rules deemed as universal (e.g., never pay dividends, never issue new shares, etc). If things were so simple, then Corporate Finance would not exist as a discipline. 2- The author kind of pounds on Jack Welch as someone who, even though successful, has not accomplished the same level of results that the CEOs included in his book did. Well, guess what, you cannot compare apples to oranges. Jack Welch was the CEO of GE. These other CEOs took over when their companies were very small, and completely unknown. I'm not saying the they do not deserve credit for what they accomplished. All I'm saying is that you cannot expect GE's stock price to grow at the same pace small cap stocks grow. Scale is important. So, when adding Jack Welch into the mix, the relevant question is no longer who grew the stock price the most, but who generated the most profits (in absolute dollar value) for their shareholders. Again, scale is important. It's not the same to be the president of the US than the president of Uruguay. I guess the ultimate goal of the book is not so much to teach Corporate Finance lessons but to help value investors select good CEO's. "Good" in this sense means CEO's who are focused on maximizing shareholder value in the long term. In other words, CEO's whose interests are in line with those of the owners of the company. Now, this might be an outdated approach since good Corporate Governance practices are nowadays widespread, which ensures that the compensation of executives is tied to business results. Not to say that there are still not principal-agent issues around, but it is definitely not as pervasive of a problem as it was decades ago. Hope this helps. Cheers!

Seth Klarman once said that Ben Graham’s works were “the north star” of investing, and I would argue that Thorndike’s “The Outsiders” is the north star of managerial capital allocation. The eight CEO’s profiled in this book all resisted the institutional imperative and subsequently compounded capital at 20%+ returns over ~20+ year time periods. While share repurchase programs are often taken for granted today, it wasn’t that long ago that they were viewed as a novel form of financial voodoo, practiced by a select few, as profiled in this excellent book. Unfortunately today’s repurchase programs bear little relevance to those of yesteryear. Today, repurchase programs are more commonly used as a way to offset dilution from options, and lack a point of view on valuation, more commonly destroying than creating value. The best CEO’s use repurchases and equity issuances opportunistically, as an additional avenue of shareholder value creation. Perhaps Steve Wynn said it best, upon being questioned on the timing of a repurchase program and subsequent equity issuance. “When we did the equity -- It is a job and you can take this as a final statement on the subject going forward. It is the job of the board of directors and especially the CEO to take advantage of market and that market movement is extreme. Now, when a company increases its value by 50% in 60 days, that's an unnatural movement to value and the market also goes the other way sometimes. These unnatural movements -- no company gets to be worth twice as much in 60 days as it was before to any intelligent person. When that happens, we take advantage of it. If everybody is hungry for shares, we let them have it. And if the shares goes down, we buy them. That policy is a statement of policy for this company. Period.” The Outsiders offers a playbook of long-term value creation. The book should be mandatory reading for all corporate finance courses taught in business school, although smarter minds than I have had said similar things about Ben Graham’s works, and he still remains persona non grata. Purchasing this book is likely one of best capital allocation decisions you will make!

As a businessperson, I have read many, many books over the years that have helped me hone my business thinking and become better at business. As an investor, I also have read so many books that have helped me become a better value investor. Rarely, however, have I found books that have helped me do both at the same time. Roger Lowenstein's book on Warren Buffett, Pat Dorsey's two books on creating protectable value in a business, Howard Mark's book on investing, perhaps the David Clark/Mary Buffet series on value investing, all come to mind. Mr. Thorndike's book not only falls into the third category, but has made its way to the top of my keeper list. it is simply extraordinary, and I could not recommend it more highly. Why did I like it so much? Because it explains, in the most straightforward of ways, in the clearest of prose, (1) the hallmarks of a good business (strong, steady, predictable cash flow, as the sine qua non and core focus), (2) the possible sources of cash and uses of cash in a business that taken together generate cash flow in simple algebra (sources less uses equals cash flow), (3) the strategies flowed by 8 business leaders in managing that flow of capital so that the math works out the right way, (4) the incredible similarities in the strategies pursued by these leaders in working with cash flow and the tight correlation to increases in shareholder value, (5) the mindset of these leaders that separated them from the pack, (6) the ability of this group to decentralize, tune out the outside noise and ignore the "institutional imperative" and (7) the common intense focus shared by these leaders on a small set of metrics (all pretty much proxies for measuring cash flow and thus return on equity. If I had to consolidate those conclusions into a single core principle that came through with crystal clarity for me in this book, it would be that strategic, rational management of cash flow against clear benchmarks may be the single highest priority for leadership in any business. And as a corollary, that so few businesses seem guided by an intense focus on cash flow with its corresponding contribution to shareholder value. I also was so impressed that the conclusions presented in the book were not simply the musings of a very intelligent thinker, but rather were grounded in the most thorough of research. I likely still would have found much of value even without the research foundation, but that aspect provided even more credence to the analysis presented in the book. I spent Saturday of Labor Day Weekend reading through this volume as if it were the latest action thriller (geeky, I know). I simply couldn't turn the pages quickly enough, and look forward to returning to its teachings time and time again. It will have a very important place on both my investing and business bookshelves in the years to come. As Mr. Thorndike says in an interview that I read after reading the book, it would be wonderful if the top business schools would teach more (or, perhaps at all) about management of cash flow as a critical business priority of the CEO that should never under any circumstances be delegated down or away. I think he may have well written the textbook.

In his highly readable book The Outsiders, William Thorndike reveals some surprising insights that distinguish the most successful CEOs of US public companies from their peers. In identifying the featured CEOs, Thorndike uses as his benchmark the return to shareholders measured on a cash-on-cash basis over a significant length of time, comparing star CEOs with their industry peers. Based on solid research of public company returns data, Thorndike first identified those companies that produced the highest long-term returns in their respective industries, measured by the increase in earnings per share. Then by studying the major actions taken over that time period, supplemented by interviews with CEOs, subordinates and investors, he developed a clear profile of what underlay each CEO's success. The result not only pinpointed some CEOs whose names may not be familiar to most readers, it also revealed a consistent pattern of decision making across all those studied in a variety of businesses and led to some interesting - and unconventional - conclusions. The key insight is what those most successful CEOs focused on. It was not, as commonly thought, on industry expertise (although they certainly had that) nor operational efficiency (though that, too, was very important - but handled by subordinates) nor even long-term strategic vision (though, again, they certainly were not short on vision). For these "outsiders," the key was a laser-like focus on, and an ability to make bold decisions about, resource allocation: where and when to allocate capital as well as human resources, including when to recover those same resources (and returns) via sales of parts of a company or the repurchase of company shares. There is much more to Thorndike's findings than this summary. Indeed, I rarely read business books because they are so often filled with fluff and one can usually learn what one needs to know from a review or from chapter summaries. The Outsiders breaks that mold for me. It is filled with surprising insights, very well-written and enjoyable to read.

This is book is a great read that will make you think. The thesis of this book is that what separates a great CEO from a mediocre or merely good CEO is how they allocate the firm's capital (i.e. how they raise capital and how they invest it). For example, The Washington Post company has been harmed by trends in the media business less than it's newspaper peers because instead of re-investing profits into their newspaper business, they bought into other industries with brighter long-term prospects. And of course, there is the all-time classic example of the fact that Berkshire Hathaway began as a textiles company, with Warren Buffett deciding to take the cashflow from that declining business to invest in other industries with better long-term prospects. Another hallmark of the outsiders CEO's is how they radically push responsibility down the chain. Their headquarters are spartan and thinly staffed. If you're interested in an even more radical approach to this thinking, you may enjoy the book Maverick by Ricardo Semler. The reason I gave this book 4 stars and not 5 is because of the flawed methodology. It's possible that other CEO's acted the same way as the Outsider CEO's but went bankrupt. We don't know. Thus there is likely some amount of survivorship bias, especially in light of how many of these CEO's used debt to finance acquisitions and share buybacks (although generally they selectively used leverage). I would have liked to see a section of the book where this limiting factor was acknowledged and discussed. For a more detailed look at this common flaw of business books, please read Phil Rozensweig's book The Halo Effect.

This books draws to the attention of the reader some pretty powerful and enduring lessons: 1) Good capital allocators are exceptionally rare. In the business literature, Thorndike, struggled to find them. So take note when you see them! The capital allocators mentioned in the book are: Henry Singleton (Teledyne), Warren Buffett (Berkshire Hathaway), Tom Murphy (Capital Cities), John Malone (TCI), Katherine Graham (Washington Post), Bill Stiritz (Ralston Purina), Dick Smith (General Cinema), Bill Anders (General Dynamics). 2) When a proficient capital allocator is combined with a competent execution, the results can be really quite stunning. The average CEO profiled in this book had returns averaging 22% over a period averaging 28 years of when they were in charge. This is simply stunning! 3) Many of these capital allocators have similarities, in terms of their characters, they were: (1) away from centers of conventional thinking (i.e. Wall St/NY-Boston Corridor); (2) emphasis on frugality and humility; (3) analytical prowess; (4) understated; (5) devotion to families; (6) did not typically relish the outward-facing part of the CEO role; (7) they did not exude charisma. 4) The characters in the book shared a common belief and experiences about how their businesses should be run: (1) often first-time CEOs; (2) very frugal or no dividends; (3) huge (30%+) share repurchases; (4) large sporadic acquisitions (>25%+ of market cap.); (5) decentralized organizational structure; (6) virtual absence of Wall St guidance; (7) laser-like focus on a few relevant and typically ‘idiosyncratic metrics’; (8) a central focus on tax implications and heavy use of tax minimization culture; (9) thought as owner-operators rather than high-paid employees. 5) Some of the lessons that we ought to learn are: (1) Always do the math; (2) The denominator matters; (3) maintain a feisty independence; (4) Charisma is overrated; (5) A crocodile-like temperament that mixes patience and occasionally bold actions; (6) Consistent application of a rational, analytical approach to decisions large and small; (7) A long-term perspective