Book review : The Outsiders - By William Thorndike

Eight Unconventional CEOs and Their radically rational Blueprint for Success

( #1 on Warren Buffets recommended reading list in Annual shareholder letter 2012) 

The Outsiders is a very Interesting read and a must recommendation for Analysts researching corporates  and for CEOs or promoters who actively take decision of Capital allocation. each of these CEOS deliver 20%+ CAGR return for investor for periods exceeding 15 years. 

The book chronicles 8 CEOs who were ready to swim against the tide and follow what was RIGHT and shun the POPULAR . Four of the Eight Companies belonged to the Media sector - A sector which has been more popular in India for wealth destruction.   All of them had strong disdain for herd behavior - something which is easy to say but hard to follow.  The CEOs showed unanimity in taking right capital allocation decisions , avoided smoothening of quarterly financials and used right metrics of cash flow and IRR to evaluate themselves as against reported earnings.   Cash flow focus seems to be low among Indian media companies and largely focus is on earnings. Also these CEOs avoided paying taxes and used the right/best instruments to reduce tax incidence - something i believe Indian Media companies are adept at.  

Some quotes i liked from the book: 

2 basic  approaches to buy back - "Straw" -  Open Market  Buy back spread across a few qtrs with a max cap price - generally used to signal under valuation.  ( HT Media did this some time back) 

Other is “Suction hose”  - Bolder approach  Buy backs  done often via tender offers within very short periods of time.   ( Jagran Prakashan recently did this) 

Singleton - If everyone doing them, there must be something wrong with them. 

Kapnick of Capital Dynamics -  initiated 3 special dividends totaling about 50% of the company and because of the size - they were deemed as return of capital - thus being tax efficient as against regular dividends.  

Most CEOs grade themselves on size and growth …very few really focus on shareholder returns.  

Chabraja ( General Dynamics CEO after Kapnick)-  What drove me was the realization that the stock was trading at a significant premium to our historic norm: 23 times next year projected earnings versus an historic average of 16 times. so what do you do with a high - price stock? Use it to acquire a premium asset in a related field at a lower multiple and benefit from the arbitrage.   — Most Indian CEOs/ Promoters perennially believe their stock is under priced and are rarely able to do such transactions.  

Characteristics of Cable business as explained by Malone :  Highly predictable, utility like revenues , favorable tax characteristics , and the fact that it is growing like a weed. 

"…. it is better to pay interest than taxes” . Malone showed strong disdain fro taxes. 

Edifice complex :  There is an apparent inverse correlation between the construction of elaborate new headquarter buildings and investor returns.    ( In India it is more synonymous with buying private jets ) 

  

He believed that the best strategy for a cable company was to use all available tools to minimize reported earnings and taxes, and fund internal growth and acquisitions with pretax cash flows. 

Disdain for consultants : Graham - CEO of Washington post :    Ironically , in the 1980s , the management consulting firm McKinsey advised the company to halt its buy back program.  Donald graham reckons this high priced McKinsey wisdom cost POST shareholders hundreds of millions of dollars of value , calling it the “most expensive consulting assignment ever. 

Buffet Letter 2014 - My notes : "You see a cockroach in your kitchen; as the days go by, you meet his relatives"

On relationship with Munger and More importantly the respect:

In 56 years, however, we’ve never had an argument. When we differ, Charlie usually ends the conversation by saying: “Warren, think it over and you’ll agree with me because you’re smart and I’m right.”

  

On Buying Good business: 

Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.

Most of the time - the quick buck buck is made on people on buying momentum or crappy stocks based on tips, news or noise. But what people forget is lot of money is eventually lost in these bad companies.  Notes to Self - BUY ONLY GOOD COMPANIES. 

On Acquisition with Stock : 

The intrinsic value of the shares you give in an acquisition must not be greater than the intrinsic value of the business you receive.

Money flows from the gullible to the fraudster. And with stocks, unlike chain letters, the sums hijacked can be staggering. At both BPL and Berkshire, we have never invested in companies that are hell-bent on issuing shares. That behavior is one of the surest indicators of a promotion-minded management, weak accounting, a stock that is overpriced and – all too often – outright dishonesty

Many promoters believe Equity is free and prefer Acquisition with Stock rather than Cash. Beware of such companies either they stock is not worth much or the mgmt has little respect for their own stock. Either ways a bad decision.   

On Business Synergies : 

Whatever their line, never forget that 2+2 will always equal 4. And when someone tells you how old-fashioned that math is --- zip up your wallet, take a vacation and come back in a few years to buy stocks at cheap prices.

Charlie Munger  on Limiting your Investments to a few quality :

In particular, Buffett’s decision to limit his activities to a few kinds and to maximize his attention to them, and to keep doing so for 50 years, was a lollapalooza. Buffett succeeded for the same reason Roger Federer became good at tennis.

Buffett was, in effect, using the winning method of the famous basketball coach, John Wooden, who won most regularly after he had learned to assign virtually all playing time to his seven best players. That way, opponents always faced his best players, instead of his second best. And, with the extra playing time, the best players improved more than was normal.

Other Quotes - which i liked: 

If horses had controlled investment decisions, there would have been no auto industry.

But Charlie told me long ago to never underestimate the man who overestimates himself.

In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives. 

That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.

Market forecasters will fill your ear but will never fill your wallet.

http://www.berkshirehathaway.com/letters/2014ltr.pdf

Buffet Letters 2013 - My Notes “A bull market is like sex. It feels best just before it ends.”

Buffet Letters 2013 - My Notes

 “A bull market is like sex. It feels best just before it ends.”

Buffet recently made two big investments in Capex intensive business - Railroads and energy utility ....and his rationale is below. 

"Our confidence is justified both by our past experience and by the knowledge that society will forever need massive investments in both transportation and energy. It is in the self-interest of governments to treat capital providers in a manner that will ensure the continued flow of funds to essential projects. It is meanwhile in our self interest to conduct our operations in a way that earns the approval of our regulators and the people they represent."

The above is of utmost importance for the government and politicians in india to understand ..to bring back a healthy environment of investment.  Multiple industries like Telecom, Mining, Utilities are in a mess because of scams and overhang of Regulatory changes at times Retrospective in nature.  Basically - the government has had little or NO respect for CAPITAL PROVIDERS - be it TATAs or BIRLA or VODAFONE or NOKIA.  While, corporates have also been at fault...but to regina trust this time the initiative has to come for the govt.

Also Buffet valuation advise for the financial community - Dont look at EBITDA for interest coverage or Valuations....especially so in Capex intensive business. Something i cannot agree more wrt to Telecom Spectrum were the Cost of Spectrum present & future hide below the EBITDA. 

"Our definition of coverage is pre-tax earnings/interest, not EBITDA/interest, a commonly-used measure we view as seriously flawed.)

When Wall Streeters tout EBITDA as a valuation guide, button your wallet."

Quotes/Gems I liked 

At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business; it’s better to have a partial interest in the Hope diamond than to own all of a rhinestone.

Woody Allen stated the general idea when he said: “The advantage of being bi-sexual is that it doubles your chances for a date on Saturday night.” Similarly, our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for our endless gusher of cash.

Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business that is being eagerly written by their competitors. That old line, “The other guy is doing it, so we must as well,” spells trouble in any business, but in none more so than insurance.

You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.

Warren Buffet Letter to Shareholders 2013