Sunday, April 3, 2016

Book Review: The Outsiders by William Thorndike, Jr.


Outsider, n - someone that doesn't belong to a group or goes against conventional wisdom

The Outsiders by William Thorndike, Jr. (affiliate link) profiles 8 CEOs that strayed from the conventional wisdom of the day which led to truly exceptional returns for shareholders.  Running and growing a business is never a straight forward task and the ability to think outside of the box to unlock value is key for CEOs and shareholders alike.

These 8 CEOs all had several things in common.  For starters they all believed in a decentralized management.  Companies don't need 20 Presidents each with their own Vice Presidents.  For the most part the headquarters for all 8 of these companies were no frills places very few employees.

They also placed an emphasis on capital allocation with a focus on simple analytical models.  They focused on cash flow rather than earnings or any other metrics because after all cash is king.

These CEOs all were able to zig when others zagged.  When other companies in their respective industries were going on acquisition binges these CEOs would shed overvalued assets.  If their share price was unjustifiably high they'd raise capital through acquisitions of undervalued assets.  Likewise if their share price was low and offered the best and safest return, they knew their companies best right?, they would have no problem buying back shares.

These CEOs can be summed up in 3 key points:
  1. Simplicity
  2. Flexible Capital Allocation
  3. Patience
I assume some of you are thinking that they were just in the right place at the right time in the right industry.  But that's far from the truth.  They operated in cable television, defense, newspapers, dog food, movies, insurance, technology and last but not least a clothing manufacturer.

Meet The Outsiders
  1. Tom Murphy, Capital Cities Broadcasting
  2. Henry Singleton, Teledyne
  3. Bill Anders, General Dynamics
  4. John Malone, TCI
  5. Katharine Graham, The Washington Post Company
  6. Bill Stiritz, Ralston-Purina
  7. Dick Smith, General Cinema
  8. Warren Buffett, Berkshire Hathaway
The shareholder returns these CEOs were able to generate were truly phenomenal.   


The Outsiders isn't a traditional investment book; however, there's a lot of value within its 220 pages.  Dividend growth investors might not appreciate these CEOs since many of them refrained from committing to a dividend but their returns speak for themselves.  If anyone is interested in business or investing I highly recommend The Outsiders and have no doubt that it will improve your own analytical process.  

I'll leave you with one excerpt that encompasses all of these CEOs.

"Charlie Munger has said that the secret to Berkshire's long term success has been its ability to 'generate funds at 3% and invest them at 13%.'" (p. 178)

What books are you reading?

4 comments:

  1. Great book buddy! It's one of my favorites, and is included among the 12 recommended books on our site. I learned so much from this book that I went out and bought it, and intend to reread it once a year. I just finished the Dhandho Insvestor by Mohnish Pabrai. It's a very good book as well, but not as good as Thorndike's Outsiders.

    I hope you guys are well this weekend
    -Bryan

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    1. Bryan,

      The Outsiders is definitely a book that most investors/small business owners should read. No it's not going to teach you how to invest or grow your business but it's the lessons behind their stories that are so valuable. Simplicity, patience and flexibility are the common themes between all of them and if you focus on those 3 things you'll do fairly well over the long run.

      Thanks for stopping by!

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  2. The idea of outsider management is a great one. I had heard many good things about this book, so I thank you for your review. The reason why someone like you or me would read the book is to identify traits that would help us pick the next "outsider CEO".

    The main criticism of this book that I have heard was that outsider CEO's are easy to identify only in hindsight. This point of view takes into account CEO's who have exhibited Outsider like behavior, but lost a lot of money for their shareholders.

    Perhaps AMZN is as misunderstood as TCI was in the old days.. Or perhaps it really is overvalued..

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    Replies
    1. DGI,

      Being able to identify the next Outsider CEOs is going to be difficult because there's so much data and information to parse through. The key takeaway that I got from the book is the common themes between them all. They focused on simplicity, patience and flexibility.

      Take WB for example it's largely rumored that he's never used a spreadsheet and rarely does number crunching. So he values simplicity. If you start needing a million different inputs to determine if an investment is worthwhile you likely need to spend your time finding another investment. He also has no problem sitting on the sidelines if there's nothing that he deems a good investment.

      Like you said it's understanding the traits that can make a great CEO or investor. No business or investment strategy is going to work 100% of the time.

      Thanks for stopping by!

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