When hedge fund billionaire Bill Ackman hosted an event in April to promote his backing of Valeant Pharmaceuticals’ $46 billion bid for Allergan, he called his presentation “The Outsider.” “The name of the presentation comes from a book which I highly recommend you read,” Ackman explained to his audience. “I would say one of the most important investment books I have ever read.”
“The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success” tells the stories of eight successful chief executives. Ackman’s overwhelming and very public endorsement of it was even more interesting because one of the CEOs highlighted and praised by the book is Bill Stiritz, who is currently one of Ackman’s key rivals in the epic battle over Herbalife that has been raging on Wall Street for over a year. The ideas and lessons of the book have resonated so powerfully among CEOs and investors that they apparently can in some ways bring them together. Ackman and Stiritz might not agree on whether Herbalife is an illegal pyramid scheme, but both men seem to believe in the extreme importance of smart capital allocation.
William N. Thorndike, Jr., founder of Housatonic Partners and author of “The Outsiders.”
The Outsiders may not be a huge best seller, but it is the book that appears to be influencing CEOs and big hedge fund and private equity-type investors. William N. Thorndike, Jr., the author of the The Outsiders, has been as surprised about the success of his book as anyone. “The reaction to the book has dramatically exceeded any expectations I had, not that I had any, I was a rookie author,” said Thorndike in an interview. “I have had a lot of interactions with CEOs and investors—lots. They seem to like the ideas and want to discuss them.”
Despite hardly any promotional push, the book has become more than just a cult hit. It has held its own in the highly competitive business book segment. According to Harvard Business Review Press, which published it in late October 2012, 75,000 copies of the book have sold, mostly in print, but also including some in digital form. The Outsiders has also had a long tail, with sales continuing steadily over time, aided by Warren Buffett’s recommendation last year in Berkshire Hathaway’s annual report. Buffett, who is featured in the book, called it “an outstanding book about CEOs who excelled at capital allocation.”
When Thorndike started the research that would lead to The Outsiders, he did not expect it would become a book. The founder of Boston-based private equity firm Housatonic Partners, which manages $1 billion, Thorndike was only volunteering to lead a talk at a conference Housatonic Partners holds biannually for the CEOs of his firm’s portfolio companies. For the talk, Thorndike chose to focus on Henry Singleton, who built Teledyne Technologies and had a reputation for being a master capital allocator. Thorndike teamed up with Aleem Choudhry, then a Harvard Business School student, and the duo spent Choudhry’s first semester doing a deep analytical dive on Teledyne. During the second semester, they interviewed everyone they could about Singleton, who died in 1999, including venture capitalist Arthur Rock, hedge fund manager Leon Cooperman and Berkshire Hathaway vice-chairman Charlie Munger.
For the next few years, Thorndike continued to team up with Harvard Business School students to study CEOs. He had a day job so the research took time—Thorndike says he would do research on the weekends or on flights back and forth to San Francisco, where his firm has an office. He researched one CEO a year. He had two tests each CEO had to meet to warrant study: Their stocks had to better the performance relative to the S&P 500 index of GE CEO Jack Welch during his tenure and meaningfully outperform their peer group. “I was doing it out of interest, I found it intellectually interesting to try to figure it out,” Thorndike says.
After some four years, Thorndike started to think that he might be able to turn the project into a book. At first, Thorndike figured the book could be a group biography, modeled after “Profiles in Courage,” “The American Political Tradition” or “The Money Masters.” But eventually Thorndike saw a theme linking the CEOs. “After the sixth [CEO] it was clear there was this very strong pattern, that was the biggest surprise,” says Thorndike. “Over a long period of time, CEOs have to do two things well, they have to manage the business to optimize the profits and after that deploy the profits. Most of what separated these guys from their peers is in that second activity, which has the unwieldy name of capital allocation.”
Thorndike spent eight years working on the book and interviewed all the living CEOs he studied. The CEOs he ended up profiling were Tom Murphy of Capital Cities, Henry Singleton of Teledyne, Bill Anders of General Dynamics, John Malone of TCI, Katharine Graham of The Washington Post Co., Bill Stiritz of Ralston Purina, Dick Smith of General Cinema, and Warren Buffett of Berkshire Hathaway. Thorndike basically concluded that to achieve meaningful outperformance, CEOs need to do things differently than the other CEOs running companies in their respective industries. At the same time, however, Thorndike found the CEOs he researched had quite a bit in common. “They were very different from the standard conventional CEO personality, they were not charismatic visionary types, they were pragmatic, flexible and opportunistic, frugal and patient,” says Thorndike.
They also bought back a lot of their stock. Share repurchases that improve corporate earnings per share have become a major part of any CEO’s playbook these days. Some have criticized the practice as a financial engineering ploy that comes at the expense of vital reinvestment and can hurt a company’s long-term prospects. The successful CEOs Thorndike studied helped usher in the share buyback era. But Thorndike discovered that there was an important nuance to their buyback moves. They were not just mindlessly repurchasing shares each quarter. They minimized their dividends and, unlike many publicly-traded companies today, did not announce a big stock buyback authorization and repurchase a systematic amount of stock every quarter. Instead, Thorndike’s CEOs waited for long periods of time without doing anything and then pounced when they thought their stock was cheap, even buying large chunks of stock in a single quarter. “They had the investor’s mind set,” says Thorndike. “They viewed it as investment and when it had attractive returns they did a lot of it.” Thorndike also documents how his eight successful CEOs shrewdly deployed capital on selective acquisitions and worked diligently to minimize taxes.
It’s interesting that both managers and investors have been drawn to The Outsiders. The Wall Street Journal reported in February that activist investors who agitate for change at companies have been particularly fond of the book. Thorndike says investors who build concentrated portfolios and hold their positions over long periods of time will find the book more useful than fast-money traders. Says Thorndike: “The ideas of the book have the most value over longer holding periods.”
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