Outsiders

Job of CEO

“CEOs need to do two things well to be successful: run their operations efficiently and deploy the cash.”

Choices of deploying capital

investing in existing operations

acquiring other businesses

issuing dividends

paying down debt

or repurchasing stock

Methods to raise cash

tapping internal cash flow

Issuing debt

raising equity.

Henry Singleton’s two-pronged approach to value creation

1. Focused Teledyne’s capital on selective acquisitions and 2. a series of large share repurchases.

Other Ideas

In the long run, the increase in per-share value is the most important thing.

• Cash flow, not reported earnings, is what drives the value in the long term.

• Decentralized organizations support entrepreneurial energy and keep costs down.

• Independent thinking is essential to long-term success. Interaction with outside resource can be detrimental to independent thinking

• Sometimes the best investment is your own stock.

Tom Murphy Formula 

focus on industries with attractive economic characteristics

selectively use leverage to buy occasional large properties

improve operations

 pay down debt

Great investors (and capital allocators) must be able to both sell high and buy low;

Repurchase when p/e is low 

The average price-to-earnings ratio for Teledyne’s stock issuances was over 25

The average multiple for his repurchases was under 8.

Jack Welch’s formula 

“Welch believed General Dynamics should only be in businesses where it had the number one or number two market position. (This was strikingly similar to the Powell Doctrine of the same era, which called for the United States to only enter military conflicts that it could win decisively.)”

Get out of commodity business 

“The company would exit commodity businesses where returns were unacceptably low.”

“There is an apparent inverse correlation between the construction of elaborate new headquarters buildings and investor returns. Not one of the outsider CEOs built lavish headquarters.”

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” —Warren Buffett

Avoid competition in buying businesses 

“Stiritz focused on sourcing acquisitions through direct contact with sellers, avoiding competitive auctions whenever possible.”

Berkshire’s secret formula 

“Charlie Munger has said that the secret to Berkshire’s long-term success has been its ability to “generate funds at 3 percent and invest them at 13 percent,” and this consistent ability to create low-cost funds for investment has been an underappreciated contributor to the company’s financial success.”

“the value of being in businesses with attractive returns on capital and the related importance of getting out of low-return businesses.”

“We don’t try to do acquisitions; we wait for no-brainers.”

“In fact, Buffett can perhaps best be understood as a manager/investor/philosopher whose primary objective is turnover reduction.“

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