Success Leaves Traces

That is a great John Templeton quote (that I plan to use as the title for an upcoming piece.) 

I was stuck in the Philly airport during the NYC ground stop on Wednesday, and started, then finished, the book The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by Thorndike.  Buffett mentioned the book recently so I had ordered it but it sat on my shelf for some time and included in Chapter 1 was the above quote.  It’s absurdly cold here so will likely find a pub with a fireplace to cozy up to here in a bit.

(PS I also scraped together some of the reading lists from some hedge fund managers and uploaded them to AMZN here.)

The author  examines one of the more overlooked duties of a CEO, capital allocation, and argues it is as important, if not more so than operational abilities.  Considering all of the work we have done on how capital allocation affects stock prices ala Shareholder Yield, it was a natural fit.  Some quotes and excerpts below, a great read!

—-

CEOs need to do two things well to be successful:  run their operations efficiently and deploy the cash generated by those operations.  Most CEOs (and the management books they write or read) focus on managing operations, which is undeniably important.  Singleton, in contrast, gave most of his attention to the latter task.

Basically CEOs have five essential choices for deploying capital – investing in existing operations, acquiring other businesses, paying down debt, or repurchasing stock – and three alternatives for raising it – tapping internal cash flow, issuing debt, or raising equity.  Think of these options collectively as a tool kit.  Over the long term, returns for shareholders will be determined largely by the decisions a CEO makes in choosing which tools to use (and which to avoid) among these varios options….In fact, this role just might be the most important responsibility any CEO has, and yet despite its importance, there are no courses in capital allocation at the top business schools. As Warren Buffett has observed, very few CEOs come prepared for the task:

“The heads of many companies are not skilled in capital allocation.  Their inadequacy is not surprising.  Most  bosses rise to the top because they have excelled in an area such  as marketing, production, engineering, administration or,  sometimes, institutional politics. Once they become CEOs, they face new responsibilities.  They now must make capital allocation decisions, a critical job that  they may have never tackled and that is not easily mastered.  To stretch the point, it’s as if the final step for a highly talented musician was not to perform at Carnegie Hall but instead, to be named Chairman of the Federal Reserve.”

—–

The conventional wisdom was that repurchases signaled a lack of internal investment opportunity, and they were thus regarded by Wall St as a sign of weakness.  Singleton ignored this orthodoxy, and between 1972 and 1984, in eight separate tender offers, he bought back an astonishing 90 percent of Teledyne’s outstanding shares. 

—-

As Chabraja described to me, “What drove me was the realization that the stock was trading at a significant premium to our historic norm:  twenty-three times next year’s projected earnings versus an historic average of sixteen times.  So what do you do with a high-priced stock?  Use it to acquire a premium asset in a a related field at a lower multiple and benefit from the arbitrage.”