One of my favorite investing books is The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, by William N. Thorndike. In fact it’s also the top choice on Warren Buffett’s reading list. The book provides stories on eight of the most successful CEOs in history who were great capital allocators.
One of my favorite chapters is on Teledyne CEO Henry Singleton, who Buffett said had the best operating and capital deployment record in American business. While the whole chapter is a must read I pulled out the following excerpt on Singleton:
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One of the most important decisions any CEO makes is how he spends his time—specifically, how much time he spends in three essential areas: management of operations, capital allocation, and investor relations. Henry Singleton’s approach to time management was, not surprisingly, very different from peers like Tex Thornton and Harold Geneen and very similar to his fellow outsider CEOs.
As he told Financial World magazine in 1978, “I don’t reserve any day-to-day responsibilities for myself, so I don’t get into any particular rut. I do not define my job in any rigid terms but in terms of having the freedom to do whatever seems to be in the best interests of the company at any time.” Singleton eschewed detailed strategic plans, preferring instead to retain flexibility and keep options open. As he once explained at a Teledyne annual meeting, “I know a lot of people have very strong and definite plans that they’ve worked out on all kinds of things, but we’re subject to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible.”
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In a rare interview with a BusinessWeek reporter, he explained himself more simply: “My only plan is to keep coming to work. . . . I like to steer the boat each day rather than plan ahead way into the future.” Unlike conglomerate peers such as Thornton or Geneen or Gulf & Western’s colorful Charles Bluhdorn, Singleton did not court Wall Street analysts or the business press. In fact, he believed investor relations was an inefficient use of time, and simply refused to provide quarterly earnings guidance or appear at industry conferences. This was highly unconventional behavior at a time when his more accommodating peers were often on the cover of the top business magazines.
Even in a book filled with CEOs who were aggressive in buying back stock, Singleton is in a league of his own. Given his voracious appetite for Teledyne’s shares and the overall high levels of repurchases among the outsider CEOs, it’s worth looking a little more closely at Singleton’s approach to buybacks, which differed significantly from that of most CEOs today.
Fundamentally, there are two basic approaches to buying back stock. In the most common contemporary approach, a company authorizes an amount of capital (usually a relatively small percentage of the excess cash on its balance sheet) for the repurchase of shares and then gradually over a period of quarters (or sometimes years) buys in stock on the open market. This approach is careful, conservative, and, not coincidentally, unlikely to have any meaningful impact on long-term share values. Let’s call this cautious, methodical approach the “straw.”
The other approach, the one favored by the CEOs in this book and pioneered by Singleton, is quite a bit bolder. This approach features less frequent and much larger repurchases timed to coincide with low stock prices—typically made within very short periods of time, often via tender offers, and occasionally funded with debt. Singleton, who employed this approach no fewer than eight times, disdained the “straw,” preferring instead a “suction hose.” Singleton’s 1980 share buyback provides an excellent example of his capital allocation acumen. In May of that year, with Teledyne’s P/E multiple near an all-time low, Singleton initiated the company’s largest tender yet, which was oversubscribed by threefold. Singleton decided to buy all the tendered shares (over 20 percent of shares outstanding), and given the company’s strong free cash flow and a recent drop in interest rates, financed the entire repurchase with fixed-rate debt.
After the repurchase, interest rates rose sharply, and the price of the newly issued bonds fell. Singleton did not believe interest rates were likely to continue to rise, so he initiated a buyback of the bonds. He retired the bonds, however, with cash from the company’s pension fund, which was not taxed on investment gains.
As a result of this complex series of transactions, Teledyne successfully financed a large stock repurchase with inexpensive debt, the pension fund realized sizable tax-free gains on its bond purchase when interest rates subsequently fell, and, oh yes . . . the stock appreciated enormously (a ten-year compound return of over 40 percent).
Singleton’s fierce independence of mind remained a prominent trait until the end of his life. In 1997, two years before his death from brain cancer at age eighty-two, he sat down with Leon Cooperman, a longtime Teledyne investor. At the time, a number of Fortune 500 companies had recently announced large share repurchases. When Cooperman asked him about them, Singleton responded presciently, “If everyone’s doing them, there must be something wrong with them.”
Buffett and Singleton: Separated at Birth?
Many of the distinctive tenets of Warren Buffett’s unique approach to managing Berkshire Hathaway were first employed by Singleton at Teledyne. In fact, Singleton can be seen as a sort of proto-Buffett, and there are uncanny similarities between these two virtuoso CEOs, as the following list demonstrates.
- The CEO as investor. Both Buffett and Singleton designed organizations that allowed them to focus on capital allocation, not operations. Both viewed themselves primarily as investors, not managers.
- Decentralized operations, centralized investment decisions. Both ran highly decentralized organizations with very few employees at corporate and few, if any, intervening layers between operating companies and top management. Both made all major capital allocation decisions for their companies.
- Investment philosophy. Both Buffett and Singleton focused their investments in industries they knew well, and were comfortable with concentrated portfolios of public securities.
- Approach to investor relations. Neither offered quarterly guidance to analysts or attended conferences. Both provided informative annual reports with detailed business unit information.
- Dividends. Teledyne, alone among conglomerates, didn’t pay a dividend for its first twenty-six years. Berkshire has never paid a dividend.
- Stock splits. Teledyne was the highest-priced issue on the NYSE for much of the 1970s and 1980s. Buffett has never split Berkshire’s A shares (which now trade at over $120,000 a share).
- Significant CEO ownership. Both Singleton and Buffett had significant ownership stakes in their companies (13 percent for Singleton and 30-plus percent for Buffet). They thought like owners because they were owners.
- Insurance subsidiaries. Both Singleton and Buffett recognized the potential to invest insurance company “float” to create shareholder value, and for both companies, insurance was the largest and most important business.
- The restaurant analogy. Phil Fisher, a famous investor, once compared companies to restaurants—over time through a combination of policies and decisions (analogous to cuisine, prices, and ambiance), they self-select for a certain clientele. By this standard, both Buffett and Singleton intentionally ran highly unusual restaurants that over time attracted like-minded, long-term-oriented customer/shareholders.