Book Review - The Outsiders

A CEO has five essential choices for deploying capital raised through internal accruals, debt and equity. a) Invest in existing operations, b) acquisitions, c) debt reduction, d) dividends and e) buybacks.

Essentially, the most vital skill a CEO must have is capital allocation which will determine the return to shareholders. This crux is the key focal point of William Thorndike’s excellent book The Outsiders. In this book Thorndike writes about eight CEO’s whose average returns during their tenure have outperformed the S&P 500 and their peers by a huge margin. All these individuals were first time CEO’s with insignificant prior managerial experience but they still succeeded owing to their consistent analytical and rational thought process and having a long term perspective. The other significant trait common to all these CEO’s was none of them was obsessed with boosting up market capitalization. The eight terrific CEO’s featured are:

Tom Murphy – Capital Cities Broadcasting

Henry Singleton – Teledyne

Bill Anders – General Dynamics

John Malone – TCI

Katharine Graham – The Washington Post Company

Bill Stiritz – Ralston Purina

Dick Smith – General Cinema

Warren Buffett – Berkshire Hathaway

These eight individuals were champions in capital generation, capital allocation and decentralized operations. All of these CEO’s were “foxes” (as against “hedgehogs” – knows one thing, but knows very well) who knew many disciplines and were very efficiently able to make connections across industries and disciplines and this variety rendered fresh perspectives and innovation. For e.g. Buffett before becoming CEO was a highly successful investor and was fully prepared (his prior experience in evaluating an array of investments) for allocating capital as the CEO of Berkshire Hathaway. For fans of Charlie Munger, there are some inputs from him as well as the author interviewed him for some portions of this book.

These CEO’s made capital allocation decisions themselves (unlike at many organizations) and  firmly believed in independent thinking, razor sharp focus on cash flow based metrics and operating costs, buybacks as an investment opportunity and patience with acquisitions. Each one of them attracted doubt and uncertainty from peers and Wall Street during their tenure but increasing per share value was their primary goal and that translated in exceptional returns for their long-term shareholders. 

Lastly, the author provides a checklist to think like The Outsider’s CEO. This book is worth the money and time and one will surely gain many insights on a variety of businesses. Strongly Recommended!