Lessons Learned from The Outsiders & How Intelligent Fanatics are Different
I’m a full-time private microcap investor. My goal is to own the smallest, most illiquid, least institutionally owned, best businesses I can find that are run by Intelligent Fanatics. One of my inspirations for co-authoring two books with Sean and launching IntelligentFanatics.com was William Thorndike’s book, The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. Before I get into my favorite part of his book, I’d like to explain the difference between The Outsiders and what we do here at IntelligentFanatics.com.
Thorndike focused mainly on capital allocation where we focus on culture in our books. The other key difference would be fanatical vs genius. Many of the CEO’s in The Outsiders, like Buffett and Singleton, were literally geniuses. These geniuses retained practically everything they read and were(are) truly one of a kind. Often times, once the genius is gone [retires or dies], the company falls into mediocrity.
Some Intelligent Fanatics were geniuses, but many are/were not. They are incredibly street smart and self-aware. They know their deficiencies and fill those holes with talented individuals. Finding and cultivating talent and building leaders is instilled early in their business maturation. This is why Intelligent Fanatic led organizations can dominate well past the founders retirement or passing. You will notice Genius isn’t in our intelligent fanatic formula, but Integrity is paramount.
Intelligent Fanatic = (Long-term vision + Intelligence + Energy + Perseverance + Execution) x Integrity
We highlight several of these individuals in our new book, Intelligent Fanatics: Standing on the Shoulders of Giants. You get it for free when you become a Premium Member.
Now I want to get back to my favorite part of The Outsiders.
I wrote, How To Find Intelligent Fanatic CEO’s Early, soon after reading The Outsiders where I blended some of the lessons learned from it, with articles that Sanjay Bakshi wrote on Intelligent Fanatics, as well as my own experiences. The great leaders outlined in The Outsiders, and many of the successful ones I’ve invested in are/were iconoclasts. Thorndike refers to this trait as Intelligent Iconoclasm:
They seemed to operate in a parallel universe, one defined by devotion to a shared set of principles, a worldview, which gave them citizenship in a tiny intellectual village. Call it Singletonville, a very select group of men and women who understood, among other things, that:
Capital allocation is a CEO’s most important job.
What counts in the long run is the increase in per share value, not overall growth or size.
Cash flow, not reported earnings, is what determines longterm value.
Decentralized organizations release entrepreneurial energy and keep both costs and “rancor” down.
Independent thinking is essential to long-term success, and interactions with outside advisers (Wall Street, the press, etc.) can be distracting and time-consuming.
Sometimes the best investment opportunity is your own stock.
With acquisitions, patience is a virtue . . . as is occasional boldness.
An Intelligent Iconoclasm
Interestingly, their iconoclasm was reinforced in many cases by geography. For the most part, their operations were located in cities like Denver, Omaha, Los Angeles, Alexandria, Washington, and St. Louis, removed from the financial epicenter of the Boston/New York corridor. This distance helped insulate them from the din of Wall Street conventional wisdom. (The two CEOs who had offices in the Northeast shared this predilection for nondescript locations—Dick Smith’s office was located in the rear of a suburban shopping mall; Tom Murphy’s was in a former midtown Manhattan residence sixty blocks from Wall Street.) The residents of Singletonville, our outsider CEOs, also shared an interesting set of personal characteristics: They were generally frugal (often legendarily so) and humble, analytical, and understated. They were devoted to their families, often leaving the office early to attend school events. They did not typically relish the outward-facing part of the CEO role. They did not give chamber of commerce speeches, and they did not attend Davos. They rarely appeared on the covers of business publications and did not write books of management advice. They were not cheerleaders or marketers or backslappers, and they did not exude charisma.
It is impossible to produce superior performance unless you do something different. —John Templeton The New Yorker’s Atul Gawande uses the term positive deviant to describe unusually effective performers in the field of medicine. To Gawande, it is natural that we should study these outliers in order to learn from them and improve performance.1 Surprisingly, in business the best are not studied as closely as in other fields like medicine, the law, politics, or sports. After studying Henry Singleton, I began, with the help of a talented group of Harvard MBA students, to look for other cases where one company handily beat both its peers and Jack Welch (in terms of relative market performance). It turned out, as Warren Buffett’s quote in the preface suggests, that these companies (and CEOs) were rare as hen’s teeth. After extensive searching in databases at Harvard Business School’s Baker Library, we came across only seven other examples that passed these two tests. Interestingly, like Teledyne, these companies were not generally well known. Nor were their CEOs despite the enormous gap between their performance and that of many of today’s high-visibility chief executives. . . . The press portrays the successful, contemporary CEO, of which Welch is an exemplar, as a charismatic, action-oriented leader who works in a gleaming office building and is surrounded by an army of hardworking fellow MBAs. He travels by corporate jet and spends much of his time touring operations, meeting with Wall Street analysts, and attending conferences. The adjective rock star is often used to describe these fast- moving executives who are frequently recruited into their positions after well-publicized searches and usually come from top executive positions at well-known companies. Since the collapse of Lehman Brothers in September 2008, this breed of high-profile chief executive has been understandably vilified. They are commonly viewed as being greedy (possibly fraudulent) and heartless as they fly around in corporate planes, laying off workers, and making large deals that often destroy value for stockholders. In short, they’re seen as being a lot like Donald Trump on The Apprentice. On that reality television show, Trump makes no pretense about being avaricious, arrogant, and promotional. Not exactly a catalog of Franklinian values.
This group of happily married, middle-aged men (and one woman) led seemingly unexciting, balanced, quietly philanthropic lives, yet in their business lives they were neither conventional nor complacent. They were positive deviants, and they were deeply iconoclastic. The word iconoclast is derived from Greek and means “smasher of icons.” The word has evolved to have the more general meaning of someone who is determinedly different, proudly eccentric. The original iconoclasts came from outside the societies (and temples) where icons resided; they were challengers of societal norms and conventions, and they were much feared in ancient Greece. The CEOs profiled in this book were not nearly so fearsome, but they did share interesting similarities with their ancient forbears: they were also outsiders, disdaining long-accepted conventional approaches (like paying dividends or avoiding share repurchases) and relishing their unorthodoxy.
Like Singleton, these CEOs consistently made very different decisions than their peers did. They were not, however, blindly contrarian. Theirs was an intelligent iconoclasm informed by careful analysis and often expressed in unusual financial metrics that were distinctly different from industry or Wall Street conventions. In this way, their iconoclasm was similar to Billy Beane’s as described by Michael Lewis in Moneyball. Beane, the general manager of the perennially cash-strapped Oakland A’s baseball team, used statistical analysis to gain an edge over his better-heeled competitors. His approach centered on new metrics—on-base and slugging percentages—that correlated more highly with team winning percentage than the traditional statistical troika of home runs, batting average, and runs batted in. Beane’s analytical insights influenced every aspect of how he ran the A’s—from drafting and trading strategies to whether or not to steal bases or use sacrifice bunts in games (no, in both cases). His approach in all these areas was highly unorthodox, yet also highly successful, and his team, despite having the second-lowest payroll in the league, made the playoffs in four of his first six years on the job.
Like Beane, Singleton and these seven other executives developed unique, iconoclastic approaches to their businesses that drew much comment and questioning from peers and the business press. And, like Beane’s, their results were exceptional, handily outperforming both the legendary Welch and their industry counterparts. They came from a variety of backgrounds: one was an astronaut who had orbited the moon, one a widow with no prior business experience, one inherited the family business, two were highly quantitative PhDs, one an investor who’d never run a company before. They were all, however, new to the CEO role, and they shared a couple of important traits, including fresh eyes and a deep-seated commitment to rationality. Isaiah Berlin, in a famous essay about Leo Tolstoy, introduced the instructive contrast between the “fox,” who knows many things, and the “hedgehog,” who knows one thing but knows it very well. Most CEOs are hedgehogs—they grow up in an industry and by the time they are tapped for the top role, have come to know it thoroughly. There are many positive attributes associated with hedgehogness, including expertise, specialization, and focus. Foxes, however, also have many attractive qualities, including an ability to make connections across fields and to innovate, and the CEOs in this book were definite foxes. They had familiarity with other companies and industries and disciplines, and this ranginess translated into new perspectives, which in turn helped them to develop new approaches that eventually translated into exceptional results.
An area of intelligent iconoclasm that I’ve experienced firsthand is that many intelligent fanatics as well as “Outsiders” don’t cater to Wall Street. They view Wall Street as a distraction. Their customers and employees are their priority, and they know if those two groups are happy, shareholders will be happy. They focus on the long-term and let their performance do the talking. This allows long-term shareholders to self select in while dispelling short-term traders, thus creating a shareholder base that is an asset to the company. They know that being a public company exposes them to a lot of short-term noise. They just choose, unlike 95% of public company CEO’s, to not pay attention to it. They do this by focusing on building a superior business. Ultimately, a superior business and the intelligent fanatic’s large ownership stake affords them the ability to focus on the long-term and not get distracted by the noise. Great capital allocation can help to produce a dominant company, but a superior culture is necessary to keep it on top for decades.
Here is William Thorndike’s Talks at Google:
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