Today I finished reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. William N. Thorndike, Jr. profiled these CEOs:

• Tom Murphy, Capital Cities Broadcasting
• Henry Singleton, Teledyne
• Bill Anders, General Dynamics
• John Malone, TCI
• Katharine Graham, The Washington Post
• Bill Stiritz, Ralston Purina
• Dick Smith, General Cinema
• Warren Buffett, Berkshire Hathaway

The book describes how CEOs generated capital and executed creative approaches to capital allocation, and it reports their returns over a long period. I was familiar with Buffett but less so with the others. I took many notes on Murphy, Singleton, Malone, and Graham.

It was interesting to learn about Singleton’s strategy. It was the same as Buffett’s playbook, and Singleton was older than Buffett and deployed his strategies before Buffett did. Buffett has praised Singleton as one of the best businessmen ever, and I’d imagine many strategies that make Berkshire Hathaway successful were borrowed from Singleton’s playbook.

John Malone is the CEO I’m most unfamiliar with and most excited to learn more about. Malone recognized the predictability and high growth rate of the cable industry early. He used various strategies to build one of the largest cable distribution companies. He also helped seed various cable programming entrepreneurs, such as Bob Johnson of BET, and partnered with other cable entrepreneurs, including Ted Turner.

This book chronicles CEOs of publicly traded companies, so most examples don’t apply to early-stage entrepreneurs. But it does a good job of explaining capital allocation, including why it’s the most important job of a CEO, and quantifying the results of superior capital allocation by talented CEOs.

Capital allocation is a mindset and a skill all entrepreneurs should be aware of. For entrepreneurs seeking to grow their companies, capital allocation is a critical skill to master.

Last week I shared my takeaways from reading Built from Scratch: How a Couple of Regular Guys Grew The Home Depot from Nothing to $30 Billion, a book about Home Depot’s founding. One thing I learned is that Home Depot’s founders rethought their market, which changed their growth strategy.

They initially went after the do-it-yourself market, which was consumer focused. Then they realized they were serving the home-improvement market. This change in how they thought about and defined their market was important because home improvement included contractors too. Home improvement was a much bigger and more fragmented market than do-it-yourself. This decision played a role in Home Depot’s annual revenue increasing from $20 billion in 1996 to $135 billion in 2023.

Today it was announced that Home Depot is acquiring SRS Distribution Inc., a “distributor of building products . . . serving the professional roofing contractor’s business.” The deal is for about $18.25 billion. The stated logic behind the deal is that it will help Home Depot grow its business with contractors.

The Home Depot’s founders haven’t run the company for over twenty years. But their insight about what their market is and what customers they serve is still driving the growth strategy today, even if it’s growth through acquisition rather than organic growth.

Markets matter a lot more than some entrepreneurs realize. I’d say it’s one of the most important factors that impact business success and growth potential. Building a big business in a small market is hard because there aren’t enough people willing to buy your product or solution. Home Depot’s realization about its market roughly thirty years ago has allowed it to build a massive business, and it still provides growth opportunities, as shown by today’s announcement.

I recently finished reading Bull! A History of the Boom and Bust, 1982–2004 by Maggie Mahar. The book was published in 2004, not too long after the dot-com bubble burst. I’ve seen the book recommended a few times and noticed that the cover includes an endorsement by Warren Buffett, so I ordered it. Also, the book’s narrow focus on the period when interest rates started what ended up being a forty-year decline through 2004 was intriguing to me.

I enjoyed reading the book. Given the focus on a very specific period, it provides lots of details about the economic environment, who the main figures were who had an impact on the stock market, and the key decisions they made. Mahar does a good job of describing her perspective on the impact those decisions had on inflating and bursting the internet bubble.

One thing that caught my attention was her explanation of the role the inclusion of high-flying technology companies in stock market indexes (e.g., the S&P 500 and NASDAQ Composite) played in valuations reaching levels that were hard to justify. She believes that this, combined with the rise of the 401k and index funds, contributed to a significant amount of capital being allocated to these highfliers even though valuations were hard to justify. The valuations of companies kept rising because capital kept flowing into the index funds until the stock market bubble burst around 2000.

This caught my attention because last month, I listened to an interview of David Einhorn, founder of Greenlight Capital. Einhorn shared his opinion of the impact that passive investing is having on the valuations of certain companies in today’s stock market. Essentially, he believes that valuations of companies continue to rise because they’re part of one or more stock market indexes (e.g., the S&P 500 and NASDAQ Composite). Passive index funds track indexes, which leads to the funds buying more shares in these companies, regardless of the valuation, as more investors allocate capital to the passive index funds. For this section of Einhorn’s interview, listen here.

I found this interesting because there’s a twenty-year gap between this book’s publication date and Einhorn’s interview.

This weekend, I was chatting with a friend about public markets and IPOs. Neither of us knew how IPOs are trending this year, so I decided to check the stats. Here’s what I found:

2024 IPOs

• January: 15
• February: 16
• First two months total: 31

For comparison, here are the stats for the same months for the last five years:

2023 IPOs

• January: 8
• February: 17
• First two months total: 25
• Full-year total: 154

2022 IPOs

• January: 34
• February: 32
• First two months total: 66
• Full-year total: 181

2021 IPOs

• January: 118
• February: 132
• First two months total: 250
• Full-year total: 1,035

2020 IPOs

• January: 12
• February: 20
• First two months total: 32
• Full-year total: 480

2019 IPOs

• January: 6
• February: 21
• First two months total: 27
• Full-year total: 232

The number of IPOs completed in the first two months of this year has increased compared to the same months in 2023 (which was an anemic year). But we’re well below the number of IPOs we saw in 2021 (which was a record year).

Interestingly, the stock market reached an all-time high this past week. The NASDAQ Composite Index reached a record high close of 16,274 this past week. Its previous high was 16,057 over two years ago in November 2021.

I’m curious to see how IPO activity plays out for the rest of this year, especially if the NASDAQ Composite Index stays above the records set in 2021.

I’m following the rumored Reddit IPO, as it’s anticipated to be the first major technology IPO of 2024. The performance of this IPO could affect the actions of other late-stage technology companies and venture capital investors. With the NASDAQ trading just shy of all-time highs as of this writing, a well-performing IPO could unleash a wave of technology IPOs.

Last week, Reddit officially filed its Form S-1 with the SEC, indicating its intention to publicly list on the New York Stock Exchange (NYSE). Per CNBC, the company’s public market debut is expected in March (but that isn’t confirmed and is subject to change).

I’m curious to learn more about Reddit’s business and follow its post-IPO performance (assuming it moves forward with its public offering).

Today a friend texted me about a company I follow and sent a screenshot of a news headline. He wanted me to be aware that the company may be going through hard times. I read the headline and laughed.

The headline included company financial figures that were wrong. I know they were wrong because I’ve read the reports issued by the company. The writer clearly didn’t understand the company and had confused the details. I pointed this out to my friend and shared the correct financial figures, which show the company’s doing fine.

This exchange was a reminder of the value of getting first-source data. When you rely on other people’s interpretations, you run the risk of basing your conclusions and actions on incorrect interpretations.

More interesting details came out today in an article about Reddit’s potential IPO. A few points reported by Bloomberg caught my attention:

• Revenue increased more than 20%, from $666 million in 2022 to over $800 million in 2023.
• The company is unprofitable. Adjusted EBITDA is negative $69 million.
• Its listing is closely watched and a bellwether for tech IPOs.
• It’s expected to unveil a public IPO filing as soon as this month.
• It could start marketing its IPO as soon as March.

These assertions can’t be confirmed as accurate until the company files its S-1 with the SEC (reporters, being human, can make mistakes).

Assuming the info is accurate, I have a few thoughts:

• This IPO will likely be a bellwether given Reddit’s brand awareness among tech and non-tech investors and the timing—if it happens, it will be the first tech IPO of 2024. This means it will be watched closely by VCs and founders. Its performance will influence other companies considering an IPO in the first half of this year.
• Last year’s fall IPOs of Instacart and Klaviyo haven’t performed well to date. Both are still trading below their IPO offering prices, even as the NASDAQ is nearing all-time highs (more on that here). What about Reddit’s offering will be different and get enough investors interested in purchasing shares?
• Reddit is most likely free cash flow negative and burning cash—I’m not sure at what rate or how close they are to being cash flow breakeven. But I wonder how this will impact public-market investor receptiveness to this listing. Instacart and Klaviyo both reported positive free cash flow for the 2023 quarters proceeding their IPO, and those listings haven’t performed well.
• I suspect public-market investors are rethinking revenue multiples for technology companies. I’m curious to see how investors value Reddit given that it’s likely consuming cash.

I’m looking forward to Reddit filing its S-1 so I can dig in. If the company decides to proceed with the listing, I’m really curious to see how investors receive this company.

Today I read in an article that Reddit picked the New York Stock Exchange for its initial public offering. Reddit is a social platform that allows users to create digital communities based on niche user interests. It’s probably best known to mainstream America for the events of 2021, when a community named WallStreetBets played a role in the GameStop saga. I visit Reddit periodically and find it helpful. I enjoy being able to get the unfiltered, crowdsourced views of others on specific topics.

Reddit is a well-known tech company. Picking an exchange is a sign it’s seriously considering going public soon. But anything could happen. The company could decide not to list (as it did in 2021). If it does go forward with a listing, that could be helpful in gauging public-market investor appetite for new technology companies. If it lists and is successful, other companies might follow its lead.

Today I read an interesting fact. In the 1860s, there was a unique group of successful stock market investors. They went against the grain and were thought of as outsiders by their investing peers. They were called “panic birds.”

Here’s what they did that was so different from what other investors did:

• You had to physically visit Wall Street to buy or sell stock then. Most investors were on Wall Street daily, regardless of whether they were buying, selling, or just observing the market. The panic birds, though, stayed far away from Wall Street when conditions were normal. They didn’t want to get caught up in the prevailing group think or speculative mindset that prevailed among investors on Wall Street. They wanted to be able to see things clearly and think objectively.
• They went to Wall Street only when the market and other investors were in a panic or desperation was rampant.
• They bought only when two conditions were met: prices had crashed and liquidity was scarce (i.e., they were getting the bargain of a lifetime).
• When they did buy, they didn’t buy broadly; instead, they bought carefully in only the highest quality companies.
• They held their investments long term. This wasn’t common—people regularly bought and sold in those days.

This list describes some successful investors alive today. For example, Warren Buffett has a panic-bird investing style. He’s had outsize success, and he’s well respected on Wall Street. Yet he lives in Omaha, Nebraska. He buys only when companies are trading at a material discount from what he believes their intrinsic value is. He’s been known to buy large positions in a handful of companies during times of crisis, and he usually holds those positions for a long time.

I found all this interesting. It showed me that most good ideas aren’t new. They’re borrowed from people who came before us, figured things out through trial and error, and went on to achieve outsize success. I suspect that Buffett and other successful investors studied history and borrowed from the most successful and timeless ideas as they formulated their investing approaches.

I’ve been learning about business models in different industries for a few years. SEC filings of publicly traded companies have been great for companies I’ve wanted to take a dive deep into, but I wanted an additional resource. One that would help with discovery of companies and industries I’m less familiar with. One that could help me efficiently learn about new business models at a high level.

This week I found the Business Breakdowns podcast and have enjoyed listening to several episodes. It breaks down public and private companies, which I really like, and covers a broad range of industries. Some of the companies profiled I would have never thought to research, or wouldn’t have been able to because they’re private. The episodes I’ve listened to have been helpful and have gotten me thinking more about various ways of charging for the value you provide to customers.

If you’re interested in learning how different companies generate revenue and think about their business, consider giving the podcast a listen.