After reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, I wanted to learn more about the CEOs profiled in the book. I was especially interested in Henry Singleton, given that Warren Buffett likely borrowed from Singleton’s playbook when building Berkshire Hathaway.

Singleton didn’t do many interviews, and no one has written a biography about him. I managed to dig up Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It. It’s hard to find, but I got lucky and started reading it.

Singleton went on an acquisition spree during Teledyne’s early years in the 1960s. Two things likely led to Singleton embracing this strategy and making it so effective:

• The stock market valued Teledyne richly in the 1960s, and Singleton shrewdly took advantage. He used Teledyne’s stock as currency. Teledyne traded at a double-digit P/E multiple ranging between thirty to seventy times earnings (i.e., high valuation) as a public company, while smaller, private companies were valued at single-digit P/E multiples of roughly nine times earnings (i.e., lower valuations). Singleton recognized this arbitrage and paid for his acquisitions using overvalued Teledyne stock.
• World War II took place mostly in the 1940s. New technologies were created, and many small companies were founded to help the war effort. After the war, veterans benefited from the G.I. Bill, receiving tuition-free college educations, from which they learned new technologies and methods. This combination of newly educated and tech-savvy veterans and a wave of new technology led to a boom in entrepreneurship in the 1940s and 1950s. By the 1960s, many of these small companies had matured, and the founders were ready to sell or needed growth capital to reach the next level.

Singleton’s genius was in recognizing that he was positioned to benefit from twin tailwinds. Two forces were occurring simultaneously, and he crafted a strategy to take full advantage of both. There was a large supply of entrepreneurs interested in being acquired, and he could fund acquisitions using richly valued Teledyne stock instead of cash. His strategy led to over one hundred companies being acquired in a decade and Teledyne growing from $4.5 million in revenue and $58,000 in profit to $1.3 billion in revenue and $60 millions in profit annually by the end of the acquisition spree.

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As I’ve been reading Cable Cowboy: John Malone and the Rise of the Modern Cable-TV Business, I’ve gotten a clearer picture of John Malone. Malone is brilliant and shrewd. I’d consider him more of a financial engineer than anything else. He excelled at deal making, strategy, and capital allocation—but not at building a cable service customers loved or a company that was sustainable long-term.

Between 1973 and 1989, he completed 482 deals, or one every two weeks or so. From the company’s low in 1974, not long after Malone joined, through mid 1989, the stock rose 55,000 percent, a spectacular return.

Malone’s constant deal making created remarkable shareholder value. But it came at a cost. Customers hated TCI. Malone’s goal was to charge as much as possible for his service but spend as little providing it as he could get away with. This strategy maximized cash flow but resulted in notoriously poor customer service, massive rate hikes, unreliable service technicians, and inconsistent cable service. TCI’s poor reputation with customers and its business practices (including others not mentioned here) led to Malone being forced to appear before Congress to defend himself and TCI’s business practices. He and various state and federal politicians became enemies. TCI’s shareholders were happy, but Malone and the company were under constant attack.

Malone was in a service-oriented business selling to consumers, but he didn’t approach it that way. He focused on engineering financial outcomes, not making customers happy. He got the financial returns he wanted, but he and TCI were vilified by customers, politicians, and competitors. It all took a toll on Malone over the years. As I read this part of the book, I couldn’t help but wonder if all the hate he encountered was worth it. Couldn’t he have gotten a similar outcome if he built something people loved, not hated?

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Last week I learned about John Malone while reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. This inspired me to buy and begin reading Cable Cowboy: John Malone and the Rise of the Modern Cable-TV Business.

Tele-Communications Inc. (TCI) was a cable company founded by rancher and cottonseed salesman Bob Magness. TCI laid wires to allow cable to reach homes and charged monthly fees for access to its infrastructure and programming.

Magness used debt to expand TCI and got in over his head. In 1972, he recruited Malone to get the company’s finances in order and take it to the next level.

Malone focused on increasing the long-term value of TCI, not short-term profits. He ignored reported profits and concentrated on the company’s cash flows, not net income. He reinvested cash flow in ways that would generate a high return and increase TCI’s market capitalization (i.e., valuation). Here are two key things I noticed Malone did:

• Depreciation – Cable systems were depreciable assets. Once a system was acquired, TCI depreciated this cost over time, which minimized (and often eliminated) TCI’s tax bill. The lower the tax bill, the more cash TCI had to buy more cable systems. The more cable systems TCI purchased, the more cash flow Malone had to reinvest and the more depreciation lowered TCI’s tax bill. The bigger the system became, the more subscribers Malone had to use as leverage in negotiations.  
• Programming – Cable system operators thought programming was a commodity they had to pay for. Malone realized programming companies were valuable because they had two revenue streams: advertising and payments from cable systems (like TCI) based on subscribers. New channels increased fees to cable systems as popularity increased. Malone realized that owning part of new programming (i.e., new cable channels) would allow TCI to profit twice by owning “both the pipe and the water flowing through it.” He could offer new channels broad distribution early and negotiate lower programming rates for TCI, a win-win. Malone started seeding new cable networks. He provided capital and access to subscribers in his system in exchange for 20% of new programming channels.

Malone ended up building a powerful flywheel that increased TCI’s long-term value. The more cable systems he bought, the more cash flow and subscribers he had. The more subscribers and cash he had, the more leverage he had with new cable channels. The more these new channels succeeded, the more revenue they had and the more valuable they became. The more valuable new programmers became, the more valuable TCI became.

Using this approach, Malone ended up owning stakes in BET, the Discovery Channel, the Family Channel, and others.

I haven’t finished the book yet, but I can already see why Malone is considered one of the best capital allocators.

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Reviewing my notes on The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, I spotted a few patterns. Most of the CEOs displayed the following traits:

• Daily operations – These CEOs hired strong lieutenants who managed day-to-day operations. This time-management hack allowed them to focus on whatever the most pressing issue was at any given time and strategic things like capital allocation. Finding the right number two took years in some cases, but when it happened, it freed these CEOs from the weeds of the business and gave them more control of their time.  
• Frugal – There’s an old saying: “If you watch the pennies, the dollars will take care of themselves.” All these CEOs took this to heart and watched their costs. They were happy to spend, but only when the return was clear. They avoided unnecessary layers of people and the associated costs. Most avoided expensive class A offices, opting for modest, unassuming offices instead. Tom Murphy of Capital Cities Broadcasting used frugality as a defense to his company’s inconsistent ad revenue. He recognized that he couldn’t control revenue but he could control his costs.
• Independent thinking – These CEOs didn’t believe in mimicking others. They didn’t follow their peers or conventional thinking. Instead, they spent time doing their own thinking to arrive at rational and pragmatic decisions. These decisions were often the opposite of what peers were doing and led to returns that exceeded those of their peers.
• Free cash flow – Free cash flow is a recurring focus among these CEOs. They didn’t pay attention to reported profits (i.e., net income); rather, they wanted to know how much cash the business generated that they could allocate. The distinction between free cash flow and net income is an important one. Many entrepreneurs don’t understand that difference, and it shows in their decision-making.

These CEOs ran large public companies, but these are traits that founders of almost any stage company can embrace and benefit from.

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.

I started reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success this weekend. The book, written by William N. Thorndike, Jr., and published in 2012, details eight CEOs' methods and why they led to outsize returns for their shareholders over a long period.

The central concept of this book is that capital allocation is the CEO’s most important job. Capital allocation is “the process of deciding how to deploy the firm’s resources to earn the best possible return for shareholders.” It’s investing to get the highest return, so CEOs are both capital allocators and investors.

CEOs need capital before they can deploy it. They can acquire capital in three ways:

• Generating cash from company operations
• Issuing debt (i.e., bank loans or bonds)
• Selling equity (i.e., selling part of the company to VC, PE, or public investors)

When CEOs have capital, they can deploy it in several ways:

• Investing in the company’s existing operations
• Acquiring other businesses
• Issuing dividends
• Paying down debt
• Repurchasing equity (i.e., buying back part of the company)
• Launching new businesses (as the sole owner or in partnership with others)

These options make up a CEO's capital allocation toolkit. Figuring out what tools to use, if any, and when, is the skill of capital allocation. The book emphasizes that no courses are taught on capital allocation (as of 2012), so it’s a skill many CEOs lack. Now, though, Columbia Business School apparently covers this topic in its Security Analysis course.

Core to gauging the effectiveness of a CEO’s capital allocation in the long run “is the increase in per share value, not overall growth or size.” Long-term per share value essentially measures long-term value creation.

When I ran my company, I was focused on two things: running the company efficiently and generating cash. Getting the operations right consumed much of my time, and I didn’t think in terms of being a capital allocator.

So far, the stories of how these CEOs thought about and executed capital allocation strategies to generate high returns have been thought provoking. I’m looking forward to finishing this book.

I finished reading The Davis Dynasty: Fifty Years of Successful Investing on Wall Street this week. The book chronicles three generations of the Davis family and how an initial $50,000 investment in stocks by the patriarch has turned into more than $2 billion for the family and an investment firm that manages over $25 billion in total assets.

This book caught my eye because I enjoy learning about “investor entrepreneurs” —investors by profession who don’t want to work for someone else, so they choose to become entrepreneurs by starting companies that invest capital

In the 1940s, the Davis family patriarch had a unique insight about insurance companies. He realized that (1) the companies had hidden investment portfolios that would compound for long periods until claims were paid out, but they were disguised as unprofitable companies because of accounting rules, and (2) the market for life insurance was exploding because of World War II. He quit his job in 1947 and became a full-time investor specializing in the stocks of insurance companies. His timing proved ideal: his portfolio ballooned from $50,000 to roughly $10 million by 1959.

One key takeaway from this book is the patriarch’s insistence on writing and distributing a weekly bulletin about the insurance industry. In the early 1990s, his grandson began helping him write this newsletter. He asked why they should bother when the lack of feedback suggested that no one was reading it. The patriarch’s response? “It’s not for the readers. It’s for us. We write it for ourselves. Putting ideas on paper forces you to think things through.”

The patriarch used the weekly bulletin as a tool for reflection and learning. Distributing it to others added accountability to the process.

When I read this, I thought about a few successful founder friends with a similar habit—which I remembered because it’s rare. They’ve built companies worth hundreds of millions of dollars or more. Each sends a weekly email update to their investors and/or team. They’ve kept up with this habit for years, since their earliest days. I asked one of them why he keeps doing it. He does it for himself, he said, not the recipients. It forces him to reflect on the past seven days and plan for the next seven.

I’m a proponent of founders sending update emails. It’s a habit with superpower potential. Everyone can do it, and because few people do, it gives those who take the time for it an edge.

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.