Insights

We try to read The Outsiders at least annually. It is our favorite, and most recommended, book on the topic of shareholder orientation. The author compares eight unique CEOs and their legendary track records with the traditional example of a successful CEO…GE’s Jack Welch. The “Outsiders” share a common philosophy that includes several similarities: a preference for cash flow over earnings, opportunistic share buybacks, decentralized operations, the thoughtful use of leverage and infrequent, but meaningful acquisitions. Despite stock performances that trounced the market and their peers, this group of extraordinary leaders were not “charismatic”, but, rather were often humble, independent, highly analytical (more engineers than MBAs) and family-oriented. We are always on the “look-out” to partner with Outsider-like CEOs.

This book provides a great framework for understanding the current transition from fossil fuels to renewable energy by examining past energy transitions such as wood to coal and animal power to oil.  The basic thesis is that energy transitions are about cost, they are slow, and they have profound effects on society. The transition to renewables for electricity generation has accelerated in recent years as wind and solar power have become considerably less expensive than fossil fuels, even without tax credits.  However, renewables are still held back by the cost of battery storage, which is required to address wind and solar’s intermittency issue. Electric vehicles are approaching cost parity with internal combustion engines enabling a transition away from fossil fuels for transportation.  The speed of the renewable energy transition is hard to predict, but this book is well researched and provides wonderful insight into why the transition is occurring and how it is likely to develop.

A nice complement to The Man Who Solved the Market, this book traces the remarkable life of the original “quant” Ed Thorp. The first part of the book describes his childhood and his love for math and science, which eventually earned him a Ph.D. in math and an MIT post. He spent the 1960s literally writing the book on how to take on the casinos (Beat the Dealer) and the market (Beat the Market). It is particularly entertaining to read about Thorp and fellow MIT professor / “father of information theory” Claude Shannon tinkering with roulette equipment in Shannon’s basement and then the game of bridge with Warren Buffett in 1968. Thorp spent the next several decades developing option pricing theory and mastering hedged strategies, including convertible and statistical arbitrage, for his Princeton Newport and Ridgeline hedged funds. The book is highly recommended for those interested in the beginnings of the quant investing revolution.

The Man Who Solved the Market, holiday reading for River Road associates, tells the remarkable story of former math professor Jim Simons and the secretive investment firm he built, Renaissance Technologies. With an annualized return of +39% (after fees) over the past 30 years, and not a single year of negative returns, Renaissance’s Medallion Fund is arguably the most successful investment fund in history. The book describes how Simons assembled a team of brilliant, and often quirky, mathematicians and computer programmers to identify complex patterns in the market. We especially enjoyed the author’s insights about the many challenges Renaissance faced in developing its algorithms and Simon’s perseverance.

This book is for true value investing junkies that perk up when something is “happening” (e.g. M&A, recapitalizations, asset sales, reorganizations, self-tenders, and liquidations). A Warren Buffett quote comes immediately to mind upon reading this book…taken from his 1988 shareholder letter, “Give a man a fish and you feed him for a day. Teach him how to arbitrage and you feed him forever.” Through conversations with 17 risk arbitrageurs / value investors ranging from John Paulson to Paul Singer and Michael Price, the authors trace the natural evolution many of these investors have taken from pure risk arbitrage (providing liquidity for those not interested in waiting for a deal to close) to activist investing (use influence to close the “value gap”) and finally distressed investing (the natural end to the investing cycle). Several common themes among the investors include the importance of thoughtful valuations, robust risk controls, and portfolio construction.

It seems unlikely that a weatherman from a tiny cable TV station in Ithaca, NY would someday lead one of the largest media companies in the world. Once the reader learns, however, that Bob Iger was groomed for his leading role from the “greatest two-person combination in management that the world has ever seen or maybe ever will see” (at least according to Warren Buffet) – Tom Murphy and Dan Burke, his eventual success makes more sense. As Iger was promoted through the ranks of ABC / Capital Cities, the Outsiders duo of Murphy / Burke certainly rubbed off on him. Upon assuming the Disney CEO role in 2005, Iger followed the Capital Cities playbook of decentralization and making infrequent, but meaningful, investments. Iger quickly dismantled the Strategic Planning Group (~65 Ivy-educated MBAs) and made three large studio investments in Pixar, Marvel, and Lucasfilms. Iger re-focused and re-energized the firm over the past 14 years and the stock price has followed his lead, returning almost 15% per annum over that time period and beating the market by ~600 basis per annum. Disney shareholders should sleep well at night with Iger leading the firm into its next direct-to-consumer chapter.

Hunter Harrison’s tenacity, common sense, creativity, and willingness to not be loved allowed him to change an entire industry that is critical to life in North America. While viewed by many inside and outside the companies he ran as the enemy, Mr. Harrison’s results at the four railroads he ran were nothing short of amazing and have stood the test of time. At the core of Hunter Harrison’s success is his own brand of railroading, “Precision Scheduled Railroading” (PSR). Many of Harrison’s ideas are counter-intuitive, such as the notion that the customer isn’t always right or that by reducing the number of locomotives you could increase the volume transported or that an asset unused can actually be a liability. The key to PSR is that it results in better service for customers through faster and more reliable service while providing the railroad with better economics.

It is rare for an individual to succeed with a new retailing format let alone two different models. However, Sol Price changed the way people shop and the way retailers operate by creating the discount retail model with FedMart, in the 1950s, and the warehouse club model with Price Club, in the 1970s. His ideas influenced many of the most successful retailers in history including Sam Walton (Walmart), Bernard Marcus (Home Depot), and Jim Sinegal (Costco). At the core of his success was the notion that his companies maintained a professional fiduciary relationship with their customers. He felt that he was representing the customers and that he had a duty to be very honest and fair with them. This idea along with many other Sol Price ideas can be most directly observed at Costco today, which acquired Price Club in 1993.