30/9/2014

Q&A With William Thorndike, Author of The Outsiders - Motley Fool Inside Value

Joe Magyer, the advisor of Inside Value and Motley Fool Pro in Australia, recently interviewed William
Thorndike, author of The Outsiders: Eight Unconventional CEOs and Their Radically Rational
Blueprint for Success, often hailed as the best investing book in years. They discussed what makes
for a stellar CEO, which CEOs may be poised for outsize success now, and how investors can spot
successes-in-the-making. Read on!
JOE MAGYER:
Hi, Fools. This is Joe Magyer, and I'm here today with Will Thorndike, the founder of Housatonic
Partners and the author of The Outsiders. The Outsiders is a book that all the cool investing kids are
talking about, and in all seriousness, it's the best and most original investing book I've read in years.
Unlike most investing books that focus on either how to get rich quick or how to pick stocks, The
Outsiders is more focused on a group of super successful, iconoclastic CEOs that delivered huge
returns, not just over one, three, five years, but over a span of decades. And for a sense of the scale
of research that went into this book, Will's team did more than 100 interviews and studied more than
1,000 company years' worth of financial data while researching this book. So, thanks very much for
joining me and talking to us about the book today, Will.
WILLIAM THORNDIKE:
Thanks, Joe, for having me.
JOE MAGYER:
I appreciate your taking the time. I guess a logical place to start would be to talk about Henry
Singleton who the guy is and why he's the best CEO of the past century.
WILLIAM THORNDIKE:
Yes. Henry Singleton had a unique background for a CEO. He was trained as an engineer and
scientist. He got his undergraduate degree, master's, and a Ph.D. from MIT in electrical engineering,
and for his doctoral thesis, he programmed the first computer at MIT. He subsequently went on to
develop a degaussing technology that allowed naval ships to avoid radar detection during the
Second World War. He ended up working for one of the pioneering conglomerates in the 1950s,
Litton Industries. While he was there, he developed an inertial guidance system that's still in use in
military and commercial aircraft.
He was a super-talented engineer. When he was an undergraduate, he won something called the
Putnam Medal, which is awarded to the top mathematician in the country. Later in his career, at the
age of 43, he founded his own company, Teledyne (NYSE: TDY), which grew to be one of the most
successful of the '60s-era conglomerates, and in running that business over almost 30 years, he
generated exceptional returns: 20% compounded over 28 years.
It roughly doubled the rate of return for his conglomerate peers. In doing that, he developed a whole
range of varied, unusual, idiosyncratic practices, including pioneering stock buybacks, never selling
his stock, and doing a whole range of things that were unheard of at the time. He was a remarkable
figure and the first in this series of chapters in the research project.
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Q&A With William Thorndike, Author of The Outsiders - Motley Fool Inside Value

JOE MAGYER:
Why is it that despite what is an incredible track record, only a small group of investing nerds actually
know who this guy is?
WILLIAM THORNDIKE:
Yes, it is remarkable. He is still relatively unknown. Part of that stemmed from his personality type. He
disdained the limelight and was very reticent to spend time with the business press and with Wall
Street analysts. In his day, he gave no earnings guidance. He never appeared in Wall Street sell-side
conferences and that sort of thing. He preferred to stay apart and focus on building value in his
company over time.
JOE MAGYER:
Yes. A pretty big contrast to the CEOs that most people could name.
WILLIAM THORNDIKE:
He would not have been on Squawk Box.
JOE MAGYER:
Yes. How did you go about choosing this group? Part of the reason I ask is I know the obvious
answer might be the equity returns over a long time horizon, but you're careful to point out, early in
the book, that you're focused on folks who were, through the different processes, citizens of Grahamand-Doddsville, and not ideally just being the levered-up survivors of a series of coin flips.
WILLIAM THORNDIKE:
Yes, that's right. Each of the CEOs had to meet two classes. There's an absolute returns test, which
says they had to have better returns relative to the S&P over their tenure than Jack Welch had
during his 20 years atGeneral Electric (NYSE: GE) at the helm. And then they had to materially
outperform their peer group.
And in looking at the specific actions that led to that higher performance, by definition, these CEOs
were doing things very differently than their peers, but it turned out that the specific actions were
remarkably similar across the group. They centered around things relating to capital allocation and
more broadly resource allocation.
JOE MAGYER:
I see a lot of Outsider tools being used today. Share buybacks. All sorts of creative tax minimization
or deferment. One thing I feel I don't see a lot of but I'm curious about your thoughts on this is a
lot of the underlying principles that made some of these folks so successful. Two of the big ones that
spring to mind are frugality and decentralization. Is that just because frugality isn't fun as a CEO?
WILLIAM THORNDIKE:
Yes, and I think those two things, honestly, go together. I think an ethos of frugality in a corporation
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Q&A With William Thorndike, Author of The Outsiders - Motley Fool Inside Value

usually stemming from a CEO at the top it infuses a culture and it naturally leads to a bias
toward decentralization: the hallmark of decentralization being lean corporate headquarters staffing
and often, relatedly, non-fancy corporate headquarters buildings.
I think that in corporate America, there is a natural tendency to want to grow your business. Have the
business be bigger. More prestigious. Have a larger corporate headquarters building. Have it
designed by a leading architect. Surround yourself by MBAs and generally engage in the behavior
that's commonly associated with CEO-ness. This group pretty actively disdained that.
JOE MAGYER:
We have something I jokingly call the Lobby Test where we'll go into the office of a new company
we're researching, and if there is a waterfront view from the lobby, we're immediately concerned
about the cost management. And it's a surprising number of companies.
In contrast, we're invested in Sky Network Television (ASX: SKT), which is the dominant pay-TV
company in New Zealand, and it's run by John Fellet, who formerly worked with John Malone. And
when we went out to visit with them, we took a cab and keep driving and driving and driving.
We're out in the suburbs and we're surrounded by houses. I'm starting to get angry with the
cabdriver. We finally stopped and turned into what looked like a driveway. It turns out Fellet built this
office and these massive satellite dishes right out in suburbia, surrounded by homes sitting right next
to these massive dishes.
WILLIAM THORNDIKE:
Oh, that's great. I love that. I have a similar story. I grew up around Boston. Of all the CEOs in the
book, only one of them is from Boston. It's a guy named Dick Smith who ran a company called
General Cinema. And when I grew up as a kid, I went to the movies at one of his movie theaters in a
local suburban strip mall.
I went in and out of that movie theater probably 100 times in my youth, and I never realized that the
nondescript door to a back office to the right of the theater I used to go to was actually the door to
the corporate headquarters for General Cinema. And General Cinema, at that point in time behind
that nondescript door was the headquarters for a company that controlled the largest PepsiCola (NYSE: PEP) bottler in the country, the Neiman Marcus legion of retail stores, and Harcourt
Brace, the largest educational publisher in the U.S. The same thing just extraordinarily nondescript
was the headquarters. So, yes. I love that.
JOE MAGYER:
Who are the younger CEOs you see out there today who are succeeding with Outsider-style
leadership and capital allocation?
WILLIAM THORNDIKE:
I think there are a number of CEOs who are currently following this path. It would include the Rales
brothers of Danaher (NYSE: DHR) and Colfax(NYSE: CFX). Nick Howley
of TransDigm (NYSE: TDG), which is a wonderful aviation components company that I know you
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Q&A With William Thorndike, Author of The Outsiders - Motley Fool Inside Value

guys are familiar with. The guy who runs a software company in Canada calledConstellation
Software (NASDAQOTH: CNSWF). The CEO's name is Mark Leonard.
I know you know a group of insurance companies that follow these sort of Buffett principles and are
very close to this whole approach: Markel(NYSE: MKL) and Fairfax (NASDAQOTH: FRFHF)
and White Mountains (NYSE: WTM). There's a home builder called NVR (NYSE:NVR). There's a
reinsurance company called Arch Re (NASDAQ:ACGL). I recently came across a utility business
called Calpine (NYSE:CPN) that's doing some interesting things. There are definitely current
exemplars out there. We were following this to different degrees. It's been fun to watch that.
By the way, Valeant Pharmaceuticals (NYSE: VRX) is a really interesting case as to whether or not
the CEO there, Mike Pearson, is an Outsider. Of course, being very much in the news with
the Allergan(NYSE: AGN) bid.
JOE MAGYER:
One of the funny things about the style of management is that it's easy to look back at a single
instance and say, "Well, this was clearly brilliant, and it clearly worked." But at the time, these guys
were totally either ignored or they were ignoring other people. As you look at some of these, like the
Valeant situation today, there are a lot of people who have strong opinions about whether or not its
approach is working. I think you could look at other names like Jeff Bezos
of Amazon (NASDAQ: AMZN), which a lot of value investors wouldn't consider, but there's a lot of
Sam Walton and John Malone there.
I guess what I'm getting at is if you're in the moment of looking for the qualities that you have as an
outsider CEO, how do everyday investors go about identifying those kinds of CEO leaders in the
here and now? A lot of times they're off the grid or their style is so unconventional that they'd never
show up on a screen and you wouldn't see them on television.
WILLIAM THORNDIKE:
That's a good question. And by the way, I do think that the current reaction to the Valeant-Allergan
side and sort of the bear case is very similar to concerns that were heard across John Malone's
entire career at TCI. There are very interesting similarities there, I think, to the reactions and
concerns being raised.
I think, over time, you can assess a CEO's fit with this approach by their actions: by the acquisitions
they make, by the stock repurchases. And I think over time what they do, ultimately, is sort of the key
guide to whether or not they're following this approach and whether or not they're CEOs that you
want to invest with. A marker of this that could be quite predictive is the way they describe or they
think about and describe their business I think can be very revealing.
And specifically, if they have developed idiosyncratic metrics that they are optimizing the business
around, I think that can be a very strong signal of the presence of this sort of worldview, specifically
to the degree they're talking about the cash economics of the business as opposed to the broader
accounting conventions and expressing those on a per-share basis. Those are the two key
hallmarks, I think.
JOE MAGYER:
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Q&A With William Thorndike, Author of The Outsiders - Motley Fool Inside Value

I love a good, clear, intrinsic value-oriented shareholder letter. They're few and far between, but
they're nice to find.
WILLIAM THORNDIKE:
Yes, and I would agree with you. I think Bezos is a very interesting case. I think he is the most
Outsider-like by a wide margin of the sort of visionary tech CEO. His letters are great reading and
they are very revealing of a highly rational, analytical mind-set.
JOE MAGYER:
Well, as an Amazon shareholder, I love hearing your confirmation.
WILLIAM THORNDIKE:
Yes.
JOE MAGYER:
I have a screen that I run looking for Outsider companies. In a way, it's a waste of time, because the
qualities that you're looking for don't as readily show up on the screen. I don't know if TCI would have
shown up on the screen. But anyway, we're typically looking for something like shrinking share count
and growth in book value per share, just as a rough guide. In the U.S., I'll find 200-plus names and
that's great, but when I do the same screen in Australia, I get zero names.
It's not that there aren't any savvy capital allocators in Australia, just that different tax laws have a big
impact on how companies go about returning cash to shareholders. Adding the local layer of
complexity makes screening for Outsiders feel that much more futile. This all leads to my noticing that
there are no international CEOs featured in the book. Was the difficulty in identifying some of these
Outsiders who were successful locally but less known in the States part of the reason there weren't
any international CEOs featured in the book?
WILLIAM THORNDIKE:
It's a good question, Joe. I would love to include an international name in the book. The reason that I
didn't is just data availability. I worked with a group of HBS students in researching the book, and
through them I had access to the incredible Baker Library of the Harvard Business School.
Unfortunately, the databases there are heavily focused on the domestic U.S. market. So, I think it's
something that would be a very interesting exercise. I do think there are examples internationally, and
I also think these ideas are much less developed outside the U.S. So there's an even greater, longerterm opportunity over time. I think that's exciting.
JOE MAGYER:
Thinking about either an international version or a second edition where we might see an
international name leader pop up, one group that springs to mind is 3G Capital. They've done
amazing work with some of their acquisitions. Organic growth, cost cutting, incredibly smart use of
leverage. I've really been impressed by those. I'm curious if you've spent any time studying 3G and
have any thoughts on them.
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Q&A With William Thorndike, Author of The Outsiders - Motley Fool Inside Value

WILLIAM THORNDIKE:
Yes. I have spent a little bit of time studying them, and I agree that they share these traits. They
remind me a lot of, from the book, Capital Cities. I think there are some very interesting similarities
there, and it will be interesting to see, over long periods of time, whether they add the share
repurchase arrow to their quiver the way Capital Cities did. But I think they're a very interesting
international example. Yes.
JOE MAGYER:
I'm curious. There are Buffett, Malone, and Stiritz who are also out there applying their trade. I'm
curious. Do you have any money with the three of them?
WILLIAM THORNDIKE:
I own a bunch of the Malone entities and have for some time. Then I do own Berkshire
Hathaway (NYSE: BRK-B) shares. I do not own any of Bill Stiritz's shares currently, although I have
enormous regard for him. But two out of the three I do own actively.
JOE MAGYER:
Got you. Last one. I noticed in the epilogue that you thanked Charlie Munger for his early
encouragement and insights. How much fun was it talking shop and old stories with Uncle Charlie?
WILLIAM THORNDIKE:
Oh, my gosh. That was great. Charlie Munger is such an amazing individual and unbelievably
insightful. He was very supportive of this project from very early on. I spent a fair amount of time with
him all of the chapters where he had first-hand experience with the companies. That was really
fun. And then after the book came out, I had a chance to breakfast with him in L.A. What a wonderful,
gracious, and talented man. That was a really fun part of the project.
JOE MAGYER:
Well, going to the Berkshire meeting every year is a favorite pastime of mine, so I can only imagine
sitting down with him. We'll call it there. Will, I really appreciate your taking the time, and I encourage
everybody reading ... to simply check out the book. It's a wonderful read. It's the first investing book I
nudge people to read these days. Thanks again, Will, and thanks everybody. ... Fool on!
WILLIAM THORNDIKE:
Thank you, Joe. Take care.

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