Book Summary: ‘The Outsiders’ – Eight unconventional CEOs

“You are right not because others agree with you, but because your facts and reasoning are sound.” – Benjamin Graham

Importance of capital allocation

The 8 CEOs studied in the book far outperformed the S&P 500 over a 20-30 year period and this is attributed to their capital allocation strategies. All CEOs are investors AND managers, but the ‘investors’ part is typically ignored. As Buffett says, capital allocation is one of the most important tasks of a CEO, yet almost none of the people who rise to be CEOs are trained for it. They rise to the top based on their engineering, marketing, sales or other skills. This is analogous to a master musician being promoted to being Chairman of the Federal Reserve.

The capital allocation toolkit

  • Ways to deploy capital:
    1. Invest in existing operations
    2. Acquire other businesses
    3. Pay down debt
    4. Issue dividends
    5. Repurchase stock
  • Ways to raise capital:
    1. Tap internal cash flow
    2. Issue debt
    3. Raise Equity
  • Together, these 8 mechanisms form a tool-kit. Long-term returns provided by a company to its shareholders will depend heavily on how the CEO uses these 8 options. Companies with identical operating results and different approaches to allocating capital will lead to different outcomes for shareholders.

Themes common to all the eight outsiders

  • Free cash-flow, not earnings: Pay attention not to earnings, but cash-flow. Quarterly earnings reports are a distraction. This shapes company decisions including accounting policies.
  • Clever buy/sell of own stock: Buy-back own company’s stock aggressively when it is running low and attractively priced. Use the stock to finance acquisitions or get cheap debt when the stock price runs high. Stock repurchases are a more tax-efficient method of returning capital to shareholders than dividends, which are taxed twice (corporate and individual level).
  • Fly under the radar: Wall Street and the press are a distraction, ignore them. Great CEOs (as measured by return delivered in multiples over S&P 500) also avoid frequent magazine covers, interviews etc and fly under the radar.
  • Anorexic HQ: Run decentralized operations, with rigorous budget monitoring. Headquarters should be ‘anorexic’, with only enough staff as absolutely needed to support the general managers of the various business units. The GMs are given utmost authority and autonomy.
  • Traits as an investor:
    • Concentration: “Be comfortable with concentration and buy only a few things that you understand well.”
    • Patience: Be willing to wait long periods of time  (while the market complains about your inactivity), often a decade or more, for the right opportunity to emerge.
    • Boldness: Each of the 8 CEOs made at least one acquisition or more that exceeded 25% of their firm’s enterprise value.
    • Frugality & Tax Minimization
  • Focus on ‘value per share’: Do not shy away from shrinking the company if that is the best move. Most of corporate America focuses on growth, these 8 CEOs focused on increasing ‘value per share’.
  • Individualistic thinking: “Cut through the glare of peer activity and conventional wisdom to see the core economic reality and act accordingly.”
  • To sum it up, their advantage relative to their peers was one of temperament, not intellect.

1. Capital Cities Broadcasting –  Tom Murphy and Dan Burke

  • Sign of a well-run great company: Diaspora are all over the industry. For Capital Cities, the alumni went to Disney (Bob Iger, CEO), Pulitzer (CEO). Dan Burke’s son Steve was COO of Comcast, followed by CEO of NBCUniversal.
  • Bought ABC, when it was 4 times bigger than Capital Cities. Warren Buffett helped finance the deal in exchange for a 25% stake in the combined company.
  • Most companies fall into the trap of a ‘prosperity blinded indifference to unnecessary costs’. CC executives remained focused on the core businesses.
  • Simple cycle that Tom Murphy used, which most people fail to remember or apply:
    • Look for attractive economic characteristics in a business or undertaking
    • Use whatever leverage you can apply to get that attractive business
    • Once you have it, improve operations.
    • Use the cash flow from the improved operations to pay down debt.
    • Rinse and repeat.
  • The above practice today is known as a ‘roll-up‘. Many companies collapsed under the burden of bad roll-up debt – they acquired too rapidly and did not integrate and improve operations well.
  • Tom Murphy finally sold to Disney for an extraordinary $19 billion.
  • “Paint the two sides facing the road, leaving the other two sides untouched.” – Murphy when asked to touch up a building for the advertisers who visited it.
  • Be frugal, but invest heavily where it is needed – every one of CC’s TV stations led in its region, because they invested heavily in the news talent and technology.
  • What employees and general managers said about CC – “the system corrupts you with so much authority and autonomy that you cannot imagine leaving.”
  • Tom Murphy spent years developing relationships with the owners of desirable properties, and worked very hard to become a preferred buyer.


  • While Teledyne’s own stock ran at P/E multiples in the 20-50 ranges, CEO Henry Singleton never bought companies with a P/E multiple higher than 12.
  • Great investors are able to sell high and buy low: Teledyne’s stock issuances happened at P/E multiples of ~25 and buybacks at around ~8.
  • Singleton, like Buffett designed an organization that allowed him to focus on capital allocations, not operations. Both viewed themselves primarily as investors, not managers.

General Dynamics – Bill Anders, Nick Chabraja

  • Bill Anders, CEO, had been the lunar module pilot on Apollo 8. “After orbiting the moon, mundane business problems did not faze him.”
  • Anders’ turn-around strategy to exit all businesses with low returns, commodity businesses and ones which it did not know well. He systematically shrunk the company in an era where CEOs prided on size and growth.
  • Warren Buffett bought 16% of General Dynamics in 1992 after two years of observing Anders’ work.
  • Nick Chabraja, a successor, sold almost one-third of company stock to acquire GulfStream when GD was trading at 23 P/E multiples (history, was 16). This was counter-intuitive as such massive stock selling hadn’t happened before. The best capital allocators are opportunistic, practical and flexible. They are not bounded by strategy or ideology. Nick sold the stock at its highest P/E and got a company that provided almost 50% of the combined company’s cash flow.

TeleCommunications Inc – John Malone

  • Ditch Wall Street’s metrics: John Malone at Tele-communications Inc was among the first to realize that the first among the cable operators to hit high scale would be able to lower programming costs and create a virtuous loop (higher subscribers, move leverage with content programming costs, lower costs imply more ability to buy subscribers..). This scaling would come at the expense at EPS, which was the holy grail of Wall Street.
  • It pays better to be a technology “settler” rather than a “pioneer” in traditional industries like cable – John Malone waited for other companies to test out the merits of a new technology before investing in it.
  • Comcast took until mid-1980s to realize this and switch from EPS-focused to growth-focused approach.
  • John Malone introduced the concept of EBITDA (earnings before interest, taxes, depreciation and amortization).

General Cinema – Dick Smith

  • Learnings from Dick Smith – recognize the strong, underlying demographic trends of your generation (sub-urban theatres would be beneficial in the 1960s) and then go after them trying to gain an advantage over others (used lease financing to expand theatres faster rather than buying land like everyone else was).
  • He repeated the same act with the beverage bottling businesses – recognizing that they would grow in the coming decade (1970s) and creatively growing them (financing via a sale/leaseback of the manufacturing facilities).
  •  Be opportunistic and willing to make sizeable bets when the circumstances warrant it (the HBJ acquisition was 62% of General Cinema’s value at that time, but it was an attractive bet since they were buying a business at 6 times its cash flow. They would later sell it for 11 times the cash flow).
  • “It is remarkable how much value can be created by a small group of highly talented people.” – Spoken by a media investor about the General Cinema team.

Washington Post – Katharine Graham

  • A rigorous and cautious capital expenditure approval process meant Washington Post avoided expensive investments in new technology printing plants until her competitors had vetted it.
  • Stringent acquisition criteria – acquisitions needed to earn a 11 percent return without leverage over a ten-year period.
  • Being part of the insider circles help – Buffett was friends with both Katharine and Tom Murphy of CC, so when FCC rules forced CC to divest some of its stations, the Washington Post got to take an exclusive look at the deal and they bought it.

Berkshire Hathaway – Warren Buffett

  • Until age 35, Warren Buffett ran a non-descript investment partnership out of Omaha. He did a ‘hostile takeover’ of Berkshire Hathaway, a 100-year-old but undifferentiated/unremarkable textile company based in MA.
  • Charlie Munger – “Berkshire’s long-term success stems from its ability to generate funds at 3% and invest them at 13%.
  • Advantage of being an outsider CEO (Buffett was an investment manager before Berkshire – he did not hesitate to divest the textile holdings when he did not see growth and good returns in the textile business) – you are not wedded to a particular business or industry. It is easier for you to exit businesses/industries with low returns and concentrate on those which are likely to meet their investment targets.
  • Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
  • Buffett’s portfolio management philosophy: a high degree of concentration and extremely long holding periods.
  • Warren Buffett to students – your investments results will improve if, at the beginning of your careers, you are handed a 20 hole punch-card symbolizing the total number of investments you can make in your investing lifetimes.
  • Institutional Imperative” – this is the big-company/CEO equivalent of ‘teenage peer pressure.’ Buffett scorns this.
  • “Be greedy when others are fearful, and fearful when others are greedy.”

Overall Take-aways

  • Act boldly when you see a difference between value and price.
  • When your stock is low, buy it back. When it is high, use it raise debt or buy other companies.
  • The best defense against revenue lumpiness is a constant vigilance on costs.
  • “When you see something that you like, make a very large bet.” 

Notes from Zero To One by Peter Thiel

On Startups

  • Successful people find value in unexpected places and they do by thinking about business from first principles instead of applying formulas.
  • Peter Thiel’s mandatory interview question –  “What important truth do very few people agree with you on?”
  • Going from 1 to n is horizontal progress. An example is globalization where you take something that works at one place and replicate it elsewhere in the world.
  • Going from 0 to 1 is vertical progress or ‘technology’.
  • A startup is the largest group of people you can convince of a plan to build a different future. Its hard to do it alone and impossible to do it in big organizations.
  • “How much of what you know about business is shaped by mistaken reactions to past mistakes?” A lot of people took away the wrong lessons thanks to the dot-com bubble.

Competition v/s Monopoly

  • Creating value is not enough – you also need to capture some of the value you create. For example, Google creates less value than airlines (monetarily) but airlines capture very little of what they create and Google captures a lot.
  • Competition destroys profit. Aim for monopoly. Capitalism and competition are opposed.
  • Both competitive companies and monopoly players are incentivized to bend the truth. Competition players will frame their market as an intersection of several markets to make them seem more relevant than they are. Monopolies will frame their market as a union of several markets to make them seem smaller than they actually are.
  • The competitive ecosystem pushes people towards ruthlessnes or death.  Paypal and decided to merge because they were losing a lot of energy competing as opposed to building what they wanted to.
  • In business, money is either an important thing or everything. Monopolists can afford to think about things other than money. Non-monopolists can’t.
  • All happy companies are different (they found monopoly in a different way). All failed companies are alike – they failed to escape competition.
  • “All Rhodes scholars had a great future in their past.” Refers to how competition destroys individual potential.
  • In business, if you recognize competition as a destructive force,  you are already more sane than most. Use the clear head to build a monopoly.

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Book Summary: Flow: The psychology of optimal experience

The concept of flow

  • What is described in popular culture as being ‘in the zone’ or ‘in the groove’.
  • Makes use of an individual’s focused attention, referred to as ‘psychic energy’. Focused attention, not time or anything, is an individual’s most precious resource.
  • The labels applied to people (“extrovert”, “high achiever”, “paranoid”) really refer to the specific patterns that people have used to structure their attention. A paranoid person is paranoid because they focus a lot of attention and energy on worrying.
  • 8 conditions together leading to flow:
    1. Confront challenging but completable tasks
    2. Concentration
    3. Clear goals
    4. Immediate feedback
    5. Deep, effortless involvement (lack of awareness of worries and frustrations)
    6. Sense of control over actions
    7. Concern for self disappears (paradoxically awareness of self is heightened immediately after flow)
    8. Sense of duration of time is altered
  • Every flow activity transforms the self by making it more and more complex. e.g. the rock climber is a different person after scaling El Capitan at Yosemite. The chess player is a different person after playing a grandmaster tournament.
  • Most enjoyable activities are not natural – they demand an effort that initially one is reluctant to make.
  • Steps to achieving flow
    1. Set a goal.
    2. Concentrate your ‘psychic energy’ on achieving it.
    3. Pay attention to the feedback
    4. Make certain that the challenge is appropriate for one’s skill level.
  • The best moments usually occur when a person’s body and mind are stretched to its limit in a voluntary effort to accomplish something difficult and worthwhile.

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Book Summary: The hard thing about hard things by Ben Horowitz

TL;DR: This book is a great reference for the following things (some well-summarized in this YC talk)

  1. Various aspects of running an enterprise tech company in the valley.
  2. How to hire execs. Contains a comprehensive checklist of things one should think about hiring a VP of enterprise sales.
  3. How to handle performance reviews, firings, demotions.
  4. What a good HR organization should do, and help you with.
  5. How to design your organization (think of org. design as a communications architecture for the company).
  6. How to conduct effective 1:1s as an organization (followed by a great list of questions for a manager ask).
  7. Misc. tricky situations to handle as a founder – hiring from your friends’ company, promote from within or bring external candidates, when to sell etc.

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PAN-IIT GLC 2015 Learnings

Book Recommendations:

Womens’ Day Sessions:

  • Management is not command-and-control as Indian upbringing tells you – it is about gaining influence, gaining credibility, recognizing the best ideas and having the ability to marshall people towards them.  (Paulette Altmaier)
  • Don’t need to know 100% of the role before stepping into it. Nobody has done the POTUS job before – they all step into it, some do a good job. (Anjali Joshi)
  • The biggest mistakes made (as admitted by panelists about their own career) was to not imagine a big enough future for themselves. (Paulette Altmaier).
  • Tipping point is 30% of a team being women – that’s when the culture changes for good. Google strives for this, one of the ways is to have 50% females in the intern batch and encourage the interns.

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Notes from ‘A Curious Mind: The secret to a bigger life’

  • The author, Brian Grazer, is a famous Hollywood producer, who held ‘curiosity conversations’ with famous politicians, techies, sports-people, Nobel Laureates over 35+ years to understand the world and viewpoints of someone very different from him.
  • He landed a job as a glorified courier delivery guy (“law clerk”) for Hollywood folks his law firm was doing business with. He took the opportunity to meet people he was delivering to (mostly celebrities) by claiming that the docs had to be handed “in person”. No one ever called his bluff!
  • Curiosity can help you use anger or frustration constructively. How?
  • Curiosity needs to be substantiated with two traits: (a) Pay attention to the answers to your questions (b) Willingness to act.
  • People – even famous and powerful people – are happy to talk, especially about themselves and their work. Second, it helps to have even a small pretext to talk to them.
  • The author managed to get himself a ‘corner office’ when a senior VP was fired right next to the 3 most important folks at Warner Bros. He observed John Calley – the president of Warner Bros, and figured that the “business part of show business was all about conversation.” He soon realized he could talk to anyone – not just the people he was delivering Warner Bros papers to! He used  a clear, concise message: I work for Warner Bros. I only need 5 mins, and I am not looking for a job. I want to meet you for <X> reason.
  • He had one rule for himself at age 23: “Meet one new person in the entertainment business everyday.”
  • Later on, he met people from CIA directors, Isaac Asimov, sports people to Senators Obama, Bush and McCain.
  • He NEVER met people with a movie in mind. His goal was to learn something. Though eventually some of the meetings resulted in movies. It helps to combine different perspectives: A chilean activist trapped and tortured by her government taught him about making Apollo 13 as much as astronaut Jim Lovell did. He had to portray the psychology of being trapped and crippled.

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Notes from Venture Deals (Brad Feld, Jason Mendelson) – Part II

Part I is here.  In a hurry? Italics in the post represent key dos and don’ts for founders.

How VC firms work

  • One management company (franchise) – this is the name of the VC firm you hear.
  • Under them are several “general partnerships” (no longer a “general partner” i.e. single person, this is a separate legal entity of its own ). Each “general partnership” has different funds – LPs (limited partnerships) under it.
  • Interest of VC firm != interest of the GP/LP always, particularly when new people join or MDs leave.
  • How VCs raise money
    • LPA – limited partnership agreement
    • Fund amount is not actually with the VCs. A capital call is made each they want to invest in a startup, and the LPs are obligated to respond to the capital call in two weeks.
  • Capital calls can fail or result in lower funding than expected .2008-like situations: LPs include HNIs who may be struggling with illiquidity themselves, banks who, like in 2008, may be dissolving themselves, endowments/pension funds etc who are facing capital crunch due to general market conditions.
  • Average total fee over a 10 year period: 15% of the fund. VCs are expected to make capital gains and recycle those gains to cover up for the fees.
  • Partners see base compensation with every additional fund raised.
  • “It takes 10 years to kill a venture fund.” – additional funds / rounds can be raised while the performance of the first few isn’t clear.
  • Carry: VCs get a 20% of the profit cut, which is known as “carry”. This can be reinvested (and is expected to be reinvested, at least till it covers the management fees).
  • Friction within a VC firm – Firms don’t equal allocation between partners- seniority matters. An individual partner can make X times the amount allotted, but still get no carry because of allocation style and poor performance of the overall firm or fund.
  • GP Commitment: LPs want VCs to invest a cut as well – 99% money comes from LPs, 1% from the VCs. Has gone up to 5%.
  • Clawback: VCs can pocket the carry in the middle of the fund (say 20% of 50 mn in profit) and then the overall fund turns out to not do so well. VCs have taken more than the deserved carry and LPs demanding for this back is ‘clawback’.  Harder to pull off across multiple partners.. (e.g. one partner got divorced, paid half to spouse. All partners paid taxes on the carry).
  • Time impact of fund activity
    • If you are raising with a VC fund that closers to closing, higher pressure for an exit.
  • Wary of ‘zombie’ VC firms (no new funds to raise, carrying on their existing funds). Just ask when their last investment was.
  • Wary of ‘secondary sale’ – VC can sell their entire portfolio to someone in a secondary sale.
  • VCs close to end of the fund can also redistribute the portfolio to LPs – hassle for founder if there are too many LPs.
  • Reserves – VC have a fraction of the fund (30-50%) in ‘reserve’ i.e. for future investments with their portfolio companies. Ask upfront for details on this.
  • Cashflow – how does the VC maintain their cashflow? Are they recycling the carry appropriately to make up for the management fees? ([KR]: How does this affect the founder?)
  • Cross-fund investing – bad idea, since there are multiple sets of LPs and multiple kinds of terms involved.
  • Figure out what happens if and when the partner who invested in you departs – does it trip a ‘key-man clause’? (LP can ask for recall of funds).
  • Understand your VC’s fiduciary duties – they are serving you/your board, the VC firm, their own GP/LP and a bunch of other people. Not all VCs are direct about what they have on their plate, making their behavior confusing.
  • Understand your investors motives and financial incentives. Have an open, if difficult conversation about it now, to avoid surprise and trauma later.

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Notes from Venture Deals (Brad Feld, Jason Mendelson) – Part I

In a hurry? Just skim over the italics in this post – they represent key dos and don’ts for founders. Part II of the post is here.


Term Sheet

  • Typically 8-ish pages (~2012).
  • Two key aspects, everything else is secondary, don’t waste too much time on other terms:
    • Economics terms
    • Control terms.
  • Signs of the VC not being entrepreneur friendly appear during the term-sheet negotiations.

VC History

  • Early VC example: AR&D:  70k for 78% of the company. Post-money valuation becomes 90k.
  • Individual VCs today own less than 50%, no effective voting control. They negotiate provisions that give them control over the major decisions made by the company.
  • VCs investing at different stages in the company => different ownership percentages, varying rights, diverging motivations.
  • Founders should direct and control the process of financing – leave as little as possible outsourced for the lawyer.
  • Capitalization-table (Cap Table): spreadsheet that defines the economics of the deal.

VC hierarchy

  1. MD/GP: Managing Director or General Partner. They make the final decisions and sit on the boards of the companies they invest in. Prefixes “executive” or “founding” may be applied to indicate seniority.
  2. Principal/Directors: Have deal responsibility, need a MD involved to take the final decision. These are junior partners making their way up to MD.
  3. Associates: Not deal partners, they work for the partners. They do: scout new deals, due diligence on existing deals, write internal memos about prospective investments. Associates likely spend the most time with the cap table.
    – Many VC firms have a 2 year associate program – after that, the associate leaves to go to B-school, work for a portfolio company or start up her own company. Star associates may go on to become principals.
  4. Analysts: Bottom of the ladder, crunch numbers and write memos.
  5. Other people involved in VC:
    1. Venture partners/Operating Partners: Experienced entrepreneurs who have a part-time relationship with the VC firm. May take an active role in managing the investment as chairman or board member.
    2. EIR (Entrepreneur in residence): Experience entrepreneurs who park themselves at a VC firm while figuring out their next company. Help the VC with intros/networking and due diligence. Last 3-12 months typically. Some VCs pay the EIR , some just offer office space and an implicit agreement to fund the next company.

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Notes from The Power of Positive Thinking

Caveat Emptor: Great book, but throws in way too much Christianity/religion in the face of the reader. IMHO, it is much easier for humans to place absolute confidence and faith in an abstract higher power, than it is to place faith in their innate prowess. Substitute “prayer” and “God” in this book summary for something similar that works for you.

  • Six point action plan to stop fuming and fretting:
    1.  Get in a relaxed physical position.
    2. Visualize: Your mind is the surface of a lake, tossed by waves and in tumult. But when the waves subside, the surface of the lake is placid and unruffled. This imagery should help you calm down.
    3. Spend two-three minutes thinking about the most beautiful and calming nature scenes you’ve witnessed.
    4. Repeat, slowly to yourself, words along the lines of “tranquillity”, “serenity”, “peace” and let the effect of them sink in.
    5. Make a list of times in your life when you were worried and anxious, and things turned out fine (for the more religious, “God took care of everything”).
    6. Rely on a higher power to take charge of the situation and fix it.

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Work empowers personality

“Bill O’Reilly who precedes me on our channel, is like a superhero. Because if you meet him in person, he is kind of shy, quiet. He would never dominate your dinner table. But you put that guy behind that desk, and he grows into this larger than life personality. And I have a little bit of that. When I sit in front of that desk, I don’t care who’s across of me, I don’t care if its a Republican or Democrat or President. It doesn’t matter. I only have one master and that’s my audience. I will serve that audience and if you try to dodge or weave, you will get pinned down. So I feel very empowered. In person, I am not a shrinking violet, but I don’t have quite as much, uh, power.” 

– Megyn Kelly, 2014 interview