Book Highlights

“They seemed to operate in a parallel universe, one defined by devotion to a shared set of principles, a worldview, which gave them citizenship in a tiny intellectual village. Call it Singletonville, a very select group of men and women who understood, among other things, that: Capital allocation is a CEO’s most important job. What counts in the long run is the increase in per share value, not overall growth or size. Cash flow, not reported earnings, is what determines longterm value. Decentralized organizations release entrepreneurial energy and keep both costs and ‘rancor’ down. Independent thinking is essential to long-term success, and interactions with outside advisers (Wall Street, the press, etc.) can be distracting and time-consuming. Sometimes the best investment opportunity is your own stock. With acquisitions, patience is a virtue . . . as is occasional boldness.”

“Each ran a highly decentralized organization; made at least one very large acquisition; developed unusual, cash flow–based metrics; and bought back a significant amount of stock. None paid meaningful dividends or provided Wall Street guidance. All received the same combination of derision, wonder, and skepticism from their peers and the business press. All also enjoyed eye-popping, credulity-straining performance over very long tenures (twenty-plus years on average).”

“Interestingly, their iconoclasm was reinforced in many cases by geography. For the most part, their operations were located in cities like Denver, Omaha, Los Angeles, Alexandria, Washington, and St. Louis, removed from the financial epicenter of the Boston/New York corridor. This distance helped insulate them from the din of Wall Street conventional wisdom.”

“Isaiah Berlin, in a famous essay about Leo Tolstoy, introduced the instructive contrast between the ‘fox,’ who knows many things, and the ‘hedgehog,’ who knows one thing but knows it very well. Most CEOs are hedgehogs—they grow up in an industry and by the time they are tapped for the top role, have come to know it thoroughly. Foxes, however, also have many attractive qualities, including an ability to make connections across fields and to innovate, and the CEOs in this book were definite foxes.”

“This single decision underscores a key point across the CEOs in this book: as a group, they were, at their core, rational and pragmatic, agnostic and clear-eyed. They did not have ideology. When offered the right price, Anders might not have sold his mother, but he didn’t hesitate to sell his favorite business unit.”

“The outsider CEOs were also distinctly unpromotional and spent considerably less time on investor relations than their peers. They did not offer earnings guidance or participate in Wall Street conferences. As a group, they were not extroverted or overly charismatic. In this regard, they had the quality of humility that Jim Collins emphasized in his excellent Good to Great. They did not seek (or usually attract) the spotlight. Their returns, however, more than compensated for this introversion.”

“These executives were capital surgeons, consistently directing available capital toward the most efficient, highest-returning projects. Over long periods of time, this discipline had an enormous impact on shareholder value through the steady accretion of value-enhancing decisions and (equally important) the avoidance of value-destroying ones. This unorthodox mind-set, in itself, proved to be a substantial and sustainable competitive advantage.”

“One of the most important decisions any CEO makes is how he spends his time—specifically, how much time he spends in three essential areas: management of operations, capital allocation, and investor relations.”

“Basically, CEOs have five essential choices for deploying capital—investing in existing operations, acquiring other businesses, issuing dividends, paying down debt, or repurchasing stock—and three alternatives for raising it—tapping internal cash flow, issuing debt, or raising equity. Think of these options collectively as a tool kit. Over the long term, returns for shareholders will be determined largely by the decisions a CEO makes in choosing which tools to use (and which to avoid) among these various options.”

“Essentially, capital allocation is investment, and as a result all CEOs are both capital allocators and investors. In fact, this role just might be the most important responsibility any CEO has, and yet despite its importance, there are no courses on capital allocation at the top business schools.”

“The heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration, or sometimes, institutional politics. Once they become CEOs, they now must make capital allocation decisions, a critical job that they may have never tackled and that is not easily mastered. To stretch the point, it’s as if the final step for a highly talented musician was not to perform at Carnegie Hall, but instead, to be named Chairman of the Federal Reserve.”

“1. The allocation process should be CEO led, not delegated to finance or business development personnel. 2. Start by determining the hurdle rate—the minimum acceptable return for investment projects. 3. Calculate returns for all internal and external investment alternatives, and rank them by return and risk. Use conservative assumptions. 4. Calculate the return for stock repurchases. Require that acquisition returns meaningfully exceed this benchmark. 5. Focus on after-tax returns, and run all transactions by tax counsel. 6. Determine acceptable, conservative cash and debt levels, and run the company to stay within them. 7. Consider a decentralized organizational model. 8. Retain capital in the business only if you have confidence you can generate returns over time that are above your hurdle rate. 9. If you do not have potential high-return investment projects, consider paying a dividend. 10. When prices are extremely high, it’s OK to consider selling businesses or stock.”

“Be very wary of the adjective strategic—it is often corporate code for low returns.”

“The outsider CEOs always started by asking what the return was. Every investment project generates a return, and the math is really just fifth-grade arithmetic, but these CEOs did it consistently, used conservative assumptions, and only went forward with projects that offered compelling returns. They focused on the key assumptions, did not believe in overly detailed spreadsheets, and performed the analysis themselves, not relying on subordinates or advisers. The outsider CEOs believed that the value of financial projections was determined by the quality of the assumptions, not by the number of pages in the presentation.”

“These CEOs shared an intense focus on maximizing value per share. To do this, they didn’t simply focus on the numerator, total company value, which can be grown by any number of means, including overpaying for acquisitions or funding internal capital projects that don’t make economic sense. They also focused intently on managing the denominator through the careful financing of investment projects and opportunistic share repurchases.”

“Buffett’s exceptional results derived from an idiosyncratic approach in three critical and interrelated areas: capital generation, capital allocation, and management of operations.”

“In another departure from conventional wisdom, Singleton eschewed reported earnings, the key metric on Wall Street at the time, running his company instead to optimize free cash flow. He and his CFO, Jerry Jerome, devised a unique metric that they termed the Teledyne return, which by averaging cash flow and net income for each business unit, emphasized cash generation and became the basis for bonus compensation for all business unit general managers.”

“Related to this central idea was Malone’s realization that maximizing earnings per share (EPS), the holy grail for most public companies at that time, was inconsistent with the pursuit of scale in the nascent cable television industry. To Malone, higher net income meant higher taxes, and he believed that the best strategy for a cable company was to use all available tools to minimize reported earnings and taxes, and fund internal growth and acquisitions with pretax cash flow.”

“In lieu of EPS, Malone emphasized cash flow to lenders and investors, and in the process, invented a new vocabulary, one that today’s managers and investors take for granted. Terms and concepts such as EBITDA were first introduced into the business lexicon by Malone. EBITDA in particular was a radically new concept, going further up the income statement than anyone had gone before to arrive at a pure definition of the cash-generating ability of a business before interest payments, taxes, and depreciation or amortization charges.”

“Cash return on capital became the key metric within the company and was always on our minds. This was a first for the entire industry, which had historically had a myopic focus on revenue growth and new product development.”

“Decentralization is the cornerstone of our philosophy. Our goal is to hire the best people we can and give them the responsibility and authority they need to perform their jobs. All decisions are made at the local level. We expect our managers to be forever cost conscious and to recognize and exploit sales potential.”

“The system in place corrupts you with so much autonomy and authority that you can’t imagine leaving.”

“Singleton believed in an extreme form of organizational decentralization with a wafer-thin corporate staff at headquarters and operational responsibility and authority concentrated in the general managers of the business units. This was very different from the approach of his peers, who typically had elaborate headquarters staffs replete with vice presidents and MBAs.”

“There is a fundamental humility to decentralization, an admission that headquarters does not have all the answers and that much of the real value is created by local managers in the field.”

“Singleton and Roberts eschewed the then trendy concepts of ‘integration’ and ‘synergy’ and instead emphasized extreme decentralization, breaking the company into its smallest component parts and driving accountability and managerial responsibility as far down into the organization as possible. At headquarters, there were fewer than fifty people in a company with over forty thousand total employees and no human resource, investor relations, or business development departments.”

“TCI’s operations were remarkably decentralized, and as late as 1995, when Sparkman retired, the company had only seventeen employees at corporate in a company with 12 million subscribers. The company did not have human resource executives and didn’t hire a PR person until the late 1980s. TCI’s culture was described by Dennis Leibowitz as a group of frugal, action-oriented ‘cowboys’ who defined themselves in counterpoint to the more conservative and bureaucratic Easterners who ran the other large cable companies.”

“By the end of Chabraja’s tenure, the company would have more employees than when Anders arrived but only a quarter as many people at corporate headquarters. There would be only two people between the CEO and the head of any profit center, whereas before there had been four. Operating managers were held responsible—in Chabraja’s words, ‘severely accountable’—for hitting their budgets and were left alone if they did so.”

“Murphy and Burke realized early on that while you couldn’t control your revenues at a TV station, you could control your costs. They believed that the best defense against the revenue lumpiness inherent in advertising-supported businesses was a constant vigilance on costs, which became deeply embedded in the company’s culture. Murphy even scrutinized the company’s expenditures on paint. Shortly after Murphy arrived in Albany, Smith asked him to paint the dilapidated former convent that housed the studio to project a more professional image to advertisers. Murphy’s immediate response was to paint the two sides facing the road leaving the other sides untouched.”

“The Edifice Complex. There is an apparent inverse correlation between the construction of elaborate new headquarters buildings and investor returns. Over the last ten years, three media companies—The New York Times Company, IAC, and Time Warner—have all constructed elaborate, Taj Mahal–like headquarters towers in midtown Manhattan at great expense. Over that period, none of these companies has made significant share repurchases or had market-beating returns. In contrast, not one of the outsider CEOs built lavish headquarters.”

“To Murphy, as a capital allocator, the company’s extreme decentralization had important benefits: it allowed the company to operate more profitably than its peers (Capital Cities had the highest margins in each of its business lines), which in turn gave the company an advantage in acquisitions by allowing Murphy to buy properties and know that under Burke, they would quickly be made more profitable, lowering the effective price paid. In other words, the company’s operating and integration expertise occasionally gave Murphy that scarcest of business commodities: conviction.”

“The company did not simply cut its way to high margins, however. It also emphasized investing in its businesses for longterm growth. Capital Cities stations always invested heavily in news talent and technology, and remarkably, virtually every one of its stations led in its local market. As Phil Beuth, an early employee, told me, ‘The company was careful, not just cheap.’”

“Murphy was willing to wait a long time for an attractive acquisition. When he saw something that he liked, however, Murphy was prepared to make a very large bet, and much of the value created during his nearly thirty-year tenure as CEO was the result of a handful of large acquisition decisions, each of which produced excellent long-terms returns. These acquisitions each represented 25 percent or more of the company’s market capitalization at the time they were made.”

“Murphy was a highly disciplined buyer who had strict return requirements and did not stretch for acquisitions—once missing a very large newspaper transaction involving three Texas properties over a $5 million difference in price. Like others in this book, he relied on simple but powerful rules in evaluating transactions. For Murphy, that benchmark was a double-digit after-tax return over ten years without leverage. As a result of this pricing discipline, he never prevailed in an auction, although he participated in many. Murphy told me that his auction bids consistently ended up at only 60 to 70 percent of the eventual transaction price.”

“Murphy had an unusual negotiating style. He believed in ‘leaving something on the table’ for the seller and said that in the best transactions, everyone came away happy. He would often ask the seller what they thought their property was worth, and if he thought their offer was fair he’d take it. If he thought their proposal was high, he would counter with his best price, and if the seller rejected his offer, Murphy would walk away. He believed this straightforward approach saved time and avoided unnecessary acrimony.”

“The business of business is a lot of little decisions every day mixed up with a few big decisions.”

“Capital Cities under Murphy was an extremely successful example of what we would now call a roll-up. In a typical roll-up, a company acquires a series of businesses, attempts to improve operations, and then keeps acquiring, benefiting over time from scale advantages and best management practices. This concept came into vogue in the mid- to late 1990s and flamed out in the early 2000s as many of the leading companies collapsed under the burden of too much debt. These companies typically failed because they acquired too rapidly and underestimated the difficulty and importance of integrating acquisitions and improving operations. Murphy’s approach to the roll-up was different. He moved slowly, developed real operational expertise, and focused on a small number of large acquisitions that he knew to be high-probability bets.”

“Singleton’s approach to acquisitions differed from that of other conglomerateurs. He did not buy indiscriminately, avoiding turnaround situations, and focusing instead on profitable, growing companies with leading market positions, often in niche markets. As Jack Hamilton, who ran Teledyne’s specialty metals division, summarized his business: ‘We specialized in high-margin products that were sold by the ounce, not the ton.’ Singleton was a very disciplined buyer, never paying more than twelve times earnings.”

“The hurdle we always used for investment decisions was the share repurchase return. If an acquisition, with some certainty, could beat that return, it was worth doing.”

“In his approach to acquisitions, Stiritz always sought an edge and focused on buying businesses that he believed could be improved by Ralston’s marketing expertise and distribution clout. He preferred companies that had been undermanaged by prior owners; and, not coincidentally, his two largest acquisitions, Continental Baking and Energizer, were both small, neglected divisions within giant conglomerates. The long-term returns from these two purchases were excellent, with Energizer generating a 21 percent compound return over fourteen years.”

“When the opportunity to buy Energizer came up, a small group of us met at 1:00 PM and got the seller’s books. We performed a back of the envelope LBO model, met again at 4:00 PM and decided to bid $1.4 billion. Simple as that. We knew what we needed to focus on. No massive studies and no bankers.”

“Acquisitions needed to earn a minimum 11 percent cash return without leverage over a ten-year holding period. Very few deals passed through this screen. The company’s whole acquisition ethos was to wait for just the right deal.”

“The transformational acquisition for Smith was the 1968 purchase of the American Beverage Company, the largest, independent Pepsi bottler in the country. The deal as negotiated by Smith was both compelling (an attractive price of five times cash flow) and very large, equaling over 20 percent of the company’s enterprise value at the time. Smith leveraged his real estate expertise to creatively finance the purchase via a sale/leaseback of ABC’s manufacturing facilities.”

“In buying ABC, Smith acquired a legitimate platform company—one that other companies could be added to easily and efficiently. As ABC developed scale advantages, Smith realized he could purchase new franchises at seemingly high multiples of the seller’s cash flow and immediately reduce the effective price through expense reduction, tax savvy, and marketing expertise.”

“Immediately after TCI took over the floundering Pittsburgh franchise from Warner Communications, it reduced payroll by half, closed the elaborate studios the prior owners had built for the city, and moved headquarters from a downtown skyscraper to a tire warehouse. Within months, the formerly unprofitable system was generating significant cash flow.”

“Prior to the early 1970s, stock buybacks were uncommon and controversial. The conventional wisdom was that repurchases signaled a lack of internal investment opportunity, and they were thus regarded by Wall Street as a sign of weakness. Singleton ignored this orthodoxy, and between 1972 and 1984, in eight separate tender offers, he bought back an astonishing 90 percent of Teledyne’s outstanding shares. As Munger says, ‘No one has ever bought in shares as aggressively.’”

“Singleton believed repurchases were a far more tax-efficient method for returning capital to shareholders than dividends, which for most of his tenure were taxed at very high rates. Singleton believed buying stock at attractive prices was self-catalyzing, analogous to coiling a spring that at some future point would surge forward to realize full value, generating exceptional returns in the process. These repurchases provided a useful capital allocation benchmark, and whenever the return from purchasing his stock looked attractive relative to other investment opportunities, Singleton tendered for his shares.”

“Fundamentally, there are two basic approaches to buying back stock. In the most common contemporary approach, a company authorizes an amount of capital and then gradually over a period of quarters buys in stock on the open market. This approach is careful, conservative, and, not coincidentally, unlikely to have any meaningful impact on long-term share values. Let’s call this cautious, methodical approach the ‘straw.’ The other approach, the one favored by the CEOs in this book and pioneered by Singleton, features less frequent and much larger repurchases timed to coincide with low stock prices—typically made within very short periods of time, often via tender offers, and occasionally funded with debt. Singleton, who employed this approach no fewer than eight times, disdained the ‘straw,’ preferring instead a ‘suction hose.’”

“Conglomerates were the Internet stocks of the 1960s, when large numbers of them went public. Singleton, however, ran a very unusual conglomerate. Long before it became popular, he aggressively repurchased his stock, eventually buying in over 90 percent of Teledyne’s shares; he avoided dividends, emphasized cash flow over reported earnings, ran a famously decentralized organization, and never split the company’s stock, which for much of the 1970s and 1980s was the highest priced on the New York Stock Exchange.”

“In the area of capital allocation, Murphy’s approach was highly differentiated from his peers. He eschewed diversification, paid de minimis dividends, rarely issued stock, made active use of leverage, regularly repurchased shares, and between long periods of inactivity, made the occasional very large acquisition.”

“When it came to issuing equity, Malone was parsimonious, with the company’s occasional offerings timed to coincide with record high multiples on his stock. He was justifiably proud of his stinginess in issuing equity and believed it was another factor that distinguished him from his peers.”

“Most CEOs grade themselves on size and growth . . . very few really focus on shareholder returns.”

“It is hard to overstate how unusual these moves were: in less than three years, Anders had dramatically streamlined operations, sold off over half of his company, generated $5 billion in proceeds, and, rather than redeploying the cash into R&D or new acquisitions, returned most of it to shareholders, using innovative, tax-efficient techniques. It is very, very rare to see a public company systematically shrink itself.”

“His turnaround strategy for General Dynamics was rooted in a central strategic insight: the defense industry had significant excess capacity following the end of the Cold War. As a result, Anders believed industry players needed to move aggressively to either shrink their businesses or grow through acquisition. In this new environment, there would be consolidators and consolidatees, and companies needed to figure out quickly which camp they belonged in.”

“When Anders and Mellor began to implement their plan, General Dynamics was overleveraged and had negative cash flow. Over the ensuing three years, the company would generate $5 billion of cash. There were two basic sources of this astonishing influx: a remarkable tightening of operations and the sale of businesses deemed noncore. They moved quickly to wring the excesses out of the system. When they visited an F-16 factory, they counted huge numbers of expensive F-16 canopies in a facility that made one plane a week—Mellor’s new rule: a two-canopy maximum.”

“Throughout the balance of the 1980s, Stiritz continued to optimize his portfolio of brands, making selected divestitures and add-on acquisitions. Businesses that could not generate acceptable returns were sold (or closed). His add-on acquisitions focused on the core battery and pet food brands, particularly in underpenetrated international markets. All these decisions were guided by a careful analysis of potential returns for shareholders.”

“Stiritz came to believe that even with a relatively decentralized corporate structure, some of the company’s businesses were not receiving the attention they deserved either internally or from Wall Street. To rectify this and to minimize taxes, Stiritz became an early user of spin-offs. Spin-offs highlight the value of smaller business units, allow for better alignment of management incentives, and, critically, defer capital gains taxes.”

“Malone was a pioneer in the use of spin-offs and tracking stocks, which he believed accomplished two important objectives: (1) increased transparency, allowing investors to value parts of the company that had previously been obscured by TCI’s byzantine structure, and (2) increased separation between TCI’s core cable business and other related interests. Malone started with the spin-off of the Western Tele-Communications microwave business in 1981, and by the time of the sale to AT&T, the company had spun off a remarkable fourteen different entities to shareholders.”

“Malone occasionally and opportunistically sold assets. He coolly evaluated the public and private values for cable systems and traded actively in both markets when he saw discrepancies. As Malone told David Wargo as early as 1981, ‘It makes sense to maybe sell off some of our systems at 10 times cash flow to buy back our stock at 7 times.’”

“A critical part of capital allocation, one that receives less attention than more glamorous activities like acquisitions, is deciding which businesses are no longer deserving of future investment due to low returns. The outsider CEOs were generally ruthless in closing or selling businesses with poor future prospects and concentrating their capital on business units whose returns met their internal targets.”

“Companies in financial distress often hire restructuring ‘consultants’ who helicopter in, slash costs, negotiate with lenders and suppliers, and look to sell the company as quickly as possible before moving on to the next assignment. These hired guns tend to ignore longer-term considerations like culture, capital investment, and organizational structure, focusing instead on short-term cash needs.”

“After closing an acquisition, Murphy actively deployed free cash flow to reduce debt levels, and these loans were typically paid down ahead of schedule. The bulk of the ABC debt was retired within three years of the transaction. Interestingly, Murphy never borrowed money to fund a share repurchase, preferring to utilize leverage for the purchase of operating businesses.”

“Malone pioneered the active use of debt in the cable industry. He believed financial leverage had two important attributes: it magnified financial returns, and it helped shelter TCI’s cash flow from taxes through the deductibility of interest payments. Malone targeted a ratio of five times debt to EBITDA. Malone structured his debt with great care to lower costs and avoid cross-collateralization so that if one system defaulted on its debt, it would not affect the credit of the entire company.”

“Malone’s one extravagance in terms of corporate staff was in-house tax experts. The internal tax team met monthly to determine optimal tax strategies, with meetings chaired by Malone himself. When he sold assets, he almost always sold for stock or sheltered gains through accumulated NOLs. As Dennis Leibowitz said, ‘TCI hardly ever disposed of an asset unless there was a tax angle to it.’”

“What drove me was the realization that the stock was trading at a significant premium to our historic norm: twenty-three times next year’s projected earnings versus an historic average of sixteen times. So what do you do with a high-priced stock? Use it to acquire a premium asset in a related field at a lower multiple and benefit from the arbitrage.”

“Singleton eschewed detailed strategic plans, preferring instead to retain flexibility and keep options open. As he once explained at a Teledyne annual meeting, ‘I know a lot of people have very strong and definite plans that they’ve worked out on all kinds of things, but we’re subject to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible.’”

“Smith ran the company in close collaboration with a coterie of three top executives: chief financial officer Woody Ives, chief operating officer Bob Tarr, and corporate counsel Sam Frankenheim. He officially designated this group the Office of the Chairman, or the OOC. The OOC met weekly, and Smith actively encouraged debate among his top executives. Longtime General Cinema investment banker Caesar Sweitzer characterized these sessions as ‘wrestling matches conducted in a constructive, collegial way.’”

“The system was totally federalized, with all excess cash sent to corporate. Managers had to make the case for all capital projects. The key question was, ‘Where’s the next dollar best applied?’ And the company was rigorous and skeptical in answering that question.”

“This discipline led Graham to a more cautious approach to physical plant investments than that of her peers. During the 1980s, other large newspaper companies spent hundreds of millions of dollars to install new printing and prepress facilities that allowed shorter lead times and color printing. Graham, alone among major newspaper CEOs, held back, eventually becoming the last major publisher to rely on old-fashioned letterpress printing, deferring the expensive investment in a new plant until costs had dropped and the benefits had been definitively proven out by peers.”

“We lost no major ground by waiting to invest. Unfortunately, pioneers in cable technology often have arrows in their backs.”

“To the standard menu of five capital allocation alternatives, Malone added a sixth: investment in joint ventures. No CEO has ever used joint ventures as actively, or created as much value for his shareholders through them, as John Malone. Malone realized early on that he could leverage the company’s scale into equity interests in programmers and other cable companies, and that these interests could add significant value for shareholders, with very little incremental investment.”

“Buffett believes that the best boards are composed of relatively small groups of experienced businesspeople with large ownership stakes. He requires that all directors have significant personal capital invested in Berkshire’s stock. He believes directors should have exposure to the consequences of poor decisions (Berkshire does not carry insurance for its directors) and should not be reliant on the income from board fees, which are minimal at Berkshire.”

“After graduation in 1952, Buffett asked Graham for a job at his investment firm, but was turned down and returned to Omaha, where he took a job as a broker. The first company he recommended to clients was GEICO, a car insurance company that sold policies directly to government employees. The more he studied it, the more he realized GEICO had both important competitive advantages and a margin of safety, Graham’s term for a price well below intrinsic value (the price a fully informed, sophisticated buyer would pay for the company).”

“General Cinema maintained a disciplined approach to capital expenditures, with all capital requests requiring attractive cash returns on invested capital. The Neiman Marcus business had significant capital requirements. Smith was willing to make the occasional large investment to open new Neiman stores because he believed that demonstrating growth potential would allow the company to realize a premium price on exit (in its twenty years of ownership, General Cinema opened just twelve stores; the new buyer would plan to open many times that number).”

“In assessing performance, what matters isn’t the absolute rate of return but the return relative to peers and the market. You really only need to know three things to evaluate a CEO’s greatness: the compound annual return to shareholders during his or her tenure and the return over the same period for peer companies and for the broader market.”

“Context matters greatly—beginning and ending points can have an enormous impact, and Welch’s tenure coincided almost exactly with the epic bull market that began in late 1982 and continued largely uninterrupted until early 2000. During this remarkable period, the S&P averaged a 14 percent annual return, roughly double its long-term average. It’s one thing to deliver a 20 percent return over a period like that and quite another to deliver it during a period that includes several severe bear markets.”

“When a CEO generates significantly better returns than both his peers and the market, he deserves to be called ‘great,’ and by this definition, Welch, who outperformed the S&P by 3.3 times over his tenure at GE, was an undeniably great CEO. He wasn’t even in the same zip code as Henry Singleton, however.”

“CBS spent much of the 1960s and 1970s taking the enormous cash flow generated by its network and broadcast operations and funding an aggressive acquisition program that led it into entirely new fields, including the purchase of a toy business and the New York Yankees baseball team. CBS issued stock to fund some of these acquisitions, built a landmark office building in midtown Manhattan at enormous expense, developed a corporate structure with forty-two presidents and vice presidents, and generally displayed what Buffett’s partner, Charlie Munger, calls ‘a prosperity-blinded indifference to unnecessary costs.’ At its core, Paley’s strategy focused on making CBS larger. In contrast, Murphy’s goal was to make his company more valuable.”

“Murphy negotiated an extraordinary $19 billion price for his shareholders, a multiple of 13.5 times cash flow and 28 times net income. He left behind an ecstatic group of shareholders—if you had invested a dollar with Tom Murphy as he became CEO in 1966, that dollar would have been worth $204 by the time he sold the company to Disney. That’s a remarkable 19.9 percent internal rate of return over twenty-nine years, significantly outpacing the 10.1 percent return for the S&P 500 and 13.2 percent return for an index of leading media companies over the same period.”

“Conglomerates, companies with many, unrelated business units, were the Internet stocks of their day. Most conglomerates built up large corporate headquarters staffs in the belief that they could find and exploit synergies across their disparate companies, and they actively courted Wall Street and the press in order to boost their stock. Their halcyon days, however, came to an abrupt end in the late 1960s when the largest of them (ITT, Litton Industries, and so on) began to miss earnings estimates and their stock prices fell precipitously.”

“Suppose you own a successful high-end bakery. You are faced with two choices for growing the business: expand into the space next door and buy a second oven, or open a new store, in a different part of town. Conventional wisdom points to expanding your store as the right path, but you sit down and do the math. You’ve decided your personal hurdle rate: you will go forward only if the project can produce at least a 20 percent return.”