More on this book
Community
Kindle Notes & Highlights
Read between
March 24 - May 18, 2019
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.
the best newspaper executive in the country during this twenty-two-year period by a very wide margin.
Under Graham, the Post Company, like Buffett’s Berkshire, very rarely sold operating businesses and actively eschewed spinoffs, preferring instead the long-term direct ownership model.
In this regard, he was not unlike Warren Buffett in the early days at Berkshire Hathaway, extracting capital from the low-return textile business to deploy in much higher-return insurance and media businesses.
spin-offs highlight the value of smaller business units, allow for better alignment of management incentives, and, critically, defer capital gains taxes.
Stiritz saw this combination of characteristics and arrived at a new approach for optimizing shareholder value. In fact, he fundamentally changed the paradigm by actively deploying leverage to achieve substantially higher returns on equity, pruning less profitable businesses, acquiring related businesses, and actively repurchasing shares.
Stiritz eventually developed an appreciation for the tax inefficiency of asset sales and, as we’ve seen, began to use spinoffs, which he believed released entrepreneurial energy and creativity while deferring capital gains taxes.
Stiritz, in contrast, believed that repurchases were the highest-probability investments he could make, and after convincing his board to support him, he became an active repurchaser.
Stiritz believed that Ralston should only pursue opportunities that presented compelling returns under conservative assumptions, and he disdained the false precision of detailed financial models, focusing instead on a handful of key variables: market growth, competition, potential operating improvements, and, always, cash generation.
Again, Stiritz’s approach (similar to those of Tom Murphy, John Malone, Katharine Graham, and others) featured a single sheet of paper and an intense focus on key assumptions, not a forty-page set of projections.
Stiritz married nuts-and-bolts packaged goods marketing expertise with financial acumen, an unusual combination. He focused on newfangled metrics, like EBITDA and internal rate of return (IRR),
Stiritz observed that many CEOs came from functional areas (legal, marketing, manufacturing, sales) where this sort of analytical ability was not required. Without it, he believed they were severely handicapped. His counsel was simple: “Leadership is analysis.”
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.
The movie theater business is characterized by exceptional cash flow characteristics due to its negative working capital needs (customers pay in advance, while the movie studios are paid ninety days in arrears for their films) and low capital requirements (once a theater is built, very little investment is required to maintain it).
cash earnings (defined as net earnings plus depreciation) as the key metric in evaluating company performance, not net income.
“Float is money we hold but don’t own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money.”
In both insurance and investing, Buffett believes the key to longterm success is “temperament,” a willingness to be “fearful when others are greedy and greedy when they are fearful.”4
“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 approach to managing Berkshire’s stock investments has been distinguished by two primary characteristics: a high degree of concentration and extremely long holding periods.
approach to management as “hire well, manage little” and believes this extreme form of decentralization increases the overall efficiency of the organization by reducing overhead and releasing entrepreneurial energy.
Buffett spends his time differently than other Fortune 500 CEOs, managing his schedule to avoid unnecessary distractions and preserving uninterrupted time to read (five newspapers daily and countless annual reports) and think. He prides himself on keeping a blank calendar, devoid of regular meetings. He does not have a computer in his office and has never had a stock ticker.
