Founders - #328 Tom Murphy (Buffett's favorite manager)

Starting point is 00:00:00 You might be able to hear this in my voice in the episode that you're about to listen to, but I just got over either COVID or the flu. I'd been traveling way too much and I've been sleeping terribly and it finally caught up to me. I've been home now for almost a week and I feel way better. And one thing that actually helped me feel a lot better is my eight sleep. Before I had an eight sleep, I never had the ability to change the temperature of my bed before, and I had no idea how much that affects and improves the quality of my sleep. I keep my eight sleep ice cold. It's cold before I even get into bed. This helps me fall asleep faster and wake up less during the night. And when I had this fever and these flu-like symptoms, I kept it even colder, and it actually helped me recover

Starting point is 00:00:41 from this sickness faster than if I didn't have an eight sleep. I had been feeling terribly for a day or two before I got back home and I was forced to sleep in a hotel bed that I cannot make cool. And I slept terribly. It was impossible for me not to notice my eight sleeps absence. And I think that's a definition of a great product. A great product is when you notice its absence. There's a lot of founders that have actually spoken publicly about their love for Eight Sleep. People like Elon Musk and Mark Zuckerberg have both tweeted and posted publicly about the fact that they own and use and enjoy an Eight Sleep mattress. I know Mateo, who is the founder of Eight Sleep. I've spent a bunch of time with him. We live in the same city. He listens to founders. I know he has a complete dedication to the constant

Starting point is 00:01:25 improvement of his product. I believe that there are very few no-brainer investments in life, and 8sleep is one of them. Normally, when you go to 8sleep.com forward slash founders, you actually get $150 off. But right now, if you do this now, you get $500 off because 8sleep is having a holiday sale. If you wanted to see why so many high quality people are raving about Eight Sleep, why I hate traveling without it, and you want to test it for yourself, now's the best time to do that. Get $500 off of your own Eight Sleep by going to eightsleep.com forward slash founders. Warren Buffett said Tom Murphy and Dan Burke were probably the greatest two-person combination in management that the world has ever seen or maybe ever will see. When he speaks to business school

Starting point is 00:02:13 classes, Warren Buffett often compares the rivalry between Tom Murphy's company, Capital Cities Broadcasting, and CBS to a transatlantic race between a rowboat and the QE2. QE2 is the Queen Elizabeth II. It is this giant transatlantic liner, much, much larger than the Titanic. So he compares it to a transatlantic race between a rowboat and the QE2 to illustrate the tremendous effect management can have on long-term returns. When Murphy became the CEO of Capital Cities in 1966, CBS was the dominant media business in the country, with TV and radio stations in the country's largest markets, the top-rated broadcast network, and valuable publishing and music properties.

Starting point is 00:03:00 In contrast, at that time, Capital Cities had five TV stations and four radio stations, all in small markets. CBS's market capitalization was 16 times the size of Capital Cities. But by the time Murphy sold his company to Disney 30 years later, Capital Cities was three times as valuable as CBS. In other words, the rowboat had won decisively. That is an excerpt from the book I'm going to talk to you about today, which is The Outsiders, Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. It was written by William Thorndike. And specifically, I'm going to focus on chapter one, which is about Tom Murphy and

Starting point is 00:03:45 Capital Cities Broadcasting. And the name of the chapter is a perpetual perpetual motion machine for returns. And before I do that, I'm going to actually put this book down for one second. I'm going to pick up last week's book, which was Ted Turner's autobiography and read this section because he he appears Tom Murphy and his partner, Burke, appear in Ted Turner's autobiography as well, because they also built, they essentially built Capital Cities from a small broadcasting company into a multi-billion dollar media conglomerate. And so this is what Ted Turner said about them. I like the Capital Cities people a lot.

Starting point is 00:04:18 Dan Burke and Tom Murphy really understood the business. They had built their company up by buying TV and radio stations, as well as newspapers and magazines, and operating them efficiently. That is not the first time I read Tom Murphy's name in one of the books that I've covered for the podcast. All the way back on episode 286, I did an episode on Warren Buffett and Charlie Munger. Warren Buffett and Charlie Munger talk about Tom Murphy over and over again. They met him in the shareholder letters. They met him when they're answering the Q&As at their annual meeting.

Starting point is 00:04:46 But this is what they said in the book, All I Want to Know is Where I'm Going to Die, So I'll Never Go There, that I covered back on episode 286. This is Warren Buffett. He says, 40 years ago, Tom Murphy gave me one of the best pieces of advice I've ever received.

Starting point is 00:04:59 He said, Warren, you can always tell someone to go to hell tomorrow. You haven't missed that opportunity. Just forget about it for a day. If you feel the same way tomorrow, then tell them that then. And just one more excerpt before we jump into the book. And this actually comes from the book called A Few Lessons from Warren Buffett. I covered it all the way back on episode 202. This is advice that Tom Murphy gave Warren Buffett on cost control. Cost control is something you and I are going to talk about a lot today. It's central to understanding Tom

Starting point is 00:05:29 Murphy's incredible performance. This is what Warren Buffett says. 30 years ago, Tom Murphy drove this point home to me with a hypothetical tale about an employee who asked his boss for permission to hire an assistant. The employee assumed that adding $20,000 to the annual payroll would be inconsequential, but his boss told him that the proposal should be evaluated as a $3 million decision, given that an additional person would probably cost at least that amount over their lifetime, factoring in raises, benefits, and other expenses, down to the amount the fact that the company would have to buy more toilet paper this is how insane this guy paid attention to cost and efficiency and unless the company fell on very hard times the employee added would be unlikely to be dismissed however

Starting point is 00:06:18 marginal his contribution to the business so as we go through this overview of tom murphy's life and his business philosophy just remember that he watched headcount like a hawk. So let's go back to the book, the chapter on Tom Murphy in The Outsiders. And it's going to pick up where we just left off, where Capital Cities winds up vastly outperforming over the three decades CBS and like, OK, well, how does this happen? How did this seemingly insurmountable gap between these two companies get closed? So it says, the answer lies in fundamentally different management approaches. CBS spent much of the 1960s and 1970s taking the enormous cash flows generated by its network and broadcast operations and funding an aggressive acquisition program that led it into entirely new fields. So instead

Starting point is 00:07:04 of focusing on other media properties, media business that they knew well, they bought things like a toy business and they even bought the New York Yankees. They also would issue stock to fund some of these acquisitions. They're going to compare and contrast, obviously, the way CBS is being led under this guy named Bill Paley, who's actually the founder of CBS. I was reading about Bill Paley last week in the Ted Turner autobiography, and he mentioned Bill. So I actually went out and bought, and it's actually sitting on my desk right now. It's Bill's autobiography, which was published all the way back in 1979. So eventually I'm going to read it, and if it's good, I'll make a podcast on it. But let's go back to this. So they're getting into new fields they don't know enough about. They're issuing shares. They're building

Starting point is 00:07:45 a fancy headquarters in midtown Manhattan at an enormous expense. And then they develop, now this is going to be maybe the largest contrast between CBS and Capital Cities. They develop a corporate structure, listen to this, with 42 presidents and vice presidents, and generally displayed what Charlie Munger calls a prosperity-blinded indifference to unnecessary costs. When I got to this section of the book, it made me think of one of my favorite things that Munger says.

Starting point is 00:08:17 They go and I think he was touring the Buffalo Evening News after they bought it. And he was really against, Munger was really against spending money on luxurious offices. And so he has this great quip. He's like, why does a newspaper need a palace to publish in?

Starting point is 00:08:30 And so that's what I think of when they're describing what's going on here. The strategy at CBS was consistent with the conventional wisdom of the conglomerate era, which espoused the elusive benefits of, quote, diversification to justify the acquisition

Starting point is 00:08:44 of unrelated businesses. At its core, CBS's strategy, implemented by Bill Paley, was focused on making CBS larger. So now they start contrasting that with Murphy's strategy for Capital Cities. In contrast, Murphy's goal was to make his company more valuable, not just larger, but more valuable. As he said to me, and so Thorndike is talking to him for this book more valuable. As he said to me, and so Thorndyke is talking to him for this book, right? As he said to me, the goal is to not have the longest train, but to arrive at the station first using the least fuel. Murphy's got a bunch of good lines when he's talking to Thorndyke. That's one of my favorite.

Starting point is 00:09:21 The goal is to not have the longest train, but to arrive at the station first using the least fuel. And so as he continues to describe the difference in Murphy and Burke's strategy compared to CBS, I just jotted down a few notes on what was happening on this page for my own self. I just put, find your edge, don't diversify, and then repeat what works. Murphy and Burke rejected diversification and instead created an unusually streamlined conglomerate that focused laser-like on the media business that it knew well. Murphy acquired more radio and TV stations, as opposed to buying the Yankees or toy company, right? So he acquired more radio and TV stations, operated them superbly well,

Starting point is 00:10:01 and regularly repurchased his shares. The formula that allowed Murphy to overtake Paley was deceptively simple. Number one, focus on industries with attractive economic characteristics. Number two, selectively use leverage to buy occasional large properties. Number three, improve operations. Number four, pay down debt. And number five, repeat this loop. More contrasting by Thorndike. What's interesting is that his peers at other media companies did not follow this path. They followed fashion and diversified into unrelated businesses. I'm going to pause in the middle of that sentence, actually, because when I got to that section, it made me think of something I read in Warren's Berkshire shareholder letters, where he says the behavior of peer companies will be mindlessly imitated. That's exactly what's

Starting point is 00:10:50 happening in the book, right? They're just following fashion. What's really popular to do at the time, whatever other people, what other company, other conglomerates doing, they're diversifying to unlimited businesses. They're going to build large corporate staffs and they're going to overpay for marquee media properties. Obviously, he's setting that up for you and I to tell us that Murphy did the opposite. He did none of those things. Capital Cities under Murphy was an extremely successful example of what we would now call a roll up. acquires a series of businesses, attempts to improve operations, and then keeps acquiring, benefiting over time from scale advantages and best management practices. Now, just because it

Starting point is 00:11:31 sounds simple does not mean it's easy. There's a lot of people, especially in the 90s and the 2000s that try to do this. And a lot of these companies that try to do a bunch of roll-ups wind up going out of business. And he talks a little bit about why this happened to them and why it did not happen to Tom Murphy. A lot of these companies collapsed under the burden of too much debt. These companies typically failed because they acquired too rapidly and underestimated the difficulty of integrating acquisitions and improving operations. Murphy's approach to the roll-up was different. He moved slowly. He developed real operational expertise, which I think is one of the

Starting point is 00:12:06 benefits of not diversifying, right? By the time he does his biggest acquisition, it's going to come three decades into his career. He's going to buy ABC with Warren Buffett's help. He can have real conviction. Do I actually have operational expertise in operating all these media properties? Well, let me look at the past 30 years. Did I do this correctly or not? And then he focused on a small number of large acquisitions that he knew to be high probability bets. Capital cities combined excellence in both operations and capital allocation to an unusual degree. And that goes back to the start of the chapter where Buffett's saying like, you know, Murphy and Burke are probably the greatest two person combination ever. And it's this division of

Starting point is 00:12:44 labor. The fact that Burke was the incredible operator, the one that rooted out all the inefficiencies, and then Murphy was the one that was capital allocator, focused on strategy and acquisitions, which we'll get to. And again, here's another great Murphyism, if you will. So he says, capital cities combine excellence in both operations and capital allocation to an unusual degree.

Starting point is 00:13:03 As Murphy told me, this is great. This is excellent. The business of business is a lot of little decisions every day mixed up with a very few big decisions. Okay, so let's go back in the timeline and figure out how did Tom Murphy even get associated with capital cities to begin with. And really, the reason I'm highlighting this is because it speaks to the fact that one of the things you have to admire about Tom Murphy is that once he had conviction, he had no hesitancy about being bold. And you see that with the decision to take this job in the first place. So he graduates from Harvard Business School and he gets a job, just a normal job. He's working for Lever Brothers, which is this massive consumer package goods company at the time.

Starting point is 00:13:42 He goes to this event at his parents' house and he meets this guy named Frank Smith. And Smith begins to tell him about Smith's latest venture, which is he bought a struggling TV station. This is before cable, just like if you listen to last week, this is the early days of cable. This is very similar to the early days of Ted Turner's career. That's why I think it's so interesting to do this podcast right after the last one. So Smith buys this. He buys a struggling TV station and he purchased it out of bankruptcy. And before the evening was over, Murphy had agreed to leave his job in New York City and relocate to Albany to run the TV station. Now, here's the crazy thing. He had no broadcast experience, nor did he have any kind of management experience

Starting point is 00:14:25 of any kind. At this point, Tom Murphy is 29 years old. Tom is going to turn around this station. It's going to take him three years. So the station has a bunch of operating losses, obviously, because it was bought out of bankruptcy, right? So he winds up turning it into a consistent cash generator by improving programming and then aggressively managing costs. That's going to come up over and over and over again, aggressively managing costs. As you can imagine, when he's giving advice to Warren Buffett, by the way, Warren Buffett says that Tom Murphy was one of his heroes, that Tom Murphy made him a better person. And that actually that that is the ultimate gift you can give to somebody by helping them become a better person. So you can imagine if

Starting point is 00:15:05 he's giving Warren Buffett advice, saying that don't think about hiring another person just as like a $20,000 thing. Think about how much you're going to pay him over a decade, all the other stuff that comes with employee down to the amount of toilet paper that person's going to use in the office. I think that's an understatement, aggressively managing costs, right? So it says, this is a formula that the company would apply repeatedly in the years ahead. In 1957, so this is now three years later, Smith and Murphy buy a second TV station. Then shortly thereafter, they buy a third TV station, and then they change the name of the company to Capital Cities.

Starting point is 00:15:38 Now, the third TV station is important because this is when Murphy hires a young 30-year-old with also no broadcast experience as his replacement to run the Albany station. That is Dan Burke. Dan Burke and Tom Murphy are going to be this dynamic duo, these partners, for the next 30 years. So Murphy spends time training Burke, and he says he quickly indoctrinated Burke into the company's lean, decentralized operating philosophy. Then Murphy moves back to New York to work with Smith to build the company through acquisition. So that is how Capital Cities is going to grow. It grows by selectively acquiring additional radio and television stations. Now, here's what happened. Smith unexpectedly dies in 1966. By this time,

Starting point is 00:16:27 Smith and Murphy had been working together for 11 years. So that means at 40 years old, after Smith's death, Murphy becomes CEO. And that's the position he's going to hold until he sells it to Disney. So at the time he takes over the company, they have revenue of just $28 million. Murphy's first move as CEO, he's like, OK, I'm going to elevate Burke to the role of president and chief operating officer. And this was an excellent selection of a partner because they have essentially opposite skill sets and they have a very clear division of labor. And so this is a description of their excellent partnership and who did what. Burke was responsible for daily management of operations and Murphy for acquisitions and capital allocation. As Burke told me, our relationship was built on a foundation of mutual respect.

Starting point is 00:17:10 I had an appetite for and a willingness to do things that Murphy was not interested in doing. Burke believed his job was to create the free cash flow and Murphy's job was to spend it. So by this time, Capital City owns five different TV stations. That was the maximum allowed by the FCC. So there's a regulation on the books at the time. You cannot own more than five. So it's like, OK, well, we're not going to stop growing. What are we going to do?

Starting point is 00:17:34 Says they next turned their attention to newspaper publishing, which as an advertising driven business with attractive margins and strong competitive barriers had close similarities to the broadcasting business. So that's another example of him deviating from what other people building conglomerates are doing this time. He's like, well, I just want to stick to these businesses that are very similar to each other that I know very well. And so after buying a bunch of newspapers, he's like, well, what other businesses are very similar to the ones I already own? Eventually this regulation is going to be lifted. But before that happens, he's like, well, there's this new invention, which we talked about last week, which is cable television. Okay, well, that looks very similar to the broadcast TV stations I own.

Starting point is 00:18:15 And then some of these newspapers that I own, they're advertising-driven businesses with attractive margins. Let me go ahead and buy a cable television business. And this is one of the most fascinating things about the Ted Turner autobiography is the fact that Ted Turner was one of the first people in the broadcast TV industry to actually embrace cable. There's a maxim here that this is not a threat. It's an opportunity. Everybody, every other broadcaster besides Ted Turner. And now we see Tom Murphy as well thought about cable as, oh, my God, this is a threat to my broadcast business. They both of both Turner and Murphy thought it's like, no, it's not a threat. It's an actual opportunity. And they also understood it as a better product offering.

Starting point is 00:18:54 Like the genie's out of the bottle. Like there's nothing you're going to do. Like you might as well go with the technology that enables you to just reach a much larger market than somebody watching like a local or regional TV station. And then it goes into another strategy that he used that was quite different. During the extended bear market of the mid 1970s to early 1980s, Murphy became an aggressive purchaser of his own shares. He eventually bought back close to 50% of his outstanding shares, most of it at single digit price to earnings multiples. In 1984, the FCC relaxed its station ownership rules and Murphy in his masterstroke bought the ABC network. So the note I left myself here is this is something that comes up over and over again in these books.

Starting point is 00:19:39 Stay in the game long enough to get lucky. This is the most important thing that he does in his entire business career. And it happens 30 years into his career. So he buys ABC Network for nearly $3.5 billion with financing from his friend Warren Buffett. The ABC deal was the largest non-oil and gas transaction in business history to that point. And an enormous bet. This is what I meant about him being able to be bold when he has real conviction and an enormous bet the company transaction for

Starting point is 00:20:09 Murphy representing over 100% of Capital Equity's enterprise value at the time. So the Wall Street Journal reported on this transaction with the headline, the minnow swallows the whale. And then Murphy's partner Burke said at the time that this is the acquisition that I've been training for my entire life. So why would Murphy bet the entire company on one transaction? Says Murphy's conviction was that he can improve the margins of ABC's TV stations from the low 30s up to capital city's industry-leading levels of margins of 50 plus percent. Oh my god, check this out. Under Burke's oversight, the staff that oversaw ABC's TV station group dropped from 60 to 8 people. The margin gap was closed in just two years. So in two years, they brought ABC's margins from 30

Starting point is 00:21:01 percent to over 50. A story from this time demonstrates the culture clash between the network executives and the leaner, more entrepreneurial acquirers. ABC was a limousine culture. Executives had the habit of taking a limo for even a few blocks to go to lunch. Murphy, however, was a cab man. Before long, this practice of Murphy's practice of taking cabs everywhere instead of a limo, or for God's sakes, you should walk a few blocks. Come on, stop being lazy. Before long, this practice of taking cabs rippled through the ABC executive ranks. When asked whether this was a case of leading by example, Murphy responded,

Starting point is 00:21:40 Is there any other way? Capital Cities never made another large-scale acquisition after the ABC deal, focusing instead on integration, smaller acquisitions, and continued stock repurchasing. In 1995, so 10 years after he bought ABC, Buffett suggested to Murphy that he sit down with Michael Eisner, who was the CEO of Disney at the time. They wind up meeting at the Allen & Company gathering in Sun Valley, Idaho. And Iser expressed an interest in buying the company. They wind up having a negotiation, and Murphy negotiated a buyout price of $19 billion.

Starting point is 00:22:14 Murphy then retired from active management. He left behind an ecstatic group of shareholders. Why are they ecstatic? Well, 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. Okay, and so then the book goes into a little bit more about how they ran the business before the acquisition by Disney. It says one of the major themes in this book is resource allocation. The outsider CEOs, so not just Tom Murphy, but the eight other CEOs or the eight total CEOs covered in this book, including Henry Singleton, John Malone, Warren Buffett,

Starting point is 00:22:51 says the outsider CEOs shared an unconventional approach, one that emphasized flat organizations and dehydrated corporate staffs. There's a lot of very memorable language in the book. That is one of them, dehydrated corporate staffs. They also talked about headquarter staffs being anorexic. Both of those descriptions being important because that's how they want to build the company's culture. So the company's culture at Capital Cities meant extraordinary autonomy for operating managers. And this principle was stated in a single paragraph on the inside cover of every capital city's annual report. And it says, 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. We expect our managers to be forever cost conscious.

Starting point is 00:23:41 That phrase is repeated a few times, forever cost-conscious, and to recognize and exploit sales potential. Headquarters staff was anorexic. No vice presidents in functional areas like marketing, strategic planning, or human resources. No corporate counsel and no public relations department either. In the capital city's culture, the publishers and station managers had the power and the prestige internally, and they almost never heard from New York if they were hitting their numbers. The company's guiding human resource philosophy was repeated over and over again by Murphy, and it was, hire the best people you can and leave them alone. Extreme decentralized approach

Starting point is 00:24:22 keeps both cost and rancor down. And I love how they make the point that capital cities ate their own cooking. The guinea pig in the development of this philosophy was Dan Burke himself. In 1961, after he took over as general manager at WTEN, which was the station in Albany that first Murphy was managing, right? So after he takes over for Murphy, Burke, this is hilarious. I love this part. Burke began sending weekly memos to Murphy as he had been trained to do when he worked at General Foods. After several months of receiving no response, he stopped sending them, realizing his time was better spent on local operations than on reporting to headquarters.

Starting point is 00:25:02 As Burke said, Murphy delegates to the point of anarchy. Again, great memorable language in here. Murphy delegates to the point of anarchy. Frugality was also central to the ethos. This is going to sound a lot. I mean, again, the two main, I think, ideas you see over and over again in the history of entrepreneurship is, one, the importance of focus, and two, gentlemen, watch your costs. That is a quote from Andrew Carnegie. They are all of the people that we study on the podcast, with very few exceptions, were maniacal about watching their costs. And Murphy and Burke describe why they were also fanatical about this. It is exactly like the frame of mind that Andrew Carnegie and his partner,

Starting point is 00:25:45 Henry Clay Frick, had 150 years before this. This is exactly what they said. So it says, Murphy and Burke realized early on that while you couldn't control your revenues, you can control your costs. They believe that the best defense against the revenue lumpiness inherent in advertising supported businesses was a vigilance on costs, which became deeply embedded in the company culture. That is Andrew Carnegie and Henry K. Frick. That is Rockefeller. That is Ford. That is Sam Walton. In fact, it was hilarious. Oh, I'll bring up Walton in a minute because the next story that illustrates how obsessed they were about cost control reminded me of something that I read in Sam Walton's autobiography. One of the earliest and most often told corporate legends,

Starting point is 00:26:27 Murphy even scrutinized the company's expenditures on paint. They wanted to repaint one of their TV stations. And Murphy says, paint the two sides that face the road and leave the other sides untouched. He is forever cost conscious. There is a great story anecdote told in sam walton's autobiography he's flying the plane that little cessna that he would go around picking out like the new walmart stores and they're trying to come up with a name for what what the concept behind walmart and there's a series of names uh walmart is one of the ones suggested and one of the reasons

Starting point is 00:27:02 first sam was inspired by sol price who i've covered over and over again, about FedMart. And so he liked the idea of Walmart, but one of the reasons he picked it is because it had less letters than the other options, and therefore less lighting. You knew you had to light up your stores, right? And so the less letters, less lighting, less costs on a grand scale. As he expands, it might be only seven letters instead of 11 or whatever the other options were, but that additional four letters, you don't have to make them, you don't have to light them, you don't have to clean them, all the additional expenses that would compound over time. So again, they all think this way. They are forever

Starting point is 00:27:37 cost-conscious. They're just insane about getting this competitive advantage that comes when you just watch your costs like a hawk. This is where he goes into headcount over and over again. So Phil Meek is one of the guys, he runs their publishing division. He works for both Burke and Murphy, right? Phil Meek took this message to heart and ran the entire publishing operation. So at this time, they had six daily newspapers, several magazines, and a bunch of weekly shoppers, these things you see in grocery stores. And he ran his headquarters with only three people. They would have very few meetings. One of the meetings is the people would come to New York and they'd go over all of their,

Starting point is 00:28:14 again, they're obsessed with economic efficiency and how it relates to every single other idea that they have in their philosophy. And so what they do is they sit down and they go through line by line everything that you're spending. And so it says particular attention was paid to capital expenditures and expenses. Managers were expected to outperform their peers and great attention was paid to margins. The profit margin that your company operated at was viewed as a form of report card to HQ. Outside of these meetings, managers were left alone.

Starting point is 00:28:42 The company did not simply cut its way to high margins. Murphy and Burke realized that the key drivers of profitability in most of their businesses were revenue growth and advertising market share, and they were prepared to invest in their properties to ensure leadership in local markets. Why? Why did they invest in expanding their market share? Because they realized this through trial and error. They realized early on that the TV station that was the number one in local news ended up with a disproportionate share of that market's advertising revenue. And a great way to think about this is another description by an early employee at CapCities. The company was careful, not cheap. The company was careful, not cheap. The company's hiring practices were equally unconventional. Murphy and Burke shared a clear preference for intelligence, ability, and drive over

Starting point is 00:29:33 direct industry experience because neither one of them, Murphy when he was hired and Burke when he was hired, they had intelligence, ability, and drive. They did not have direct industry experience. And so they specifically targeted what they called talented younger foxes with fresh perspectives. Murphy and Burke were also comfortable giving responsibility to promising young managers. As Murphy described it to me, we'd been fortunate enough to have it ourselves and we knew it could work. And so one of the people they hired young was Bob Iger they hired Bob Iger at 37 and before that he had spent his entire career in broadcast sports and they hired him to assume responsibility for

Starting point is 00:30:11 ABC entertainment another important trait that fueled their success is they had exceptionally low turnover part of this culture right and they talked about there's a rival broadcaster once remarked this is another great line we have we lots of resumes, but we never see any from capital cities. Why? Because the system in place corrupts you with so much autonomy and authority that you can't imagine leaving. Again, really great memorable language. The system, these are people that are inside the company.

Starting point is 00:30:38 The system in place corrupts you with so much autonomy and authority that you can't imagine leaving. So that was a description of more of operations which fell under Burke. Let's go to Murphy and his capital allocation. In the area of capital allocation, Murphy's approach was highly differentiated from his peers. He eschewed diversification, paid minor dividends, rarely issued stock, and made active use of leverage. He would regularly repurchase shares and between long periods of inactivity made the occasional very large acquisition. The two primary sources of capital for capital cities

Starting point is 00:31:11 were internal operating cash flow and debt. The company produced consistently high industry leading levels of operating cash flow. This high amount of cash flow provided Murphy with a reliable source of capital to allocate. Murphy also frequently used debt to fund acquisitions. Once he summarized his approach as this, we take the assets and once we've paid them off, we leverage them again to buy other assets. Acquisitions was where Murphy spent the majority of his time. He did not delegate acquisition decisions and never used investment bankers. To Murphy, as a capital allocator, the company's extreme decentralization had important benefits and allowed the company to operate more profitably than its peers, which in turn gave the

Starting point is 00:31:56 company an advantage in acquisitions by allowing Murphy to buy properties and know that under Burke, remember Burke's this extreme efficient operator, they would quickly be made more profitable, lowering the effective price paid. When he had conviction, Murphy was prepared to act aggressively. And Murphy was not impatient. Murphy was willing to wait a long time for attractive acquisitions. He once said, I get paid not just to make deals, but to make good deals. When he saw something he liked, Murphy was prepared to make a very large bet.

Starting point is 00:32:28 Much of the value created during his nearly 30-year tenure as CEO was the result of a handful of large acquisition decisions. Just a handful. These acquisitions each represented 25% or more of the company's market cap at the time they were made. Murphy was a master at prospecting for deals. He knew what he wanted to buy, and he would spend years developing relationships with the owners of these desirable properties. He had a very unusual negotiating style. He would often ask the seller what they thought their property was worth, and if he thought their offer was fair, he would take it. And if he thought their proposal was high, he would counter with his best price. And if the seller rejected his offer, Murphy would

Starting point is 00:33:09 walk away. So it says like he would never do well at auctions. He usually bid, you know, 60 or 70% lower than the winning bid. But that was very interesting. It's like, you told me what the price is. I think it's worth that. I won't even negotiate with you. I'll just say, okay, I'll take it for that amount. And if that doesn't work out, here's the best price I can do. There's no back and forth. Can we just agree on this? If not, let's just keep it moving. Outside of acquisitions, the second largest amount he spent was actually share repurchasing. He bought back over 1.8 billion. He spent over 1.8 billion on share buybacks. That investment alone generated an excellent return for shareholders 22.4% over 19 years. As Murphy says today, I only wish I had bought more.

Starting point is 00:33:52 And then the chapter closes with this interesting anecdote about this very unique culture. He told me a story about a bartender at one of the management retreats who made a handsome return by buying Capital City stock in the early 1970s. When the bartender was later asked why he made the investment, he replied, I've worked a lot of corporate events over the years, but Capital Cities was the only company where you couldn't tell who the bosses were. And then there's a postscript on the chapter that if you're interested in studying, they call this company Transdime, a contemporary doppelganger to Capital Cities. It says a contemporary analog for Capital Cities can be found in Transdime, a little-known publicly traded aerospace components manufacturer. Like Capital Cities, the company focuses on very specific types of business with exceptional economic characteristics.

Starting point is 00:34:39 And Transdime evolved a highly decentralized corporate structure and operating system for optimizing the profitability of these specialized businesses. And there's actually an excellent podcast series I listen to that's actually produced. It's called 50X, if you search in your podcast player. William Thorndike, so the author of this book, actually did a four-part series on Transdime. So if you're interested in companies that are like Capital Cities, and you want to listen to that podcast, or you want to learn more, I'd highly recommend listening to that four-part series. I thought it was really good. I wish there was more books on, I can't find any biographies on Thomas Murphy. I can't find a company history on Capital Cities,

Starting point is 00:35:19 which seems like I'm making some, I have to be making some kind of massive mistake. So if you find either a biography on Thomas Murphy or a company history, please let me know. I'd gladly read it and then make a longer, like more in-depth podcast episode on this. I'm always fascinated about learning more about and from the people that are admired by people I admire.

Starting point is 00:35:40 The fact that Warren Buffett calls Thomas Murphy his hero, that Ted Turner says that these guys know what they're doing, that they were building an excellent multimedia or a multi-billion dollar media conglomerate really piqued my interest. So I will leave a link down below. I assume you already have this book. It was number one on Warren Buffett's recommended reading list for a long time. It's referenced over and over again. I think they sell it at the Berkshire annual meeting every year as well.

Starting point is 00:36:04 I actually did a podcast on a chapter in the book previously. It was episode 94 on Henry Singleton, if you want to go back and listen to that. But just in case you haven't bought the book already, I will leave a link down below. And if you buy the book using that link, you'll be supporting the podcast at the same time. That is 328 books down, 1,000 to go. And I will talk to you again soon. One more thing before you go, if you have not already subscribed to Founders Notes,

Starting point is 00:36:28 you can go to foundersnotes.com and sign up for what I think is the world's most valuable notebook for founders. I'm just gonna give you a brief history. This is, I've never been more enthusiastic or can give a more enthusiastic endorsement of any product ever because I literally created this product. So let me tell you what I mean by that. All the way back in 2019,

Starting point is 00:36:49 I get a message from one of the co-founders of Readwise. I didn't know Readwise existed at the time. His name is Tristan and he listened to the podcast. It's obvious from the podcast that I read a lot and he built an app where it's possible for you to save all the notes and highlights for every single thing that you've ever read. I might be, I'd have to ask Tristan. I know I'm one of the super users because since that happened, that was over four years ago. This happened back in 2019.

Starting point is 00:37:18 Over the years, I've added over 20,000 of my highlights and notes on all the books that I've read for the podcast. This takes an unbelievable amount of time. And typically for if I make a one hour long podcast on a book, that means I've spent about 40 hours for every one hour of audio that I produce, 40 hours reading, researching, taking notes. At the end of all that process is I manually add in all my notes and highlights. So like I would say, I don't know, 80 I manually add in all my notes and highlights. So like I would say, I don't know, 80 or 90% of all my notes and highlights never even make it into the podcast, right? You know, usually that takes, let's call it at least five hours, depending on the book.

Starting point is 00:37:56 There's at least 300 and I think 10 books of mine in read wise. If it's each an average of five hours, that's essentially the equivalent of two full months, 64 days of me putting in all these notes and highlights over the last four years. And why would I do that? Because it makes, I could not make the podcast without Readwise because now I have access. I have a way, I have essentially a database, right? To search all of my notes, all of my highlights. You just heard a database, right, to search all of my notes, all of my highlights. You just heard in this podcast me pull up all of these past descriptions that Warren Buffett and Charlie Munger have said about Tom Murphy. That didn't come from my memory.

Starting point is 00:38:37 That came because I'm constantly searching my Readwise. I leave it in my browser every day. I don't X out of it. I'm searching it constantly. I'm going through the highlights feed constantly. I'm going through the favorites feed. I'm going through individual books. I'm searching for keywords. I'm searching for ideas. That is why I think in the right hands, and I'll tell you whose hands it belongs in, I do feel that it's the world's most valuable notebook for founders.

Starting point is 00:39:02 And I've been saying this for years because I tweet about it. I post on LinkedIn about it. I go get interviewed and I talk about the fact that Readwise was the best app that I've ever paid for. And so a few months ago over the summer, I approached the founders of Readwise and I was like, hey, every day I keep getting these messages of people saying they want access to my notes and highlights. And I was always reluctant because I thought it was like, oh, it's like kind of a superpower. Like maybe I should just keep it for myself. But like you had, I started thinking is like, why are people asking this? It's like, oh, because they want to use it exactly how I want to use it. Like you can listen to, you're going to hear a lot of great ideas just from listening to the podcast, but some of these you're going to

Starting point is 00:39:39 forget, or maybe you want to search and always have them, like the ideas or the principles at hand anytime that you want. And so I was like, is there a way for us to build a product together? Where it's very simple. You go to foundersnotes.com, you sign up, and then what do you get? You get access to exactly what I see. You're seeing every single thing that I see. You see all of my books, you see all the notes, you see all the highlights. And then therefore you can actually search, find ideas and principles, and then contextually apply them to your business. So there's a line in Port Charlie's Almanac that says there's no better teacher than history in determining the future and that their answer is worth billions of dollars in a $30 history book. Founder's Notes is like that on steroids because it's not a single history

Starting point is 00:40:24 book. It's hundreds of them. And then all my notes and the way I think about and my interpretations of what's happening and why that's so important that I wanted to save that idea and actually put it into a database that I can search. So I said in the right hands, I think it's the world's most valuable notebook. So the reason what I made this for is I made this for founders that are already running successful companies, right? The reason that is because those already running successful companies, what Founders Notes does for those kind of people, and hopefully you're one of them,

Starting point is 00:40:52 is it gives you the best way to reference the thoughts and ideas of history's greatest founders. And then it's up to you how to know how to apply what you're learning to your own company. The best founders want useful information. They don't want to be told what to do. And in many cases, the only person that can actually make the right decision for your company is you because you have all of the context and the history and an understanding of what it is that you actually want to build and what you're doing. The second thing, the second way I just think about who Founders Notes is perfect for, it's for the already committed.

Starting point is 00:41:22 There is no monthly option. There's only annual subscriptions. If you have to think twice about the price, it's not for you. Again, this goes back to the there's 300 and something episodes of founders that anybody can listen to for free. It's for people running already successful companies. Like I spend I spend money all the time. If I think that something is going to make my company better, then I don't hesitate. I view that as an investment, not an expense. And Founders Notes is priced in a way where if you're already running a successful company, it's a no-brainer to subscribe and to at least try it out.

Starting point is 00:41:51 So if this is you, I encourage you to test it out for a year. You'll have access to the world's most valuable notebook for Founders, and I really do mean that, and I do believe that. And I do think the value that you'll get out of it will be incredible. After you subscribe, keep it in your browser. The tab is always open on my computer. I never exit out. If I do, it's by some

Starting point is 00:42:10 kind of drastic mistake. I reference it constantly every day. There's so much knowledge and wisdom contained in it, over 20,000 highlights. And that doesn't even tell you what I have coming. I already have three upcoming features. It's going to make it even more valuable. That'll be included and no additional cost to you. So I'm not going to even sneak on those yet. I'm going to release them, I think, one at a time with the help of Readwise, because Readwise, the team at Readwise are the ones helping me build this together. So they've been absolutely fantastic. But to get access to what I believe, sincerely believe, is the world's most valuable notebook for founders, all you have to do is go to foundersnotes.com. That is foundersnotes.com.

Founders - #328 Tom Murphy (Buffett's favorite manager)

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