Motley Fool Hidden Gems Investing - Motley Fool Money: 03.21.2014

Episode Date: March 21, 2014

Microsoft hits a 14-year high.  Wal-Mart goes after GameStop.  And Starbucks bets on wine and beer.  Our analysts discuss those stories.  Plus, best-selling author Will Thorndike shares some investing insights from his book, The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. Everybody needs money. That's why they call it money. From Fool Global Headquarters, this is Motley Fool Money. It's the Motley Fool Money radio show. Thanks for joining us. I'm Chris Hill. Joining me in studio this week, from Motley Fool One, Jason Moser. From Motley Fool Income Investor, James Early, and from Fool.com, David Hanson. Good to see you guys. Good to see you. We have got the latest from big banks, big retail, and big tech. Best-selling author Will Thorndyke breaks down how some unconventional CEOs are finding success. And as always, we

will give you an inside look at the stocks on our radar, but we begin this week with the big macro. On Wednesday, the Federal Reserve issued a statement saying it intends to keep short-term interest rates near zero going into 2015, and that the Fed will wait, quote, a considerable time between the end of the bond buying program and the first hike in interest rates. But at her first press conference as Fed chief, Janet Yellen was asked to clarify what a considerable time meant. She replied, probably something on the order of around six months or that type of thing. And Jason, market took a dive after she said that. I should point out the market finished up for the week. What do you make of that drop? It seems like very short-term thinking

on someone's part. Well, it is. And I mean, it's a very difficult situation for her, I think, because she's jumping into the middle of really this major transition of this, you know, easing, you know, tapering of the quantitative easing and sort of repairing our monetary policy, more or less having to introduce herself to the entire world and understanding a little bit more from her perspective. There's a lot of us trying to figure out what we're going to get from her. And I think her trying to figure out what exactly to expect from the press, more or less. But But yeah, I think that no matter the situation, you probably want to opt to maybe keep the cards a little bit closer to your vest and just kind of put them down one at a time versus just laying

the whole hand down at once. And I mean, it can't be any surprise to anyone that the Fed's going to sit there and change their measuring stick. I mean, that's just something that they're going to do whenever they feel fit to do it. But yeah, I mean, it was an interesting start. James? The story might be more transparency, but the substance, as Jason said, was something I think everybody saw coming. I mean, And I guess an analogy might be we're sort of finally putting our clothes back on, right? I mean, we've been a little too easy in the past, but now as we raise interest rates, I mean, everybody knew this was going to happen.

So I think just that the timing is maybe a small issue, but the substance is something we all saw. And it's going to give us our credibility back as a nation, too. David, is it safe to assume that the big banks, all banks for that matter, are cheering for the day that interest rates get hiked? They are. Sure. Banks have been suffering because interest rates are so low, they haven't been able to go out and make loans and recoup some of that interest income there. But also for consumers, if rates take up a little bit, that can be a good thing for consumers as well. I know

probably all of us here at the table are getting pennies from our savings account. So, rising interest rates just because the market went down isn't a completely bad thing. Well, let me correct that. You can't get pennies from a savings account if you don't have a savings account, and I don't think many of us do anymore. Jason, just to wrap up on this, some people out there saying Janet Yellen made a rookie mistake. Is it also safe to assume that at her next press conference, she's going to be a little bit more Bernanke-ian in her responses? I have to believe that maybe they'll go through a couple of practice runs before the next one and just sort of see how she can improve upon the first one. But yeah, I imagine it'll get better from here.

This week, the Fed also announced the results of the latest stress tests for big banks. 29 out of 30 passed. David, this is an industry you follow closely. And after the Great Recession, some of the stress tests, people were saying, you know, they weren't that rigorous. What did you think of this round? Were they more rigorous? And what was your takeaway from the results?

They are a little bit more rigorous. It's not a cakewalk in this scenario that the Fed puts forward. Equity prices fall 50%. Unemployment really jumps up 45%. GDP turns in negative territory. So, this isn't just some great scenario here. And the banks are much better capitalized. Capital has basically doubled from a couple of years ago.

But I will say the stress tests are nice. You get a nice little view in terms of how healthy the banking system is. But it can't measure everything, right? I mean, think back to 2008, 2009, how much panic, how much uncertainty there was in the market. Just the emotion of it. Yeah, exactly. So, it's very hard to quantify stuff like that. So, I would say, yes, the banks are healthier, but that doesn't mean they're completely immune to anything in the future.

Next week, the Fed announces which banks will be permitted to raise dividends or buy back shares. Anyone in particular you're watching? Definitely Bank of America. They've had their quarterly dividend at one penny, so I definitely know it's not on James' income investor scorecard right now. A lot of speculation that they could raise that to $0.04, maybe even $0.10. Their results yesterday didn't look outstanding, so that's definitely one to watch. I'm not sure if they're going to ask for an increase in dividend there. Walmart announced that starting next week, shoppers can trade in used video games for gift cards

that can be redeemed in stores and online. Shares of the world's biggest retailer up more than 3% this week. So, James, good news if you're Walmart. If you're GameStop, however, and this is part of the bread and butter of your business, you've got to be worried. You know, there are two sides to this story, Chris. I mean, the GameStop shares were down about 6%. I'm surprised they're not down more.

Walmart, obviously, is a huge company, nearly $500 billion in revenue, and this is maybe a $2 billion market. So this is pretty small. I mean, this is like the overstuffed man walking out of the buffet taking food from a little kid or something, just to stuff himself a little bit more, right? Just a couple more crumbs. This is tiny. Yeah, this is tiny for them.

But obviously, they can crush GameStop. The only silver lining for GameStop is that Walmart has tried this twice before and failed twice. So it's a little bit weird. I don't see exactly why they're so excited about this, But, you know, maybe it's worth an ever for Walmart. Yeah, I mean, I think the timing for Walmart was not too bad, considering there's a whole new sort of console refresh cycle going on out there with these two new consoles, the PlayStation and Xbox. But I think that ultimately this is something that I think in the worst case scenario, it just brings a little bit more traffic into Walmart.

But I think James' points are spot on. How long, Jason, how long are console games going to last? I mean, it just seems like a dinosaur, doesn't it? I would think with the move to digital, I just don't see this being a viable market for too much longer. I mean, I think this was probably the last big one we may see. If you're Activision Blizzard, aren't you hoping for that? Isn't that going to help on the cost side of your business, if you're any game maker for that matter? There's no question, and Activision Blizzard is certainly, they're seeing the results of more margin expansion,

more profitability due to the digital distribution. And really, the good thing for Activision and Blizzard is they're seen as one of the great companies where you have all of the financial resources in the studio and the capability and the talent to produce those games. And so, the digital distribution is becoming more and more a part of their business. So, yeah, they're going to be one of the big winners regardless. Microsoft CEO Satya Nadella will be holding his first press event next week. And according to numerous reports, he will be unveiling Microsoft Office for the iPad. How big a deal is this, Jason? Well, if I'm a Microsoft shareholder, and I'm not, but if I am, then I've got to be happy about this.

And it's not for the isolated incident there, but it's really just because it's a sign, at least, that you have Nadella as more of a forward-thinking executive versus Ballmer, which he seemed like he was kind of always playing defense and was possibly even a little bit delusional if he was thinking that really the Surface was going to be something that would take up market share in the tablet space, where iPad and Google, even to an extent, have really ruled the space. But, I mean, it's just, you know, think about the apps that we use in our lives today. The most attractive apps, the best apps out there are the ones that are cross-platform. They work across all platforms.

And so, you know, essentially, Microsoft needs to get back to its core strength, which is software. No jokes, everybody. But, you know, they're not a hardware, really, play. That's a software in an operating system play. And if they can continue to really focus on that and making it more accessible and available across more platforms, then I think that's a good sign for the future. But where is Microsoft in 10 years or even five years? I mean, certainly as a short-term play, licensing office on the iPad makes sense, right?

But isn't Windows itself a declining franchise? And how are their products fared? I mean, Zune, we have the Surface. I mean, that's not their strong suit either. What do they do from here? Well, I think they need to continue to try to shine as at least enterprise software goes. I mean, your point exactly on the hardware side is spot on. I mean, they're not going to be, I think, a hardware play, really, at all.

They've proven themselves to not be able to really gain any market share in the tablets, the phones, the MP3 players. And so, really, yeah, they're going to have to continue to focus on the software side of things. And I'm sure that that's what Nadella is going to be keeping an eye on. They're kind of like the Bruce Jenner of the software world, just riding on one big achievement a long time ago. And he's never really done much since then, right? Distinctly possible. Shares of Microsoft hitting a 14-year high this week. Obviously, it's been flat for most of those years. Do you like it at this price?

Not really. I think we were talking about this before taping. Even though it's at a 14-year high, it's so woeful to underperform the market. I just feel like there are better opportunities out there for companies that are just blazing trails. I don't see Microsoft as really blazing trails at this point. David? I'm not going to cast it off as much as Jason is. James said they haven't really done much. But the reason it's been such an underperformer over the last 14 years has more to do with the crazy valuation it was carrying 14 years ago. So when you look at actual earnings, earnings have, I think, more than doubled or tripled in that time frame. So

the business continues to do well, but the valuation back then was just completely crazy. So if they can focus on what they're good at, maybe it makes sense, maybe for your watch list. Coming up, if you like wine and you like milkshakes, then we have got fantastic news. Stay right here. This is Motley Fool Money. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Welcome back to Motley Fool Money.

Chris Hill here in studio with Jason Moser, James Early, and David Hanson. Tiffany posted a loss for the fourth quarter thanks to some arbitration costs, but shares up a little bit on Friday thanks in no small part, David, to the same-store sales results up 7% in North America. That's pretty good for a mature company like Tiffany. Yeah, pretty strong. And sales across the board for the year, up 10%. That's excluding currency effects. And I stress currency effects, because if you look at their business over in Japan, which is a pretty big part of their business, that turned a 11% jump in sales, the weakening end into a 9% decline. So year over year, 9% decline in sales in Japan. So you want to look at currency, but you don't want to completely focus on that because there are such a global brand. they're in China, they're in Japan, they're in South America, they're in North America. You want to look at the actual business. I would prefer to look at this excluding currency effects,

and the business looks pretty good. Third quarter results for FedEx came in lower than expected, but shares didn't really get punished this week, James. And I guess if we're going to give any business a pass when it comes to the winter weather we've experienced lately, FedEx is going to be on the short list. I think so. And I think it shaved $125, $127 million, something like that, off of their operating income. That's an $8.3 billion number overall. So, it's still a tiny effect. And FedEx is up 42% over the past year. That's compared to 21% for the S&P. So, yeah, I don't think anybody's really complaining here.

Nike's third quarter profit and revenue came in better than expected, but shares fell on Friday after Nike warned that growth in the fourth quarter would be slowing down. And they went a step further, Jason, and said, oh, by the way, in 2015, it's going to keep slowing down. So, is this a company in trouble, or do you look at the drop in the stock as a buying opportunity? No, I actually look at it as a buying opportunity. When you look at what Nike is doing, and referring specifically the direct-to-consumer market that they're pursuing here, they're seeing margin expansion and profitability growing because of the direct-to-consumer outlet there. And that direct-to-consumer part of the business grew 23% for the quarter, and they saw 57% growth in online sales,

which I find that to be very encouraging. I think the market's right to worry a little bit about the China situation, because futures are down there, and China brings in about 25% of the company's operating profit. But, you know, this is a $70 billion behemoth company with just a very powerful brand that is still growing top-line revenue at double-digit rates. I mean, 14% is just nothing to sneeze at. So, you know, all in all, I think that for investors who are looking for one of those five- to ten-year holdings that they don't have to worry a lot about, Nike certainly fits the bill, and today could be a good opportunity. Yeah, just kind of a separate topic, but since we're always trying to add value here, I found some weird Nike trivia. You know, Just Do It is a famous slogan.

It's in the Smithsonian. Does anybody here know the origin of the Just Do It phrase? I'm assuming it came from some brilliant marketing firm. These were the last words of a serial killer named Gary Gilmore before his execution in 1977. Do you think Nike's- This is a credible source in the internet. Was he wearing Jordans or something?

Yeah, this is where it comes from. 50 Things You Didn't Know About Nike, Newsweek magazine. Is this like a serial killer with a really powerful brand? I don't think he was thinking of Nike at the time, but I think he meant just, you know. Is there a direct connection there, or is that just a coincidence? Just Do It was inspired by serial killer Gary Gilmore. I'm reading from the website. Before he was executed in 1977, Gilmore said, let's do it.

Okay, so very similar. That's where they apparently got the word in. Okay, so actually not at all. Two of the words are the same. Email us if you want the website. Radioatfool.com is our email address. Starbucks has been testing the sale of beer and wine at 40 locations in Chicago, Atlanta, and Southern California. And they must have passed the test, because this week at its annual shareholder meeting,

Starbucks announced it will be expanding the sale of alcohol in the evenings to cities across America. Good move, Jason? I think it's a good move. I mean, they don't do anything like this willy-nilly. I mean, it's something certainly that Schultz and company have been testing out for a while. We know that. And so they're going to roll it out to what they've said thousands of stores across the country. It's not going to be in every store, but I think it's going to be in the markets where they see the demand as being robust enough.

There certainly is the possibility that it could sort of turn some of the Starbucks loyalists off if they're kind of looking for that quieter third place where they can go have a cup of coffee and get some work done. We talked also about the possibility that stores will get maybe a little bit more crowded. You may be upside there is that, well, maybe it gives them an opportunity to open up new stores. But certainly, I think it'll be something that drives some additional revenue. They might not leave as quickly, because before they had uppers, now they've got downers, so they're just going to sit there, parked in a chair. Well, Red Robin Gourmet Burgers is also getting in on the act this week.

Red Robin introduced the Mango Moscato Wine Shake, a blend of white wine, vodka, mango puree, and vanilla soft serve. The company says the new drink is aimed at, quote, 39- to 49-year-old moms in need of a break. Let's bring in a 34- to 49-year-old dad who needs a break. Steve Broido, our man behind the glass, are you thirsty for one of these new drinks from Red Robin? Now, I attend Red Robin with some frequency. There's one near our home. We go with my wife's brother and his children. And they hand out balloons at the door.

So I'm thinking this is a very bad idea. Balloons plus wine, not a good combo. Plus vodka. Plus vodka. Plus a lot of small children. Let's get to the stocks on our radar this week. And Steve will hit you with a quick question. And James Hurley, what do you got?

I'm going back to one of my intermittent favorites, Cebespi. The ticker is SPS. This is a Brazilian water and sewage company. I, of course, love the sewage part because nobody's going to stop flushing their toilets no matter what happens to the economy. It's a little bit more than 50% owned by the state of Sao Paulo, which sounds bad. But in a country like Brazil, that means nothing really too bad is going to happen to this company, hopefully. It's been beaten down in the emerging markets kind of a fear or shock recently. but I think it's a stable company for the long haul.

Steve? Does currency affect this investment at all? Currency affects any investment, Steve, that you make outside of the U.S., if the results are not denominated in dollars. So, yeah, it does affect. That can cut, and that can help, obviously. David Hanson, what do you got this week? Looking at Discover Financial Services, ticker DFS.

I think investors should look at this more as kind of just your traditional bank with a really heavy lien on credit card loans, which sounds risky on the face of it, But they do a really, really good job of pricing that risk and getting compensated for the loans they're making. They produce great returns over time. So, Discover's on my radar. Steve? How is Discover so in business?

I don't think I've seen anyone accept a Discover card. Usually, they would make a big deal about it. We accept this American Express, Visa, Amex, and just now, no Discover. I have not heard anybody accepting a Discover card in a long time. Have you been into a store since 1994? I have, but they never give me that option. You're not looking. They're there. They're really increasing their footprint. It's accepted most places. Jason, what do you got?

So, in celebration of the Muppets' most wanted movie coming out today, I'm going to go with Disney, ticker DIS. You know, a lot of things, obviously, we like about this company. Been around for a long time. Obviously, a big moneymaker there in ESPN. I also found out there's an interesting little program they're heading up called Disney Accelerator, where they are going to mentor 10 technology-based company startups focused on the media and entertainment experiences. This is something where they'll receive three-month mentorships, $120,000 in startup capital to develop the ideas. I think that's great. I love to see companies that lead the way for us, helping to grow the companies of the next generation. A little bit of a question

there with leadership and what happens when Iger steps down. We've heard rumors of Sheryl Sandberg could possibly fill in those shoes. But either way you look at it, I think this is a powerful company that will be around for many years to come. Steve? I'm a shareholder. How does Disney grow if it's so diversified? Well, I mean, Disney grows a number of ways, and I think the diversification is how it does grow. I mean, they're always going to continue to bring in money with advertising from ESPN, but I think just the entertainment side, the movies, the TV shows, it's just the parks. I think there are a lot of different ways to win, and they're not just levered to one particular way. All right, guys, thanks for being here. Up next, Motley Fool CEO

Tom Gardner talks with bestselling author Will Thorndyke about some unconventional CEOs and their blueprints for success. This is Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. And this week, we're sharing Motley Fool CEO Tom Gardner's interview with Will Thorndike, best-selling author of The Outsiders, Eight Unconventional CEOs, and their Radically Rational Blueprint for Success. How would you describe the premise of the book that you've written? Yeah, so I think the best analogy for the book is duplicate bridge. So I don't know, do you play bridge?

I don't play bridge, but I'm familiar with duplicate. Yeah, so I'm a terrible bridge player. But duplicate bridge is a form of bridge in which a group of teams of two show up in a room. They're divided into tables of four. And then each table is dealt the exact same cards in the exact same sequence. So effectively eliminating the role of luck. And at the end of the evening, the team with the most points wins. So it's a pretty pure test of skill. And I would contend that in an industry over long periods of time, 20 years, which is the average tenure of the CEOs in this book, it's duplicate bridge. So if one company materially outperforms its peers, that's worthy of

study. And so that's the pattern across the eight CEOs profiled in this book. Each of them outperformed their peer group dramatically over their tenure. And then they also each outperformed Jack Welch in terms of performance relative to that. What was the catalyst for writing the book? What was the seedling that caused you to say this is more than a single study or a single company analysis? This is a broader look. So I work in the private equity business. And every two years, we host a conference for our CEOs. And about 10 years ago, I raised my hand and said, I'll do one of the talks at the conference. I then had to figure out what I was going to talk about, and I'd heard about this 60s-era conglomerate tour named Henry Singleton.

And so I connected with a Harvard Business School student who was entering his second year, and he agreed to do a four-credit independent study. And together, we did a deep dive on Singleton and his company Teledyne versus the other conglomerates of that era. What were Teledyne's returns, ballpark? 28 years at just over 20% compounded. With Henry Singleton as the CEO? Henry Singleton was the CEO throughout, and he was an extraordinary guy. So at the end of that, I wrote it up, I gave the talk,

and the student I worked with came to me and said, listen, if you enjoyed that, I know a really smart guy in the class behind me. And that first student was a Phi Beta Kappa in physics from Stanford. So he was a high-caliber guy. The second guy was a Phi Beta in chemistry from Harvard. So I just got into this vein of super high-talented second-year students at Harvard Business School and worked with them to do each of the chapters. So there are maybe three ways that you're proposing to evaluate a CEO. One of them is just the overall return of the creation of value.

The second is versus the market. The third is versus peers in the industry. Do you have a view as to the ranking of those? As an investor, do you care about one of those more than the other, obviously? it could be situational if you're an institutional investor and you've got a lot of slices in your portfolio. But if you're an individual investor out there, which one of those three things do you want most and which one do you care least about? Well, I think if your objective is to evaluate a CEO's ability, the most relevant is performance relative to the peer group.

And to assess that, you need longer periods of time. You need more than 24 or 36 months to really be able to evaluate that. Again, that typical tenure of the CEOs in the book is north of 20 years. But I think that's the one that's going to give you the best sense for true ability relative to peers operating under similar circumstances. So the book is proposing that the CEO is an incredibly important contributor player on the stage of a business. What sort of weighting do you give that in your own investments? When you're investing in the public markets, you're running a private equity firm. But when you make public market investments, how much do you spend time on the CEO versus the competitive advantages, pricing power,

and all the other factors you could look at? Yeah. So I think I would, you know, the rough weighting for me would be a third to half of the consideration. Very significant. And again, my approach as an individual investor is I run a very concentrated portfolio in my personal account, and I own things for very long periods of time. So if you removed either of those constraints, I might answer your question differently. But the benefits of this set of trades are greater the longer you're holding period. So one way to think about it is it's a way to increase your long-term rate of compounding, this set of skills, this capital allocation ability. So if you were to only be holding stocks for a year or for six months, which is tragically

how long the average individual investor holds, or a mutual fund, that wouldn't be a factor. But as you lengthen your time horizon, I don't know if you know, Will, the portfolio that I run in our service. It's called the Everlasting Portfolio. I am mandated to hold each investment for a minimum of five years. What I've actually said to the membership base is I would be happy to have that mandated to 10 years. In fact, the number one factor I think most people could use to improve their investment returns is simply to double their average holding period, whatever it is. I couldn't agree more. And I think the value of that, the value of that sort of a time horizon has only grown over time as all of the, as the rise of social media and high frequency,

high frequency trading and i mean you know these arguments are out there that you'll see like long term investing is dead because of these factors because of social media because of high frequency trading you have to be on top of things second by second you should be moving your firm closer to the exchange so that your transactions take one millisecond of a millisecond less than the competitors and you're saying that that's actually creating time arbitrage and a greater opportunity for long-term investors yeah i firmly yeah i firmly believe that and i think if you look at at the truly great long-term investing records, they're disproportionately concentrated in people with much longer holding periods and typically very concentrated portfolios. So you're going to

say that to find a great outsider CEO and a great investment like the ones you've outlined in the book, your holding period to really enjoy that should be? Minimum of five to ten years. And you know, the quality of the business for that sort of time horizon is critical as well. I don't mean to diminish that, but the value of a, you know, if you have a truly concentrated portfolio, you can choose, you can afford to be picky about both business quality and the management team. That's great. Before I go into some of the narratives in the book, I want to talk a little bit about capital allocation, the factors, the five factors, or maybe there's a sixth John Malone factor of joint ventures, but the five factors that a CEO is looking at in terms of how to use

capital and how we might think about that as investors. Yeah. Yeah. So there are three basic ways you can raise capital. You can tap your internal cash flow, you can raise equity, or you can sell debt. So those are the three alternatives. And then there are only five, in the case of Malone, maybe six, but generally only five things you can do with it. You can invest in your existing operations. You can buy other companies.

You can pay down debt. You can pay a dividend, or you can repurchase your shares. That's it. And over long periods of time, the decisions a CEO makes in choosing across those options, in choosing which levers to pull and which to ignore, have a gigantic impact on long-term returns for shareholders. So a simple way to think about that is if you have two businesses with identical operating results, over 20 years, 10 years, pick your time horizon, over a longer-term period of time,

if the two companies pursue different capital allocation strategies, the per-share results for shareholders will be wildly different. So these are circumstantial entirely, or for the fun of it, I'll put you on the spot and say, well, would you rank those? If you were the CEO of generic ABC widgets, we know that there are going to be particular circumstances in industry or something environmental that's going to cause you to lean one way or the other. But in just a super long-term, 150-year way, can you rank those five as being more effective in more situations and to a greater impact than others? I think it's hard to have an absolute weighting. I mean, you could look at this group and you could see that every single one of them did one of two things that were significant.

They bought back very significant percentages of the stock over time, 30% or more in seven of the eight cases. And they did sizable, at least one, and in most cases, several sizable acquisitions, meaning deals that were at least the quarter of the size of the company at the time they were done. But I think it's very case dependent. I mean, I think the most important thing is that they have this coolly rational mindset, that they're sort of continually looking for the highest return option. And the circumstances are going to vary over time. In fact, over 20 years, a company can move from being a rapidly growing company to a more mature business,

and the ideal alternative will be different at the beginning versus at the end. So I think it does vary. Just for the fun of it, could you give examples of misuses of those approaches to capital allocation? Let's say share buybacks. Just a classic example of when a share buyback does not impress you. Well, so I would say that there's a lot of attention in the news now about an increasing number of companies who are implementing share buyback programs. So everyone's Henry Singleton out there. This is awesome.

This is great news, right? No, definitely not. I mean, if you look at the, there's different ways, there's sort of two approaches to buying back shares. The most common one and the one that almost all of the companies that are announcing buyback programs today are following is you announce an authorization. It's usually not a very significant percentage of the company's market cap that could be bought in. So it's not a large commitment. And it's implemented quarterly, often in even quarterly allocations to share repurchase. And it's often designed to offset option issuance.

If you look at the pattern from this group, it's entirely different than that. It's the very occasional, very large repurchase is the pattern. I mean, a recent example of that is one of John Malone's entities, Liberty Capital. In the second quarter of 2011, if you tuned into the earnings call, you found out that 11% of the shares had been retired in the last 90 days. no you know just that's that's the pattern it's you know you wait henry singleton used tender offers um and bought in large chunks of stock and they're making a call on an attractive time to buy the stock rather than a cookie cut quarterly research to rebalance against the option grants exactly um okay how about acquisitions two out of three acquisitions

fail so what makes these this group so effective yeah it's i think it's the same mindset very similar to the buybacks. It's this idea that you're patient and you're waiting for compelling opportunities. And when you see them, you're prepared to act in size. They were very careful. They waited for high probability bets and then they pounced. Coming up, more of Tom Gardner's conversation with author Will Thorndyke. This is Motley Fool Money. Welcome back to Motley Fool Money. Let's get back to Tom Gardner's conversation with bestselling author Will Thorndyke. Let's go through some of the stories.

Cap City is, let's just say, ABC versus CBS. The rowboat versus QE2. Yeah, so this is an analogy that Warren Buffett uses. So he'll take the example of Capital Cities, which was Tom Murphy's company before it acquired ABC, and CBS. And he'll look at the long-term difference in returns between those two companies. So when Tom Murphy took over Capital Cities, it owned five radio stations and four TV stations, all of them in very small markets. CBS, at the same time, was the dominant media business in the country. It had the highest-rated broadcast network.

It owned major TV and radio stations in all of the largest markets in the country, Chicago, New York, L.A., et cetera. It had very valuable publishing and music properties. It was just a juggernaut. So at the time Murphy took over, his business was worth one-sixteenth of CBS's market value. and then 28 years later it was worth three times the value of CBS and so over that period of time Murphy is a very good very good pure pure comparison and Murphy executed this very focused kind of acquisition and

integration strategy he ran his businesses exceptionally well with a very decentralized operating philosophy organizational structure and CBS ran with you know 42 presidents and vice presidents all getting in limos all getting in limos they built a landmark skyscraper in midtown manhattan at enormous expense the black rock building they diverged into other business lines you know the new york yankees baseball team at one point in time you know the toy business murphy was focused laser-like on the media businesses he knew well which were terrific businesses that they operated very well let's talk teledyne in Singletonville, and you mentioned the average company, I mean, the average repurchase of the

eight companies in the book is around 30%, 33% maybe. Henry Singleton, a little bit higher. Yeah, Henry Singleton. So he's an interesting case. So he has a very unusual background for a CEO. So he's a world-class mathematician. So at age 23, he wins something called the Putnam Medal, which is awarded to the top young mathematician in the country. So Richard Feynman, the Nobel prize-winning physicist, won it later. So he's operating at a very high level. He's an MIT PhD in electrical engineering. When he's at MIT, he programs the first computer at MIT as his graduate, as his doctoral thesis. So he's a high-level math and science guy. He becomes CEO at age 43 of this conglomerate, and he proceeds to,

over the next 28 years at the helm, he buys in 90 plus percent of the shares. So no one has ever come close to that level of stock repurchase. Why are people not doing that? In other words, that was controversial or truly unorthodox, as you say. And what would the complaints against that approach have been? So historically, buybacks were very controversial and they were perceived by Wall Street as signaling a lack of internal growth opportunities. So they were a signal of weakness. They meant that you couldn't deploy that capital in investing in your existing operations. And a high-level mathematician is looking at all the options and looking at what's the best mathematical result I could get,

and it's to buy back my own stock rather than to build another factory or to go out and take a risk elsewhere. He was just continually solving for the problem of how do we create the most value per share long-term. Everything Henry Singleton did was viewed through that prism. Let's talk about Kay Graham, the first-time CEO. I mean, it's true of all of these CEOs. This is their first time as CEO. They're not being recruited by Spencer Stewart to jump from one organization in one industry to the next. They're in for 20-plus years.

That's right. I think that's one of the most surprising findings of the book is that all of these CEOs are first-time CEOs. Only two had MBAs, half not yet 40 when they got the job. And Kay Graham is the most extreme example of that because she inherits the CEO role after her husband commits suicide, tragically. She hasn't held a job in almost 20 years. So she finds herself the only female CEO of a Fortune 500-sized company, and she hasn't been in the workforce in almost 20 years. And she proceeds to put up far and away the best operating results and value creation of any CEO in the newspaper industry over the next 25 years. Why do you think this is?

Why is the first-time CEO, non-MBA, under the age of 50 or even 40, an effective leader of a public company? I think it relates to the power of fresh eyes, freshness of perspective. the ability to look at industry circumstances objectively and to not be caught up in industry conventional wisdom and to be purely rational about these decisions as a result. Ralston Purina and maybe a concept that stood out to me in that chapter is if you've got a highly predictable business, you should very seriously consider using debt. Yeah, absolutely.

And Bill Sturitz, who was the CEO of Ralston Purina, was the first CEO in the consumer products area to kind of really understand that and to run those businesses almost like a public LBO in the early days of when those concepts were sort of gaining acceptance in the private equity world. And he's an interesting case because he's the only one of the eight who was an insider. So he grew up, came up through the ranks at Ralston Purina. And once he became CEO, he turned out to be very independent. Okay. I'm wondering what you think about outsiders versus innovators and the overlap between the two. So a little bit is your reference to Steve Jobs, Herb Kelleher, Sam Walton, and a little bit more of the high-profile CEO, although that's not necessarily true of innovators.

But the innovative CEO. Do you view these outsider CEOs as being innovators or as being financial innovators? I view them more as being optimizers, you know, than innovators. I think the innovators, the innovator CEO model would be Jobs and Elon Musk and Zuckerberg and, you know, just all of these, Herb Kelleher. So these are sort of, I think, unique genius CEOs. So it's hard to replicate what makes them successful. They have extraordinary technical expertise or marketing ability or, you know, they're sort of unique geniuses. And these CEOs were very, very talented.

But I think that the core of what made them successful was temperament. is this ability to look rationally and coolly across options and just consistently over long periods of time make rational decisions despite the noise, despite what their peers were doing, despite what the press was writing about, despite what Wall Street analysts were talking, you know, asking them to do or expecting them to do. It's one of my favorite business and investment books that I've ever read. And I felt like 75% of it was reaffirming and 25% of it was, wow, I hadn't actually ever thought of things that way. And that's a huge amount of a book for me

20 years into The Motley Fool. So thanks for an outstanding book. And even if you're not going to write the next one, we'll be reading your articles. Well, thank you, Tom. And congratulations on all your success building The Fool over almost 20 years yourself. Thank you. Thanks, Will. All right. Take care. Thanks. Will Thorendyke's book is The Outsiders, Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. As a reminder, you can hear more of Tom Gardner's interview and learn more about our Motley Fool One service simply by going to foolone.com. That's foolone.com. That's going to do it for this week's edition of Motley Fool Money. The show is mixed by Rick Engdahl. Our producer is Matt Greer. Our engineer is Steve

Broido. I'm Chris Hill. Thanks for listening. We'll see you next week.