We Study Billionaires - The Investor’s Podcast Network - TIP797: Born To Be Wired w/ Kyle Grieve

Episode Date: March 8, 2026

Kyle Grieve discusses the life and career of legendary capital allocator John Malone and details the at times complex strategies that helped him compound capital over decades. IN THIS EPISODE YOU���LL LEARN: 00:00:00 - Intro 00:03:55 - How Malone uncovered fraud and took over Jerrold 00:06:20 - Why risk assessment shaped his “what if not” framework 00:09:21 - How he chose TCI over higher-paying offers 00:11:29 - Creative leverage strategies to survive heavy debt 00:13:23 - Why EBITDA helped reframe TCI’s cash economics 00:55:17 - How clustering acquisitions built regional cable dominance 00:18:51 - The Liberty Media spinoff and tax-efficient structuring 00:44:06 - Asymmetric bets that created massive upside for shareholders 00:34:34 - Lessons from disruption and Netflix’s streaming threat 00:48:54 - Malone’s thoughts on leadership, decentralization, and long-term capital allocation Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Mastermind Community⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ to engage in meaningful stock investing discussions with Stig, Clay, Kyle, and the other community members. Learn how to join us in Omaha for the Berkshire meeting ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Buy Born To Be Wired here. Listen to my episode on the Cable Cowboys here. Follow Kyle on Twitter and LinkedIn. Related ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠books⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ mentioned in the podcast. Ad-free episodes on our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Premium Feed⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. NEW TO THE SHOW? Get smarter about valuing businesses in just a few minutes each week through our newsletter, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Check out our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠We Study Billionaires Starter Packs⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Follow our official social media accounts: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Browse through all our episodes ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Try our tool for picking stock winners and managing our portfolios: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Finance Tool⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Enjoy exclusive perks from our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠favorite Apps and Services⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn how to better start, manage, and grow your business with the ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠best business podcasts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. SPONSORS Support our free podcast by supporting our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠sponsors⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠: SimpleMining HardBlock AnchorWatch Human Rights Foundation Linkedin Talent Solutions Vanta Unchained Onramp Netsuite Shopify References to any third-party products, services, or advertisers do not constitute endorsements, and The Investor’s Podcast Network is not responsible for any claims made by them. Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. John Malone is one of the greatest value-creating CEOs of all time. At TCI, he compounded the share price by more than 30% per annum over 27 years. Very few CEOs can do this merely for a few years, let alone a few decades. But Malone was a wizard at generating shareholder value, while doing it in ways that I personally found a little tough to follow. He understood value at a deep level, and he used his knowledge to find incredible deals for his shareholders. But part of his understanding of value and leverage led to some very interesting

deal structures that even confused veteran Wall Street analysts. So today, I'm going to try to remove as much complexity from Malone's strategy as possible. I'll go over his what if not strategy and how he used it to analyze the downside of a potential deal. We'll cover how John used debt through his career very intelligently and how he dealt with several potential liquidity issues, allowing his shareholders and himself to fight another day. We'll look at how John viewed taxes. and why he believed it was his job to keep as much money in his shareholders' pockets as possible. One of my favorite topics I'll cover was John's thoughts on the disruptive forces in his industry, Netflix. We'll look at Netflix through the lens of what John thought could have been,

and the forces that kept the cable industry at bay for making moves that would have provided tremendous value rather than creating this unstoppable hydra that Netflix eventually became. While John's career began many decades ago, his story and lessons remain completely timeless today. In a time of so much uncertainty and disruption, we can all learn how Malone dealt with these two subjects over his very long career. We'll also break down what I call Malone's lifeboat framework, a framework that John followed to keep himself involved in deals for decades, while others went bankrupt, or were forced to rapidly shift strategies. Now, let's drive right into the story and lessons from legendary capital allocator John Malone.

Since 2014 and through more than 190 million downloads, we break down the principles of value investing and sit down with some of the world's best asset managers. We uncover potential opportunities in the market and explore the intersection between money, happiness and the art of living a good life. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own and they may have investments in the securities discussed. Now for your host, Kyle Greve. Welcome to the Investors podcast. I'm your host Kyle Greve and today we're going to be discussing one of the most successful capital allocators in business history, John Malone. Malone has always

fascinated me simply because he's an incredible success story, but also because he did it in a way that I'm not really sure I ever would have wanted to actually partner with him. You may be thinking, well, that's kind of a weird thing to say and I wouldn't blame you. The issue that I've always had with John Malone has actually nothing to do with him. It's more a reflection of my inability to properly wrap my head around the multitude of deals that he made throughout his investing career. We'll go through many of these deals today. I'm going to be getting most of the stories that I'll discuss today from Malone's excellent autobiography titled Born to Be Wired. So let's start here with young John Malone, who had already proven himself as a consultant

at McKinsey. During Malone's time at McKinsey, he had spent nearly six months researching a business called General Instruments, which I'll refer to here as GI. Now, at one time, GI had a very expensive share price, and it was using its own shares as a form of currency to buy more businesses. One purchase was into a subsidiary that it bought called Gerald. Now, there was a problem with Gerald, and that was that it just wasn't generating cash. The problem was in the accounting irregularities, and Malone ended up getting to work trying to figure out what was happening inside of Gerald for GI to figure out what was wrong. But let's look exactly at what Gerald was because it's kind of a stepping stone that Malone needed to eventually realize his true

potential. So Gerald was one of the first providers for broadcast and then cable companies. So if you're wondering what the difference is between the two, just remember that broadcast doesn't require wires. You just needed an antenna and you pick up certain channels. Cable distributes its services via physical cables that run into people's homes. Now, during the early days of broadcast TV channels were free, as you just needed an antenna to capture the channels to play on your TV. But the trade-off there was that the service was pretty spotty. So it was discovered that the signal could be improved if you used a large antenna,

stuck it on the top of a hill, and then you just wired cables from that antenna to local homes. Of course, this was done for a fee. Gerald acted as kind of a Picks and Shovels company that would supply owners and operators of the antennas and their cable infrastructure. They sold them the wires and connectors needed to get an operation up and running. Since this was a brand new industry, many entrepreneurs needed capital, and Gerald would accept things like promissory notes from their customers, then bundle them up and sell them to financial institutions. If the operators couldn't pay it, then Gerald would simply take over the business.

This helped them become one of the largest operators in the U.S. for a time. When John began to look at Gerald's financial statements, he first hypothesized that cost had simply gotten out of control. But with a little more work, he actually realized that the company had been posting fraudulent numbers. John gave the bad use to a gentleman named Moses, who was one of John's first mentors. As discussions went further, Moses ended up asking Malone if he had any interest in actually taking over and running Gerald himself. This was a pretty attractive offer from Malone as he'd been commuting to work daily for long distances and wasn't really around home as much as he would have liked.

So he ended up taking the offer dreaming that one day he would actually get to run GI himself. Now, one of the biggest lessons that John learned from Moses was actually regarding the subtle nuance of a business deal. So it's easy to go into a deal thinking, you know, all about the money that you're going to make from it and all the glory you're going to get. But the fact is, if you're willing to pay the right price, you really can't buy anything that you want. But Moses helped look at the business through a more risk-oriented perspective. John writes, when you focus on the opportunity and genuinely deconstruct the hazards ahead, the fear of taking a leap begins to fade. Knowing with certainty that the risk won't kill you is what liberates you to take it.

Or, put another way, Moses told John always to ask a question which was, what if not? As in, what happens if this deal does not work out? What happens if the business or the idea falls apart completely? Now, I love this because I think it's value investing 101. Value investors are, of course, interested in the upside, but at their core, they want to ensure they maximize their protection when things don't work out. If you buy a business that has hard assets, just like John Malone did for much of his career, at least you have those assets to sell just in case a deal doesn't work. Maybe they won't

be worth as much as you initially paid for it, but there's a very good chance that they'll probably be useful to somebody. This was crucial to John's career in business and it was something that he always kept top of mind. Now, while John headed up Gerald, he always had the foresight to position Gerald to take advantage of potential changes in regulation. For instance, the government was toying with the notion of having two-way interactive services. Malone directed research and development specifically into these efforts. Once the systems had to go to this two-way system, they all needed these two-way amplifiers, and guess who supplied it? Only Gerald. So this helped Gerald double their market share to about 80% while their margins absolutely went into the stratosphere, rising well over three

times to 70%. When Moses was told by the board that he would need to retire due to his age, John felt that he actually deserved to be next in line to take over as CEO at GI. But Moses let him down telling John that he was simply just too young, and it didn't matter how much success he had, he would just never be in the running for the CEO job. As a result, John began looking for another job. This is an interesting case studying, a massive mistake on the part of GI. Who knows what else John would have done as a leader of GI? Probably create enormous value for shareholders.

But I get GI's points, you know, a young CEO who only has a few years of experience. experience might not be the direction you want to go or what it's going to appease the board. But luckily, John had done this very, very good job and he had three very good job offers due to his success at Gerald. So the first was an offer to take over as CEO of Teleprompter. So this business began selling electronic scroll and cue cart machines and then used the profits from selling that business to buy cable and broadcast businesses. Teleprompter said they'd actually provide John with a limo to ship him between his home in Connecticut and New York, or they would just move HQ to Connecticut specifically for him so he'd be close to home. But Irving Kahn,

who was the owner of teleprompter, was about to go through some very ugly legal troubles. John decided he just didn't want to be bothered with any potential control problems. He'd seen enough of them in his day to understand that it was a big red flag. Now on to the next offer, and this was from Steve Ross at Warner. Ross was the founder and CEO of Warner, but offered John a position as the head of Warner's cable division. He told John, we'll buy you a limo, a house anywhere you want and will pay you a lot of money. But John wasn't very interested in being a division head. The president would have been a much more interesting offer.

While mulling on that, a third party threw their hat into the ring for John's services. Now, this was an offer from a cattle rancher named Bob Magnus, who owned a business called Telecommunications Inc, which I'll refer to here as a TCI. And he had personally worked with John when John was at Gerald. Magnus can only offer a $60,000 salary to start, whereas Ross offered $150,000. But John really wanted a job specifically as a CEO and TCI offered it, so he ended up taking it. He went and moved his entire family to Denver, which he liked a lot more than being close to New York. Now, this was an interesting lesson simply because Malone could have stayed at GI had they treated him well,

or if some of these other offers had maybe been located somewhere other than New York, perhaps he would have actually enjoyed them and taken the offer. And who knows what would have happened to Malone's life had he taken that route. Perhaps it all would have just come full circle towards him helping business. build out media assets, just maybe using different names. But the real lesson here is in chasing what you know resonates most with you. John chose to move his family across the country and to take a much lower paying job than other alternatives simply because he knew his own worth.

He felt he was ready for the challenge of leading a business and he bet on himself to do it. TCI even made a loan to him when he started to purchase shares in the company so he'd have skin in the game. John showed that misalignment can result in liberation if you are open to all over to all the possibilities that are out there for you. Once John joined TCI, the road was far from smooth. First off, TCI was in constant need of financing. In 1974, they had $150 million in debt with annual revenues of just $35 million. And TCI's share price wasn't helping the matter. Shortly after IPOing, the shares traded for about $37, but now they were trading at $75

at a market cap of only $3.9 million. So this was a true nano cap. So, you know, this was a pretty ugly business to want to invest in at that point. So if I looked at this myself, once I saw there is that much debt on a business with a market cap that small, I can tell you I probably would have just stopped my research right there. But John had some very creative ways of dealing with the debt problem. In the 1970s, it was a time of hostile takeovers and neither John nor Bob Magnus wanted to lose control of TCI. At one point, there was a 20% shareholder who wanted to exit his position in TCI. Neither Bob nor John had the funds to buy. the stakeholder out even though they would if they could have. They would have loved to use TCI's own

capital to buy the shareholder out, which was this corporation called Kaufman and Broad. But the banks blocked TCI from using borrowed funds to repurchase shares. But when John and Bob were thinking one day, they actually realized they had an off-balance sheet TCI subsidiary that owned some very small cable systems. If they could leverage the subsidiary's balance sheet, they could use it to purchase the shares from Kaufman and Broad without breaking any deals with the banks. The The company purchased nearly 20% of the company at a massive discount and kept 40% of TCI shares in friendly hands. Another underappreciated attribute of John was his thinking about TCI.

As a CEO, he had to spend more and more time dealing with analysts. And they viewed TCI as just another cable TV business. This was a business with high capital intensity, which is a characteristic that tends to be frowned upon. But John looked at TCI as a sort of real estate business. You purchase property. You collect rent or lease payments. then you just hit the repeat button.

The best part about cable businesses was in the accounting. The government allowed cable businesses to quickly depreciate their assets. This means if they had cable systems that could last for, let's say, 10 years, they would be depreciated over maybe just three years. This meant their earnings were suppressed, even though their assets would continue generating cashful for many years after they were no longer being depreciated on the books. This allowed businesses like TCI to avoid paying taxes as well

as depreciation is removed as part of operating. income. Because John understood this well, he knew that the interest payments that investors were looking at on TCI's books didn't always paint the correct economic picture of TCI situation. As a result, he came up with earnings before interest, taxes, depreciation, and amortization, EBITDA. In John's mind, EBITDA was a better proxy of cash flow than gap profits. In one sense, John did understand that TCI was generating this significant cash flow that just wasn't really visible to the average investor. The use of EBITDA would help him better portray TCI's economic performance,

but I have my own opinions on this. Now, one of my favorite dissections of EBITDA is from Seth Clarmine. I highlighted his great book, Mars of Safety on TIP 737, which I'll link to in the show notes. Now, one of Seth's main gripes with EBITDA is that it just doesn't account for the fact that a business must reinvest a portion of its profits just to maintain its depreciation and amortization. So if you look at two businesses side by side, one has zero depreciation and amortization, while the other, let's say, has 20 million in depreciation and amortization.

Then the business with none has no need to reinvest back into the business. They just don't have to reinvest into its depreciation and amortization assets. The one with 20 million, of course, has to continue pumping money back into the business just to maintain its operations. Now, a business like TCI had to continue investing just to remain competitive. There were zero scenarios where a business like TCI could get. get capital light and succeed in the industry it was in because it was just so competitive and capital intensive. So even though the business clearly generated a lot of cash, EBITDA would have

been a number I know I would not have been able to feel that I could rely on to make an investing decision. There is a chance you could still use EBITDA and come up with some sort of decent numbers to use though if you maybe made some adjustments. Since TCI was growing at an insane pace, there was a reference that they had a multi-year time period where they did a deal about every two weeks. and they were clearly acquiring a ton of assets that were both tangible and intangible. So you could have used a metric like owner's earnings, which is pretty similar to EBITDA and that it adds back a lot of non-cash expenses. However, there is a major difference into why I think owners' earnings would have made an even

better metric than EBITDA. And that's because it takes maintenance CAPX into account by removing it from the cash generated from operations. Maintenance CAPX is the capital required to maintain a business, but not to grow it. Now, I have no insights into what exactly it would cost to maintain a business's hard assets like it would have been TCI's day. But I can tell you one thing, it definitely was not zero. If you could figure out how much this number was, then you can use owner's earnings to

figure out what kind of cash flow you'd realistically expect from owning a business like TCI outright. I think this is a much better way to look at their financials, and I know Warren Buffett would approve as well. Now, by the 1980s, TCI had a very, very good playbook. It had predictive cash flow streams. and John had proven that he knew how to grow a business via mergers and acquisitions. He writes,

we had three goals in the 1980s, accumulate cable systems as fast as possible, aggregate them into contiguous clusters, and refinance the debt terms based on our bigger size and bigger cash flow. John had realized through his entire career working in the world of wiring, that leverage was very important. And he knew that he could improve his terms of leverage much better than competitors simply because TCI was becoming a better and better business,

and getting more and more predictable in growing its cash flow numbers. While it was getting somewhat easier to find financing, he still had to go on these road shows and present to investors just to raise capital. Now, just to give you a sense of what the cable industry looked like, in 1978, there were less than 10 cable programming networks, and by 1984, they swel to 47. From 1976 to 1987, cable industry revenue increased 12-fold. So you can see here that the cable industry was very diverse and getting even more and more spread out, which meant great things for a talented capital allocator like John Malone. TCI had multiple levers to get the scale benefits after acquiring a business. First, they had to find leadership. Either the seller would stay on for a time or help

TCI appoint someone to take his place. Then they would start finding advantages on the margins by going through their list of employees and figuring out just who needed to be kept and who could be let go. They'd also give certain goals to achieve and see if the company could match them. They'd further improve margins by finding ways to decrease overhead costs. On top of that, TCI had all the the benefits of ordering equipment in very, very large volumes. These were volumes that, you know, smaller players just couldn't dream of ordering. So once they acquired these smaller players, they would instantly see margin improvement specifically from this advantage. Now let's get back to leverage, which is a topic that John really excelled at. You may have heard of Michael Milken,

who was the inventor of the junk bond. Junk bonds were called that because they were non-investment-grade bonds. So companies that needed financing but maybe didn't have the right rating would have a very hard time finding capital to grow. This was a situation that TCI found itself in, and junk bonds did absolute wonders in financing TCI's fast-growing business. But leverage can go past just finding someone else to fund your acquisitions. John was also incredibly talented at buying a business that could generate enough cash flow to pay off the acquisition itself in just a few years. One example for this was a TV service called Cube, which was the first cable box which allowed viewers to access on-demand services like pay-per-view, watching things like concerts and playing games, etc. So they bought

access to Cube in the Pittsburgh market because it had been floundering under previous ownership. But John believed that he had the people in place to make it grow into a profitable business. He bought it on leverage, quickly improved the business, and in only two years, the company was essentially running on its own cash flows, with leverage having dropped dramatically. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future.

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Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. Another one of my favorite stories about John Malo and his intelligent use of leverage was the spinoff of Liberty Media from TCI. John had grown tired of dealing with the regulatory issues that the U.S. government was having with cable companies.

So TCI in the 1990s was the biggest cable TV business in the U.S. And TCI's lawyers felt that the government was probably leaning towards forcing a split of TCI's assets into distribution, which are the cable operators, and programming, which are the networks. So instead of allowing the government to dictate TCI's future, John chose to preemptively make the decision for them by spinning off the programming assets from TCI. These assets included non-controlling states and a number of different programmers like Newscore. John also felt that these assets were being undervalued inside of TCI, and so he felt that spinning them out would unlock even more value for shareholders.

At an investor meeting, John hosted after announcing the spinoff, he asked the 23 analysts who were present, which of them would be participating in the spinoff. And only two said they would. This speaks to the complexity of some of the deals that John made. Since most of these stakes were non-controlling, the financials would have just been kind of a headache to make sense of. So many of these analysts simply just chose the path of least resistance and skipped it. Now, the spinoff here was named Liberty Media.

And similar to the unpopularity of the spin-off with analysts, TSIZE, shareholders were also somewhat not that enthusiastic about it as only a third of TCI shareholders swapped some of their TCI shares for Liberty stock. With John knowing that there wouldn't be much interest in Liberty given his meeting with analysts, he knew that shares were likely to remain undervalue during the spinoff. And therefore, he knew that he had a really, really good opportunity to help build wealth for himself. So John ended up swapping a third of his TCI shares for Liberty media shares. But he wanted even more. So he secured a $26 million loan to exercise the options that he was given. This combined state gave him 20% of Liberty's Class B shares with additional

voting rights. Using no shares as well as the rights that Bob Magnus gave up to John, he would control about 40% of the voting rights. Now here the story of leverage is more of a story of John betting on himself. He used the available leverage on a single bet that he thought would work out, and it did. That's not to say that betting on yourself with that much leverage is always a good idea, but John clearly was willing to take some risks in his life, and many of them ended up paying off incredibly well for him. Only two years later, his stake, which had been bought mostly on leverage for a total of about $42 million, was now worth more than $600 million, and he didn't have to pay any taxes on that windfall to boot. This brings me to the next theme I want

to focus on, which was the ability to legally avoid paying taxes. The first lens I want to look at this through is at the individual business level. As I already mentioned, John liked using EBITDA to help analysts and prospective investors better understand businesses like TCI. And even though TCI looked uglier under Gap, it really allowed the business to continue growing while utilizing capital that would have been paid to the government if the terms of GAP had been different. For instance, if the depreciation schedules were 10 years instead of three, then that would have inflated pre-tax income for TCI, which would have increased their tax bill.

So even though the whole Gap thing was kind of annoying for John in terms of getting others on board with TCI's economic value, it also ended up just helping to keep their tax bill low, so that meant they could reinvest more money back into the business and continue feeding the compounding machine. So here's what John wrote on this. The investment in the infrastructure was deducted from earnings right away, reducing our taxes on any profit, even though the benefits of the investment would last for years. It thereby provided a great incentive to keep investing in our own systems to make them better. In other words, it wasn't an accident that John employed the strategy. John also knew that inside of mergers and acquisitions, transactions could be taxed in efficient ways.

For instance, when TCI was taken over by AT&T, John strategically positioned it as a merger. So in a cash-based acquisition, taxes are paid on the purchase price. But with AT&T, the deal was done as a pure stock swap. This format minimized a tax hit as AT&T swapped its own shares for shares in TCI and Liberty. Another way that John avoided paying taxes was by using something called a tracking stock. Now, I personally find tracking stocks kind of confusing, but here's what they are. So a tracking stock was a way for a company to show the inner workings of certain segments inside of their business performance-wise, opposed to showing the performance of the company

as a whole. So when TCI and Liberty were merged with AT&T, John relied on using tracking stock so the market understood the value of each individual part. The difference in tracking stock is in its equity. You actually don't own the equity in the individual business unit, but you do own the equity in the parent company which owns the individual unit. The reason that John did this at AT&T was to make it as clear as possible what certain segments of AT&T were worth and what their performance was. The last part of tax deferral I want to mention is what John eventually did with Liberty Media,

which still exists today. So Liberty Media is interesting because it's a collection of media assets. Today it's made up of F1 and MotoJP. When looked at as individual assets, it's quite impressive, actually. So F1 has a nine-year revenue kegger of 71%. MotoGP has a four-year revenue kegher of 159%. But then it appears they have additional assets as well, so you can see why these tracking stocks are pretty vital to understanding the individual assets. One bonus of keeping a collection of assets under a conglomerate structure is tax deferral. Liberty Media has undergone numerous changes to its portfolio over the years. Tracking stocks, spin-offs, and mergers have all been made to help move the company forward, increased shareholder value, and defer tax payments by capital allocation.

One great example was SiriusXM. So inside of Liberty Media was Liberty Sirius XM Holdings tracking stock. In 2024, they created a new company named New Serious XM. Owners of Liberty Serious XM Holdings tracking stock could then exchange those shares for shares of New Sirius XM. Once the exchange was complete, New Sirius XM merged with Liberty Sirius XM holdings creating what's called a split-off stock. The merger qualified as being tax-free. Liberty could have obviously just spun out the shares of Sirius XM, but then they wouldn't have had this tax deferral.

This was done while John was not the CEO, but obviously it has his style written all over it. With the success of this split-off, Liberty Media did another deal very similar to the serious deal only with their Liberty Live tracking stock. They created a new company, merge it with Liberty Live tracking stock, then executed the split-off with favorable tax implications.

This is part of John's ability to create value. But in my eyes, it's, I don't know if it's a red flag, but probably a yellow flag. Not because Malone is doing anything malicious by any means, but simply because I just find it difficult to understand some of the deals that he makes. Any investor who trusted John and maybe invested alongside him was probably perfectly fine getting into these deals with him while maybe not having the most firm grasp of the deal structure compared to how John understood it. I think for those people, he simply just had to trust that he was doing right by shareholders

and just follow him along. But for me, I know I'm wired to kind of want to understand deals. And if I can't understand them, there's a very, very low chance that I will end up investing. Perhaps if I'd invested alongside with John from his very beginning TCI days and I'd had this massive success, you know, investing alongside them over decades, I probably would have been perfectly fine just being like, yeah, okay, I understand this deal at, you know, maybe 50%, but John clearly understands that 100. So I'm just going to go along with them because I trust him.

But to be honest, I can't really think of many people I would do a deal like this with today given just how complex it was. And I think it's pretty clear that John was a master of making deals. On his way to building up TCI, he was able to make deals that helped deliver a ton of shareholder value. One problem with deal making is that if you truly want a deal to be consummated, you can always do so if you're willing to pay the highest price. The problem with this is if you pay the highest price, you're also technically the loser of the deal simply because you've lowered or eliminated any margin of safety, and your upside is lower

than if you'd won the bid at a cheaper price. And John understood this well, which is why he developed innovative ways to structure deals that eliminated the need for bidding wars, or allowed him to partner with other businesses and share in the profits of the deals. In the 1980s, TCI was finding difficult to find partners in the media world. TCI had grown to a powerful business, and very few others were willing to make a partnership work with them. The theater industry actively disliked cable companies for pretty obvious reasons. They even went so far as to airing anti-cable TV ads before movie started. Telephone companies saw cable companies as future competition and as Malone writes, charged cable operators usurious rates to hang wires on their poles. Lastly, broadcasters

spent millions lobbying the government to weaken the power of cable operators. So John had to look at an entire different industry to find someone willing to partner with them to continue growing. He found one inside of the newspaper industry. So it started with Knight Ritter. TCI and Knight would put in equal equity to fund new cable systems. TCI would operate them. Knight Ritter would get a preferred stock that would pay them a dividend. TCI would then use these joint ventures as leverage to acquire even more cable systems.

They ended up signing up EW Scripts company and Taft Broadcasting to do a similar strategy. And once TCI was in a better financial position, they would just buy their partners out. But Malone wasn't above bidding. Sometimes he just had to do it. If you make hundreds of acquisitions, it will inevitably happen. One of TCI's subsidiaries, QVC, a type of shopping channel, was interested in purchasing Paramount Communications in the early 1990s. But Viacom decided to make a bit about 30% higher than their initial offer, and QVC just

ended up letting that one go. Another large acquisition that John was involved in was in Time Warner Cable. This was a deal that was done after his TCI days, but in his Liberty Days. John viewed Charter, which was owned partially by Liberty as a potential acquisition engine. And he spun it out of Liberty Media as a separate company named Liberty Broadband Group. So Liberty Broadband had earlier bought a 27% stake in Charter and was already up 55% on this investment in just a year and a half. One of their first targets was Time Warner Cable. It was the second largest cable operator in the U.S. and three times Charter's size.

Time Warner Cable declined the first bid of $37 billion. So Time Warner Cable could afford to be patient at this time because there was another shark in the water looking to make a bid and that was Comcast. So Time Warner Cable CEO felt Charter's bid was kind of a low ball offer. So instead of losing out on Time Warner Cable, Malone decided to explore whether a partnership with Comcast on the Time Warner deal would make any sense for both parties. Unfortunately, they couldn't get a deal done. So Comcast went at it alone, bidding $45 billion, which Time Warner Cable accepted. But regulators, luckily, were not interested in allowing the deal to go through. The combined entity would then control about 55% of the U.S. markets and they just didn't want

to deal with a giant monopoly. So as a response to this, Charter decided to increase its bid and ended up winning the bid at about $78 billion, a massive 75% premium over its original bid. John admitted that he wasn't super crazy about how much they paid for it, but he felt that it was a prize that was worth pursuing. And in the spirit of monopolies, Charter was made the largest cable operator in America when it merged with Cox Communications in 2025. So perhaps this deal was part of a bigger idea that John.

had. The art of bidding on these assets wasn't very easy. John generally wanted to avoid bidding wars, but if he felt the right deal came along at the right time, he was willing to pay up for it if he felt that it would make a large impact for many years down the road. Charter, I think, was definitely one of those types of deals. Now, given my attraction to Sierra Acuers, I think about this a lot. If I had to guess, John didn't have stringent, you know, internal rate of return strategies in his deals. He found so many deals that were more kind of like these VC bets and hyperrational IRR bets with a high chance of success. So in 1985, a man named John Hendricks had a dream of a new type of television network. It was a network focused on airing content about nature shows and nature documentaries.

It would become discovery. But Hendricks couldn't find anyone to help him fund his idea. He'd already taken a second mortgage out on his house. He pitched his idea to Disney, he pitched it to Universal, but both of them took a pass. he finally approached TCI, and they ended up wiring him $500,000 to help him with his dream. And that investment's peak value would eventually reach a billion dollars. Now, this is an interesting bet because it feels much more like a gamble, you know, than a sure thing. But the small size and the fact that TCI can make many of these small bets turned out to produce a massive, massive winners.

Now, I spoke a bit earlier in this episode about John's what if not framework and how he used that to try to find potential downsides in a deal. One of the ways that John dealt with potential downsides was by finding bets with high upside or by searching for hidden value in the assets that he was invested in. John was intimately involved with AT&T after TCI sold out to them. Since the transaction was all stock, John had switched from owning shares in his baby TCI to owning shares in AT&T, a business that he was familiar with, but no longer had the same degree of control in. Once the deal was done, John began seeing cracks inside of AT&T that really concerned him.

When John was studying the company financials, he realized that AT&T might be headed towards the liquidity crisis. They had $28 billion in short-term paper, and given that AT&T was going through a decline in cash flow, rolling that short-term debt over into long-term debt would have been quite challenging. And if AT&T was liquidated, then a large percent of Malone's net worth would have just poof, gone up in flames. This also included his Liberty media stake at the time.

John knew that if they couldn't pay back their loans and there was a chance that AT&T would sell off Liberty assets to help them fund their financing costs. Now, I highly doubt that John went into the AT&T deal, expecting cash flows to immediately crater, but that was the reality that he was in. But ATAT scrambled and quickly got some cash together. During all of this, John was contacted by a reporter at the Wall Street Journal about his thoughts on AT&T. Since the TCI deal had been completed, AT&T shares were down 38%, while Liberty Class A shares

split-adjusted had increased by 78%. I believe this was a tracking stock at a time. One of John's biggest gripes was that AT&T wasn't doing a good enough job showcasing the value and that they could have done a better job simply by using tracking stocks on its broadband unit which held cable assets that were performing very, very well. John knew AT&T had hidden value and they later completely broke the company up, skipping the tracking stock route. With Malone's connections, he suggested to Ralph Roberts, who was Comcast CEO, that they ought to

just buy AT&T's cable assets outright. Part of this seemed to be a plea for help as John writes, do something because at this point, I am the largest individual AT&T shareholder with 26 million shares and I can see that these people don't know what they are doing. The deal was eventually done and it signaled John's departure from AT&T. He had many great insights from the event. The first was to take responsibility. John took full responsibility for kind of screwing up the TCI deal.

What heard him most wasn't that he lost nearly 50% of his net worth on the deal? but that he allowed a business that he and his good friend Bob Magnus had built for decades to be sold off for 50 cents on the dollars to one of their rivals in Comcast. The second was to not stick around after deals are made. The TCI sale to AT&T was great for a number of TCI shareholders, as they could have just sold their shares after the swap was completed. But John, and I can only assume this was due to a lockup, couldn't do that exact same strategy.

And this was what caused a lot of the damage to his net worth. And then thirdly here is John had already learned from other friends inside of the wiring business that once you sell out, you just lose all your power. And sticking around is likely to be more of a headache than anything else. Looking back, he wishes he had just exited after the swap and moved on to something else. Another fascinating story about John and Risk was how he navigated through the rise of disruptors like Netflix. Disruption is a tough risk to deal with because a lot of the times, it's kind of impossible to know who's going to win out, how disruption will affect your business, and when disruption will actually happen.

By the early 2000s, cable was dominant. Any outside observer could have looked at the industry and assumed that cable had these impenetrable modes. Much of the installed infrastructure was nearly impossible to replace. The industry also had several regulatory barriers. Hundreds of billions of dollars had been invested into the infrastructure, into fiber, and into upgrades. The businesses had strong recurring cash flows from sticky customer bases.

And the businesses had control over distribution. It's hard to see how all of these advantages would just disappear. And when Netflix first started its business, it didn't really catch fire like a chat, GPT and gain millions of users almost overnight. The business was started by mailing DVDs. And when it moved to streaming, the quality wasn't the greatest. And to get more content, Netflix just paid licensing fees to movie studios to generate incremental revenue.

But Malone had a leg up on the average person. He admits that he'd seen a similar narrative in the early 1990s and felt like Netflix was taking a similar approach. So in the 90s, cable networks like TBS, AMC, Discovery, and FX all took a pretty similar approach. They just licensed old broadcast reruns. As a result, they helped build up formidable audiences. Then they used the increased revenue to create their own original content. Then they pulled away from the broadcast networks to accrue more cash flow for themselves. Malone figured that Netflix was essentially doing the exact same thing, but to the cable industry. In the early 2000, alarm bells were ringing inside Malone's head regarding the potential

existential threat that Netflix posed. Netflix had a direct-to-consumer model, which allowed it to skip paying middleman excessive fees. They controlled their own pricing and had pricing power to boot. They were also building proprietary data on their customers as they knew what their customers liked, and they could use that to their own advantage by recommending shows that their customers would likely enjoy. Basically, Netflix bypassed the wholesale structure of the retail TV industry. Malone mentions in his book that he had pushed a partner with Hastings, buy him out, or banned together with the cable industry to compete with him. But the industry just didn't do any of these things.

It's difficult to say how much thought Malone put into this at the time, though. You know, Netflix in its early days offered to sell the blockbuster for about $50 million dollars and was turned down. Any cable network could have offered a deal to Netflix at the time, but didn't do it. And $50 million was not a lot of money for them. Perhaps it was just too early at that point in Netflix's growth cycle to be taken seriously. Malone had his own hypothesis why the cable industry acted like a deer in headlights when it came to not taking part in Netflix's meteoric rise. And a lot of it had to do with human psychology.

The cable industry had been strong for multiple decades, and its leaders just refused to believe that a new way of watching TV would disrupt the legacy model of cable. But the value proposition of streaming was just so much better than cable. In cable, if you wanted a certain channel, you'd often be forced to buy bundles at higher prices that included other channels that you just didn't have any design. desire to watch. I personally remember this. Even as a kid growing up with TV, I'd probably watch maybe 10% of the channels that I had access to, but there was no way to shave off 90% of your cable bill to leave the 10% that you actually wanted to watch. This gave Reed Hastings an excellent opportunity to get into the TV industry in a different way and offer entertainment at a much cheaper price and fully on demand. I've spoken about how Netflix had a counter positioning

advantage over businesses like Blockbuster, but you could also argue that it also had a counter positioning advantage over the greater cable industry as well. The cable providers had gotten so used to acting as kind of these rent collectors for their cable toll roads that they kind of became complacent in terms of innovation. And that allowed someone else to do it for them and get all their rewards. The cable industry had very limited cable data. So they had no ability to create things like algorithms that would keep their viewers captivated. And as Netflix scaled, their ability to have these giant budgets on programming dwarfed that of traditional. cable. They just couldn't compete. The businesses that replicated Netflix started as losses as well.

So it takes time to scale and actually turn a profit in these streaming businesses. Netflix had that kind of first mover advantage over businesses like Apple, Amazon, and Google. But the thing about those three companies is that they had core businesses generating billions and billions of dollars in cash flow and they needed somewhere to spend some money. Streaming was a place that had asymmetric upside. You spent money and if it worked, great, you just added a new business unit. And they could all subsidize a losing business unit for multiple years if they felt that it was worth the short term pain. The cable industry didn't have the same advantage.

Malone admits that these tech businesses had a ton of upside optionality when it came to streaming. Cable didn't because they couldn't afford to subsidize loss-making businesses for multiple years. So the lessons that I took here are that early threats can often look very small. Netflix started as this kind of niche business with kind of an underwhelming and frank. complimentary product, but disruption rarely looks dominant early on. You have to stay on top of new themes and new technologies. Next is that optionality is cheapest before consensus views take shape. In Netflix's early days, it could have been bought for a price so low as to pose very little risk. Or the cable companies could have partnered with it further boosting its content library

while sharing in the profits. But by the time they realized they made a massive oversight, Netflix was just too big to acquire. Optionality decays with time. Next is that infrastructure advantages aren't always a wide enough mode. Cable-owned wires, billing relationships, and bundles. But Netflix own the customer. They own their data, and they own the user interface, and they created direct relationships with their customers.

Distribution without customer ownership and data simply became a commodity. And the last one here is ego and legacy thought processes can block action. Malone wrote that you can be blinded by confidence that comes from thinking, that's the way it's always worked. If you hold on to that line of thinking for even a year or too long, you can find yourself out of business. That's simple. Let's take a quick break and hear from today's sponsors.

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All right. Back to the show. Now, when you think about how many different roadblocks John had to deal with in his career, it makes it all that more impressive that he had been able to compound capital for just so long. But his ability to create a lifeboat for himself and his shareholders is a framework that I think is well worth looking at. I think all good entrepreneurs have this ability.

And it's a framework all investors need as well. Because if you want to succeed, you have to actually finish. And having a lifeboat that can save you during times of heavy volatility or simply for when you make mistakes is going to be crucial for long-term survival. I see John's framework for building his lifeboat as having multiple levers. The first is to avoid entanglement with legal disaster. He had to deal a lot with this in his career. And it's pretty clear he grew very tired of defending his decisions over and over again to

the government. One great example of this was with teleprompter, a business that, as I did, mentioned earlier in this episode, had offered Malone the CEO position. Now, this was part of the initiation of John's framework. He realized that taking the job at teleprompter would have led to a series of new headaches given cons legal issues. He'd also already dealt with ownership disruption and realized that if he wanted a long-term job, he wanted to make sure that there was a significant amount of job security and that he wouldn't be part of any potentially toxic situations that were easily avoidable. What John was doing there was just avoiding someone else's problem that could become

existential for John. This was a very smart part of the framework. The next part of his lifeboat framework is to protect power in his own hands and in those that he trusted closely around him. I mentioned that when a 20% shareholder of TCI wanted out, John and Bob Magnus strategized to kill two birds with one stone. They retained a large share of voting power while allowing this investor to exit their investment. Voting control is an interesting subject because it definitely matters, but I think it matters a lot less today maybe than it did back in Malone's days. With so many passive investment vehicles, large amounts of a company stock are now held by large institutional investors who don't really care to make a big impact on the business. Where I think this matters

more is on smaller businesses that aren't being run well or have debt problems and probably aren't in these large index funds. These are the types of businesses where an intelligent activist can come in and attempt to unlock value either by liquidating the business, removing non-performing assets, or by just improving the business's operations and efficiency. John did this with plenty of his acquisitions, but he was able to mostly protect himself and his shareholders from selling out to another company, the one big mistake being AT&T. Now, another way to strengthen your life vote is to spread potential risk between yourself and others.

Yes, at the beginning, obviously, this can cap your upside, but you can actually make a completely different argument that it actually increases your upside. So let's say you have JVs with companies that can actively improve a deal where you might not have that same advantage going at it solo. That's obviously a huge bonus that you wouldn't get if you went at it alone. So we saw this with TCI partnering with a number of these newspaper companies on cable systems. If things didn't work out, you wouldn't lose as much money as the equity was split. But if things worked out, which it usually did, you would have great assets and you could

just buy out your partners and continue scaling the business. This leads to the next part of the framework, which is making small asymmetric bets. So I already spoke about discovery, but I think my favorite story of an asymmetric bet that John made was actually in Sirius XM. So the story starts after the great financial crisis in 2008, when everyone, believe that SiriusXM was headed for bankruptcy. Credit markets were frozen, auto sales had collapsed, and that matters a lot because SiriusXM's entire business model relied on new car sales to generate leads. So if cars weren't being sold, their funnel of new customers would simply decrease.

To make things worse, they were absolutely drowning in debt to the tune of $3 billion. And they were burning through cash just to stay alive. A maturity was about to come due and they couldn't refinance. And if they weren't able to pay, it was Sayonara. John was heading up Liberty at this time and he felt that Sirius XM the business was good and that he could probably save it or it could save itself with a cash injection. But he wanted to protect himself in case things didn't go his way. So he actually didn't buy common stock, relying on opium to make a return. Instead, he structured a financing deal that was highly accretive to Liberty shareholders.

So he ended up lending Sirius XM $530 million. But that loan was at a very favorable interest rate of 12% for Liberty. And that actually wasn't even the MVP of the deal. Yes, it would offer Liberty about $64 million per year in coupon payments, but the real asymmetry was made in the preferred shares that Liberty had as part of a sweetener for the deal. So on top of the loan, they received a convertible preferred stock. The preferred stock cost less than $13,000. You heard that correct, $13,000, making them essentially free.

The preferred stock was then convertible into 40% of Sirius XM's common shares. So not only did Liberty get the upside from the bond coupons, but they were also first in line for Sirius's assets if they got liquidated. Then they had the call options that was essentially free to own. And if they converted them, they would get 40% of Sirius's equity if things worked out. Now, it's hard to assess the real downside for Liberty at this time. The business had very little in book value because they just lost so much money that the book value was nearly zero.

In 2008, they had $8.5 million in book value. But given how talented John was at breaking companies apart and changing the debt structure, my guess is he was more focused on considering things like intangible assets and goodwill that were on the company's books. They were probably worth a lot. And in the hands of Malone, he probably could have figured out something if things didn't work out as planned. But they did. The company completely turned things around. Four years after this deal, Sirius was doing $900 million in free cash flow. Then they began doing share buybacks. Liberty, of course, ended up converting its preferred shares and got a majority control of Sirius. The state became

worth $10 to $15 billion at various times depending on the share price. This was an incredible windfall. These are the type of asymmetric bets that John Malone made, and they're the types of bets that investors should be looking to make as well. No, the average investor cannot make these exact kinds of deals, but you can invest in people who can. Or you find businesses that offer a limited downside with a lot of upside. Those are the dream scenarios, and those are the bets that can completely change your fortunes. The other way that John strengthened his lifeboat have been covered in a lot of depth already, but here they are. So avoiding beating wars, using tax law to preserve capital, structure potential exits before a crisis happens, and think long term. So there's just so

many parallels here that can be used for investing. The act of public investing really is a bidding war. Historically, the best value investors just avoid bidding wars by buying businesses where there are just are very few bidders. This allows them to get into businesses at low prices. When you have significant buying pressure, it means there are many bidders and in order to get filled, you have to bid well above market prices. Now, I'm not going to say this doesn't work, but it probably should not be the mainstay of a strategy, because chances are you're going to be wrong more often than right,

buying things at a reasonable or cheap price is probably just a better bet. Since market psychology determines short-term pricing, you're better off getting bids when the market is feeling less optimistic on names that you want to buy or add to. Pessimism is the best possible scenario, but I think you can still succeed in investing by buying when the market is just less optimistic on a name that you think has rapidly improving fundamentals. As for avoiding tax laws to preserve capital, that's a very, very powerful concept. And it's actually quite simple.

So if you're a retail investor, maximize your tax sheltered accounts. This means you minimize capital gains once you decide to sell. And in some accounts, you eliminate capital gains altogether, which is excellent. Plus, you get to count some of the inflows into your registered accounts against your income, which literally reduces the taxes that you pay. If you have to hold your capital in accounts that require capital gains tax, the best strategy is to just invest for the long term. The more bets you have that don't require you to sell, the longer you defer paying taxes, meaning the more money you have in the market compounding. If you have to sell regularly, you're paying taxes regularly too, which eats into your compounding.

Another strength that John Malone possessed was an understanding of effective leadership and matching it to the right stage in a business's growth. He also knew so many talented people, and as he got more experience, he was able to work inside of his own preferences and avoid some of the parts of his job that he just didn't enjoy much, such as dealing with government regarding monopolies. The fact is not every CEO is equipped to deal with everything that will be thrown their way. At times, you may need a CEO who can simply survive difficult times. Malone himself was exceptional at this. Then you may need someone who can aggressively roll up industries and do it in a way that creates

shareholder value. Then you need to be able to withstand uncomfortable government scrutiny. Then you need to unlock as much shareholder value as possible. In order to do that, you may require a leader who firmly understands how to engineer finances and ownership structure in complex environments. And if you move to newer areas of business, you'll need to rely on others' judgments to help optimize rather than to navigate unfamiliar waters with a map that you've never learned to read.

Now, one aspect of TCI that was powerful for creating value was its ability to maintain a decentralized structure. Given his acquisition pace, his time was better. spent on acquiring and financing rather than fixing small problems that could be delegated to the subsidiary's leaders. When TCI acquired new systems, Malone usually preferred to keep strong local operators in place, who knew the area and customers at a deeper level than TCI. In the case that the seller wanted to retire or leave, he also had the connections to find people to lead the business if needed. He gave them a large degree of autonomy, and once TCI was able to optimize their margins

and offer them scale benefits, he could then incentivize the leaders to perform well to help align the business with TCI and its shareholders. When Bob Magnus hired John Malone, he knew Malone was capable of things that Magnus wasn't the strongest app. Bob was TCI's founder and original visionary. Much of his value ad was based on things like relationships that he had been building from building out these cable systems. And he had that kind of founder energy. He was willing to do whatever it took to build TCI that only a founder has. But he didn't. He didn't ended up needing help. TCI would eventually go public and needed to do so just to help fund its

continued operations. Malone knew that he was the right person for the job, so it was a great match between him and TCI. John brought things like systems thinking, financial engineering, and capital markets orientation to TCI, which it badly needed to continue scaling up. TCI needed Magnus early on just to exist, but once the business grew larger and more complex, it required a leader like Malone to take the reins. I mentioned earlier in this episode about how Liberty owned a piece of charter, which eventually became a behemoth. And while the Liberty's stake was large, Malone didn't lead the business. Charter had a gentleman named Tom Rutledge who helped build that business. Tom was a hardcore cable

operator and was the right man for the task. Rebuilds require operational intensity and focus. Charter had systems that needed to be fixed for the rebuild to work. They need to improve customer service and execute at a high level. And Rutledge was the right man for that job. Now, Liberty was actually the first job that John decided to step down in and allow someone else to take the CEO position. So he appointed Greg Maffae as a CEO of Liberty, and he did an excellent job. Malone could be seen more as kind of the architect of liberty, which he created. But as time went on, and Malone wanted to spend less time working, he realized he needed someone else to keep Liberty running in tip-top shape.

So Malone stepped into a strategic oversight role. This gave him more time to work on the things that he wanted and freed up more of his time. Now, I don't think this was a move that was done out of desperation by any means. Malone probably could have led Liberty for decades, had he been maybe a little bit younger, a little hungrier, but at that time, he was already quite wealthy and his motivations had shifted from his younger days at TCI. I think about this pretty often. I was recently speaking with a portfolio manager who was also a member of our TIP Mastermind community about a business that I don't own called Roco. Roco is a serial acquire and perpetual owner of a wide variety of business to

business and business to customer style businesses. Its CEO is Frederick Carlson, who has been wildly successful in his career as a capital allocator. He helped to achieve over 100 times returns for Lyfco. With Roco, he's running a part of Lyfco's playbook to attempt something quite similar. Now, the member I spoke with liked the business, but he brought up some great points on leadership that I felt were kind of yellowflex. For instance, Frederick is already quite wealthy. And he had some concerns that because Carlson had already had so much success early in his career, he may not be as involved or hungry to continue working at the same pace that he once did. When you look at Roco, they actually already have a deputy CEO. So it appears that the writing is on the wall that

Carlson will eventually pass his CEO role on to someone else. One hard part about investing that I spent time thinking about is in leadership. Sometimes, a business requires an incredibly talented leader to keep the company thriving and growing. I think this is especially important in businesses that rely on strong leadership and are earlier in their growth phase. But what about businesses that have matured? Sometimes a leader stepping down is the best decision. In the year 2000, Starbucks had over 3,500 stores. Revenue was growing at a fast pace, and it's found. and CEO Howard Schultz had done a brilliant job building the Starbucks brand, which was already very iconic. And he boasted great returns since Starbucks's IPO. But the height of success for

Schultz, he decided to actually step down. He believed the company needed a more operationally focused leader to scale the business efficiently. If I had been looking at a business like Starbucks back then, it would have been a pretty hard decision to see where Starbucks was headed. Under new leadership, would they continue cruising to greater heights? At first, it looked that way. But by 2007, same store sales were actually declining and the stock declined 50% in price. This was simply because they were just expanding far too quickly. The focus on efficiency of the stores ruined the culture that Schultz had worked so hard to build. And as a result, the brand lost part of its soul. So, Schultz ended up coming back, returning as CEO and engineered an incredible turnaround.

He closed underperforming stores. He shut down every U.S. store for a period of retraining, and then he reemphasized the Starbucks culture and customer experience that they'd once been known for. At first, yes, this slowed down growth, but it protected the integrity of Starbucks in the long term. It's interesting to think that, you know, some businesses with these great brands can still be ruined if management takes the business in the wrong direction. But the beauty about certain business models is that if the culture is correct and the departing CEO has a correct successor who is completely on board with the company's culture, then you can actually keep a compound or compounding long after the original CEO. leaves. This is why internal CEO hires have worked well for a number of incredible compounders, especially those that are decentralized and allow a lot of operations to be run in smaller units.

In this case, even with the CEO change, the business can continue to be run very effectively. That's because a new leader can maintain its culture. Now, the final superpower of John Malone I want to discuss today was his ability to consistently think long term. I briefly mentioned earlier that once TCI scaled, they focused on building geographic clusters. Whereas TCI originally focused on owning small operators all over the country, they realized that concentrating new acquisitions into clusters would be a very, very powerful long-term strategy. Malone would trade systems and geographies that maybe didn't make as much sense for geographies that it did make sense, and he would swap out assets that were underperforming

for assets that he believed that he could rapidly improve. The rationale here was simple. These small clusters would allow TCI to take larger pieces of market share in their given geographies in maybe five, ten, or even 20 years. He was basically creating regional monopolies. Malone wasn't trying to buy operators that would just boost next year's earnings. He bought them looking 10 years into the future and how it would make TCI an even more powerful company over the long term. So what exactly did this clustering accomplish?

Since regions have advertisers who want access to local customers, it allowed TCI to have more bargaining power with programmers and advertisers, giving TCI greater terms. This advantage in negotiating power further built up TCI's dominance as there was a degree of network effects. If a programmer wanted to be seen, it was vital to partner with a cable operator that had the most amount of customers. And this was what TCI ended up doing by building a larger and larger customer base. Let's say that TCI was negotiating with a programmer like ESPN. TCI could go to them, tell them they had two million homes in a specific region, give them the terms of the deal, and wait for their answer. A competing cable operator with, let's say, 200,000 homes

would not be able to have the same bargaining power. Plus, TCI could threaten to remove programmers from other geographies if they didn't agree to TCI's terms. But John knew the strategy would take a lot of time, and each acquisition that he made was kind of seen as a stepping stone to build a more and more powerful business. Another way John utilized his long-term thinking was regarding his personal net worth. Malone knew that ownership was important, which was why he continued to leverage his net worth not by accumulating cash in sales, but by adding to his equity in his deals. Malone, interestingly used a lot of leverage to help him do this, from his first buy a TCI to the Liberty spin-off, Malone would buy as many shares as he could, and he wasn't afraid

to use leverage as part of his strategy. His first foray into owning TCI shares when he became CEO seems to be more of a risky bet than when he borrowed for Liberty. The reason is that John wasn't nearly as familiar with the assets of TCI when he took over as CEO compared to when Liberty was spun out. But he clearly believed in himself. I could not find the terms of the loans, but it's obviously not a strategy that's going to work for everyone. I think Malone's experience with TCI taught him just how powerful compounding was. And he knew that if he could continue compounding Liberty, he was much more likely to compound wealth-owning shares in the business

rather than fiddling around with excessive amounts of cash. Another way Malone thinks long-term is completely non-business related. So Malone is currently the third largest private landowner in the U.S. He reportedly owns approximately 2.2 million acres of land. And this wasn't done for business purposes. It was mainly done because John simply appreciates the nature of beauty. and land and its importance. And he knew that building his wealth would allow him to acquire more land that he could keep untouched for future generations. Now, when I zoom out and look at John

Malone's career, I don't really see just this pure financial engineer. I see an incredibly talented capital allocator who understood risk at a very high level. John wasn't afraid to utilize complexity to increase shareholder value. Whether you look at his use of leverage, tracking stocks or stock swaps, John was always concerned with safety, not only for himself, but also for the shareholders that he placed a ton of importance on. He built his lifeboats to ensure that he would one day arrive at a favorable destination. He did this by structuring deals so that if things went wrong, he'd still be around to fight another day. He tried to avoid excessive bidding wars by partnering with unlikely parties. He used the tax law not just to look clever, but to save

his investors' money and to keep it inside of the compounding machines that he built. He maintained control simply because he felt he'd have his investors' best interests at heart, but others wouldn't. and he constantly created upside optionality to keep his growth levers expanding. For all the investors listening out there, the lessons from John Malone are quite clear. Buy when pessimism is high, focus on the downside over the upside, think in decades, not quarters, defer taxes and allow capital to compound, and invest alongside managers who are talented capital allocators with a ton of integrity. Now, I'll be completely honest here, there are many parts of Malone's style that don't

naturally fit with me. I'm wired for simplicity, not complexity. I like businesses that are easy to explain and have clean financials. I'm not a fan of constantly flipping assets. And I tend to get uncomfortable when deals become too complex. And I think Malone made a career out of operating in complexity. But Malone's deeper lesson isn't in complexity. It's in the discipline that he oozed over his long and successful career.

It's in his long-term thinking and his ability to protect his downside. It's in his ability to find and structure asymmetric bets. So while you don't have to copy his tactics, I know I won't. I think you'd be very wise to adopt these qualities. That's all I have for you today. Want to keep the conversation going? Then give me a follow on Twitter at Irrational MRKTS or connect with me on LinkedIn. Just search for Kyle Greve.

I'm always open to feedback, so please feel free to share how I can make this podcast and even better listening experience for you. Thanks for listening and see you next time. Thanks for listening to TIP. Follow We Study Billionaires on your favorite podcast app and visit the Investorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax or legal advice. The content is impersonal and does not consider your objectives, financial situation or needs. Investing involves risk,

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