Too Much of a Good Thing
As I write this review there are 183 reviews of “The Outsiders…” on Amazon. Why another? It is because private equity investor William Thorndike offers keen insights in his highly readable book into what makes a successful CEO. Drawing inspiration from such CEOs as Tom Murphy of Capital Cities, Henry Singleton of Teledyne, John Malone of TCI and Bill Stiritz of Ralston he shows how great fortunes were made for their shareholders. To him it is all about CEO's who run lean decentralized operations with a keen sense of capital allocation and the use of leverage. Appropriately timed share repurchases along with leverage is what makes for strong shareholder returns and he correctly predicted in 2012 that major tech companies would soon adopt such policies. All true, but to my mind he overstates his case because he leaves out the downside of financial engineering and ignores the role of research and development and the investment in great ideas that have built some of America’s greatest companies.
For example CEOs such as Bill Gates of Microsoft and Steve Jobs of Apple took quite a different path to build their companies. Similarly away from technology look at the great success of Wal-Mart, Starbucks and Whole Foods in retailing. Their success did not come from share repurchases and leverage. To be sure all those companies just mentioned, for the most part, benefited from strong capital allocation skills, but their success came from sourcing and developing highly profitable investment projects.
The American economy was built on such investments. While share buybacks can make sense for an individual company, it might not make sense for the economy as a whole. This I fear is what is happening today as share buybacks explode and capital investment remains tepid.
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