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“Is how newspapers picture the greatest nceos of our time. Someone who is charismatic and and action oriented. Someone who has a fancy office preferably nin. A fancy place like with hordes of underlings with mbas.
They also picture this ceo to be someone who nflies a lot on corporate jets. But they are totally wrong actually the most outstanding ceos of our ntime the the polar opposite of what i just described ceos operate in a highly quantifiable universe nbut. Many people miss this point. We understand things such as batting averages nin baseball numbers of goals scored in football or a number of title defenses in the ufc.
But what is the equivalent in the corporate nworld. It s the increase in company per share value we are not talking about absolute returns nhere. But returns relative to peers and the overall market and let s just say that the outsiders performed nquite well here on average. They outperform the s p.
500 by n20 times and their peers by seven times. So one can definitely say that there are nincentives for an investor to learn how to detect these types of people. And that is what you will learn in this video in this video. I will present the five most nimportant traits that an outstanding ceo possesses based on my own opinion after reading the nbook.
The outsiders. Which is written by william thorndike. This is the swedish investor bringing you nthe best tips and tools to reach financial freedom. Through stock market investing trait number one they are skilled investors ceos must do two things very well they must nrun their businesses.
Efficiently and they must deploy the capital that these businesses ngenerate. Which one you think is the most important unlike. What i think most people believe it nis. The second one the ceo of an established firm must know how nto allocate cash to profitable projects in other words.
Ceos are investors. It is an interesting dynamic of corporate nlife. Because skills in capital allocation. Is usually not what earned the person.
The nceo position to begin with warren buffett..
One of the outsiders. Ceos nand. The greatest investor of all time says the following about this strange. Dynamic n.
Step for a highly talented musician was not nto perform at carnegie hall. But instead to be named the chairman of the federal reserve ceos have five basic choices in deploying ncapital invest in existing operations acquiring other businesses. Issuing dividends. Paying ndown debt or repurchasing stock and the most successful ceos tend to focus non three of them a ceo s flexibility and proficiency in mixing nthese.
Three ways of allocating capital is probably the most important trait for outstanding nstock returns and sorry to all of you dividend investors nout there but dividends are actually not something preferable to see in a company that nyou invest in why because it is taxed at both the firm and the nindividual level. While the other options for capital allocation are not moreover. It may signal that the firm has nlimited growth prospects. The outsider ceos use the price of their own nshare as a benchmark for evaluating other capital.
Allocation options. Consider what henry singleton. Did with his nteledyne. He issued teledyne stock for an average of n25 times.
The company earnings and bought back that same stock at an average of eight times. So he was buying for eight dollars and selling nfor twenty five basically talk about aligning interest with shareholders. This also happens to be the next trait that nyou should look for trait number two they align interests with nshareholders such as you and me. The ceo is hired by the shareholders to benefit nthe shareholders.
But not all ceos realize this they use their position. As the chief to build ntheir own empire. Increasing revenues and the number of employees at all costs shareholders of companies with these types nof egocentric. Ceos.
Often lose a lot of money. So. The second trait that we want to look nfor. And that all outsider ceos had in common is that they are shareholder oriented.
There are a couple of clues that you can look nfor one..
The ceo is invested in the company. If he holds shares too. That is great in these cases. The ceo will most likely work nwith you two organization wide share ownership.
The ceo is the most important one to check nbut. What s even better is if there are incentives to spread share ownership in the organization. Dick smith of general cinema. For instance nissued options for executives and matched employees share contributions.
Three willingness to shrink a ceo that is willing to divest or even close nunprofitable business units. Shows that he doesn t possess that harmful ego of the charismatic nand action oriented ceo that the newspapers like to picture. Which is a good thing four bonus systems. Katherine graham of the washington post for nexample used bonuses as a major tool for compensation of executives constructed correctly this aligns interest nwith shareholders much more effectively than a flat salary trait number.
Three. They decentralize henry singleton. Had 50 people working at his nheadquarters with an organization of a total of 40000. People.
This is pretty damn impressive. And it s only surpassed by warren buffett nwho has about 30 people working at the headquarters in omaha and an organization of no less than n400000. People. Most of the outsider ceos decentralized.
Their nbusinesses. The individual business units of their oganizations ndid. N t have headquarters watching over their shoulders all day. But physical decentralization is just one npart even more importantly is how flat the hierarchy nof.
The organization is the outsider ceos prefer to have as few middle nmanagers as possible cutting out the middleman isn t just a strategy nfor supply chain managers. But also for exceptional ceos. It seems decentralization leads to freed entrepreneurial nenergy and greater work autonomy. Tom murphy of capital cities.
Probably said nit best of course..
This trade is strongly tied to ntrait number two aligning interests with shareholders. Leaving people to do whatever they find best nis right out stupid. If you don t at the same time make sure that their incentives are aligned nwith yours something that s interesting here is that nwhile ceos like singleton and buffett decentralized operations. Almost completely.
They also centralized ncapital allocation almost completely not a single dime was to be spent under their nwatch. Without first showing good prospects for return on that capital trait number four they focus on cash wall street. Loves to focus on quarterly earnings. The outsider ceos loves to focus on long term ncash flows the best illustration that quarterly earnings ncan be misleading for how a company really is performing is provided by john malone of ntci.
He deliberately made tons of acquisitions nwithin. The cable industry and finance. These through a lot of debt. Why because he realized that by minimizing net nearnings through increasing depreciation and interest payments.
The shareholders wouldn t nhave to pay any taxes at the corporate level in this way. He was able to fund investments nwith pre tax cash. It didn t make sense to look at net earnings nto. See how much value he was creating for shareholders.
Many of the outsider ceos came up with their nown metrics on how to measure business. Performance. John malone. Was a pioneer of ebitda.
As he tried to maximize interest payments. Nand depreciation. It made more sense from a value perspective to look at this number nrather than net earnings. Dick smith.
Used something called cash earnings. Nwhich was defined as net earnings. Plus. Depreciation.
And henry singleton coined..
The term and cash flow and of course to align. Interest with shareholders. Nbusiness managers of teledyne. Had their bonuses tied to this number trait number five they are frugal.
I think tom murphy. Said it best least fuel and boy did he adhere to this himself when his company capital cities acquired. Another nlarge media company called abc in 1985. He managed to upset a lot of top executives with nhis frugality.
No longer would they be able to fly first class. And tom murphy also removed their private ndining room at the headquarters. Furthermore. He wasn t afraid to lay off people nto cut down costs that way.
But the most hilarious example of tom murphy s nthrift is related to house paint. Murphy was asked to paint the walls of one nof. The company studios to project a more professional image to advertisers seeing the potential of driving more income nas. A result of this murphy obliged.
But only partly 2 4. To be exact because house paint was an expense. It had nto be minimized. So murphy decided that only the two walls nfacing.
The street should be refurbished forever cost conscious. Warren buffett. Knows what he s talking about so. Whether you are aiming for the top spot nof your current company or just want to know how to allocate the capital that is your salary nmore effectively.
You should check out my playlist of this legendary man. ” ..
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