Forum Topics Assessing management Thorndike
Solvetheriddle
Added a month ago

I was listening to an old Google podcast with William Thorndike the author of The Outsiders. His philosophy is to find outstanding CEOs, then follow them and invest alongside them when the opportunity presents itself.

A couple of things, this is an alternative to someone like Pat Dorsey who has the philosophy of finding a great business with long-lasting moats and investing in those. A blend is what most of us would aim for, me anyway.

Secondly, identifying the moats and great CEOs is much easier for ex-post than ex-ante. Unfortunately, we live in an ex-ante world when investing.

With this in mind, his comments on identifying great CEOs were of interest. He had three factors to focus upon in a CEO's answers or writings. Firstly, a big positive is those CEOs that use metrics that are based on using “per share” a lot, being earnings or per share sales etc, not growth for growth's sake. This shows an understanding that it is EPS that drives value not just growth and a respect for the share count and use of equity. Secondly, the use of the term cash and free cash flow is important rather than just talking about accounting profit. Thirdly, those that take through the unit economics of the business or product and use IRRs when talking about investing decisions. I think that is a useful framework. Of course, there will be those CEOs that are pretenders and mention it but these factors without really understanding them, that is for the investor to figure out.

How did he do? Well, that just shows how difficult investing is, remembering that this talk was 9 years ago so long enough to determine a strike rate. He did get one very big winner, Mark Leonard at CSU. A few others were mixed. Maybe that one is enough.

Since it is the holidays I will indulge myself in one of my favourite management stories from the 1980’s. The company was WMC, a very large miner, with operations in gold, nickel, alumina ( which became AWC) and Olympic Dam and the CEO was Hugh “Huge” Morgan. He trumpeted (a mistake) that a big gold acquisition was coming with the target in South America to the market. Alan Bond got wind of it and gazumped “Huge” and made it a cornerstone in his ill-fated gold float ticker “BIG” (I'm not making this up).

Huge was furious he could not come back empty-handed after being outfoxed by Bond. Quickly he scoured the Americas looking for targets (another mistake). He found three Canadian gold miners and pounced on all three making it a very big purchase. The haste made the DD lax (another mistake) and within a couple of years, it became apparent that the acquisitions didn’t have anywhere near the amount of gold originally expected. They were “nugget” deposits (as I recall) and had huge grade variability. The acquisitions were severely written down or off. Now that is an example of management not to back. Sometimes great or poor management is hard to spot and sometimes it's not.

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