#94 Henry Singleton The Outsiders

In this podcast, the host delves into the exceptional career of Henry Singleton, the founder of Teledyne, whose unconventional approach to business and capital allocation led to extraordinary shareholder returns. Despite his background as a scientist, Singleton's strategic acumen in acquisitions, share repurchases, and operations management outperformed the records of top business school graduates. Warren Buffett and Charlie Munger praised Singleton's financial prowess, with Buffett criticizing business schools for not studying Singleton's methods. Drawing on William Thorndike's book "The Outsiders," which profiles Singleton among other unconventional CEOs, the host explores Singleton's radical decentralization, his focus on cash flow over reported earnings, and his adaptability to changing market conditions. Singleton's strategy of investing heavily in areas where he had an edge, like his former employer Litton Industries, and his flexible, independent thinking, set him apart from his peers. The podcast also touches on Singleton's time management philosophy and his skepticism of widely-adopted practices, exemplified by his late-life remark on share repurchases: "If everyone's doing them, there must be something wrong with them."

• Warren Buffett regards Henry Singleton as having an exceptional record in operating and capital deployment.
• Buffett criticizes business schools for not studying Singleton, whom he considers a superior example of business acumen.
• Singleton's success is attributed to his scientific training rather than a traditional MBA.

"The failure of business schools to study men like Singleton is a crime."

This quote emphasizes Buffett's view that Henry Singleton's approach to business should be a subject of study for aspiring business leaders, pointing out a gap in business education.

"Henry Singleton has had the best operating and capital deployment record in American business."

Buffett's high praise for Singleton's business performance underlines the importance of operational efficiency and strategic capital deployment in achieving business success.

• Charlie Munger, Buffett's long-time business partner, acknowledges Singleton's exceptional financial returns.
• Munger's comments suggest that Singleton's achievements are significantly above the norm.

"Singleton's financial returns were a mile higher than anyone else."

Charlie Munger's quote highlights Singleton's extraordinary financial performance, indicating that his returns were substantially greater than his peers.

• Singleton was known for being highly private and not engaging with the press, earning him the nickname "the Sphinx."
• His approach to business was counterintuitive and not aligned with common practices.
• Singleton's strategy involved focusing on profitability over growth, which was contrary to conventional business wisdom at the time.

"Henry Singleton has always marched to his own drummer and to a music that most of his peers could not even hear."

This quote captures Singleton's unique approach to business, suggesting that he operated on principles and insights that were not widely recognized or understood by others in the business community.

• Both Buffett and Singleton designed their organizations to allow them to focus on capital allocation rather than operations.
• They viewed themselves as investors first and managers second.
• Their companies were highly decentralized, with few corporate employees and minimal layers between management and operations.
• Both were comfortable with concentrated portfolios and did not provide quarterly guidance or attend conferences.
• Singleton's Teledyne and Buffett's Berkshire Hathaway both utilized insurance company float to create shareholder value.

"Many of the distinctive tenets of Warren Buffett's unique approach to managing Berkshire Hathaway were first employed by Singleton at Teledyne."

This quote suggests that Buffett's successful strategies at Berkshire Hathaway were influenced by Singleton's earlier practices at Teledyne, indicating a transfer of wisdom and approach between the two business leaders.

• Singleton's investment strategies were seen as unconventional at the time.
• He focused on value rather than market timing, buying back shares when others lost faith in Teledyne.
• Singleton's refusal to pay dividends was based on a belief in reinvesting profits for greater long-term shareholder value.

"I don't believe all this nonsense about market timing. Just buy very good value, and when the market is ready, the value will be recognized."

Singleton's quote reflects his investment philosophy, which prioritizes intrinsic value over market trends and timing, aligning with the principles of value investing.

• Teledyne was a conglomerate with a diverse range of products but was tightly managed.
• Singleton's management style was characterized by his independence and trust in his own judgment.
• Teledyne's board was small and included notable individuals such as Arthur Rock and Claude Shannon.
• The company's financial controls were strict, and it operated with many small profit centers rather than a few large ones.

"Its board of directors consist of only six people, not the usually dozens or more."

This quote highlights the streamlined and efficient governance structure of Teledyne, which is reflective of Singleton's management philosophy.

• Henry Singleton's approach at Teledyne focused on decentralization and meticulous capital allocation, similar to Warren Buffett's methods.
• Teledyne was composed of 129 smaller companies, avoiding the fragility that comes with larger corporations.
• Singleton and his colleague George Roberts prioritized high margins and disciplined capital investment, ensuring each subsidiary maintained profitability and cash flow.

"Singleton hires, he buys this guy's companies, Roberts, and he hires him to run Teledyne, the operations part of Teledyne, like making sure that all 129 companies are doing what they need to be doing. But so Singleton focus on capital allocation, which again, sounds a lot like Buffett."

This quote highlights Singleton's strategy of hiring Roberts to oversee operations, allowing Singleton to concentrate on capital allocation, drawing a parallel to Warren Buffett's investment approach.

• Singleton and Roberts believed in splitting businesses to identify problems that could be overlooked in larger units.
• They argued that with scale, a company becomes fundamentally different and more fragile.
• The goal was to have many profitable small businesses rather than a few large ones, which aligns with the speaker's personal preference for a multitude of small, innovative companies.

"We go to an extreme in splitting businesses up so we can see problems which would be passed over in companies where the units are larger, says Roberts."

This quote explains the rationale behind Teledyne's structure of many small companies, which allowed for better problem detection and management.

• Singleton and Roberts employed strategies to avoid tail risks, similar to the philosophies of Buffett, Munger, and Ed Thorpe.
• The use of the Kelly criterion influenced their decision-making, ensuring that no single failure could jeopardize the entire company.
• The focus on survival and avoiding the risk of ruin was paramount for Teledyne's strategy.

"The survivability of the entire company will never be jeopardized by failure of one single operation."

This quote encapsulates the core of Teledyne's risk management strategy, which aimed to protect the company from the failure of any single subsidiary.

• Singleton placed great emphasis on cash flow over bookkeeping profits, ensuring that each subsidiary generated cash beyond its reinvestment needs.
• Teledyne's discipline in capital spending and investment led to a high return on capital and a strong cash position.
• Singleton's approach was contrary to the trend of large acquisitions, preferring to invest in undervalued companies and buy back Teledyne's own stock.

"Net income without cash is not necessarily net income."

This quote underscores the importance Singleton placed on actual cash generation, not just accounting profits, as a measure of a company's success.

• Singleton managed Teledyne's investments with a focus on undervalued, well-run companies, rejecting conventional Wall Street strategies like indexing.
• He concentrated his investments significantly, such as putting 25% of his portfolio into Litton Industries, demonstrating his confidence in his investment choices.
• Singleton's approach was rational and based on his own experience and analysis rather than following market trends.

"I prefer to buy pieces of other companies or our own stock or expand from within the price."

Singleton's quote reveals his preference for buying undervalued portions of companies or repurchasing Teledyne's stock as opposed to overpaying for entire companies, emphasizing a disciplined investment strategy.

• Singleton critiqued the obsession with corporate bigness and the trend of overpaying for acquisitions.
• His strategy focused on logical, value-driven decisions rather than seeking prestige or following the crowd.
• Singleton's tactics were unconventional but were based on a clear understanding of value and efficiency.

"The price for buying an entire company is too much."

This quote reflects Singleton's belief that the premiums paid for full company acquisitions do not typically offer the best value, reinforcing his investment principles focused on efficiency and avoiding overpayment.

• Henry Singleton did not believe in paying dividends, instead focusing on reinvesting profits.
• Singleton's argument against dividends was based on the belief that Teledyne could reinvest earnings more effectively than shareholders and to avoid double taxation.
• He was known for his flexibility and adaptability to changing environments, rather than adhering to a rigid ideology.
• Teledyne was described as a powerful compound income machine, with returns on equity over 30%.

"Why would I subject my stockholders money to double taxation?"

This quote illustrates Singleton's rationale against paying dividends, emphasizing the inefficiency of double taxation on disbursed earnings.

• Singleton valued maximum flexibility in his management style, adapting to external changes rather than maintaining a fixed approach.
• He did not define his job in rigid terms, focusing instead on the freedom to act in the company's best interest.
• Singleton ran Teledyne in an entrepreneurial and innovative way, which was rare for multi-billion-dollar companies.

"I do not define my job in any rigid terms, but in terms of having the freedom to do whatever seems to me to be in the best interest of the company at any given time."

This quote emphasizes Singleton's flexible and adaptive management philosophy, prioritizing the company's best interest over rigid job definitions.

• Singleton's approach to personal productivity involved not maintaining a strict schedule, akin to Mark Andreessen's productivity hack.
• He believed in focusing on the most valuable task at hand rather than planning meetings far in advance.
• Singleton applied this philosophy to both professional and personal life, preferring spontaneity over rigid scheduling.

"The greatest personal productivity hack is not having a schedule."

This quote, attributed to Mark Andreessen but reflecting Singleton's philosophy, highlights the value of flexibility and focusing on high-value tasks over strict scheduling.

• Singleton was admired by William Thorndike, who considered him the best CEO of all time.
• His background as a mathematician and scientist set him apart from typical CEOs.
• Singleton's capital allocation strategies, including share repurchases and selective acquisitions, were contrary to the practices of his peers.
• He focused on cash flow over reported earnings and ran a decentralized organization.

"Singleton has found a way to run a multi-billion-dollar company in an entrepreneurial, innovative way, which is very, very rare."

This quote summarizes Singleton's unique approach to running a large company with entrepreneurial spirit and innovation.

• Singleton's capital allocation was focused on selective acquisitions and share repurchases.
• He used debt strategically to buy back equity and then aggressively paid it down.
• Teledyne's organizational structure was extremely decentralized, with a thin corporate staff and operational responsibility given to general managers.

"Capital allocation is a CEO's founder's most important job."

This quote, reflecting the views of both Singleton and Warren Buffett, underlines the significance of capital allocation in a CEO's role.

• The CEOs profiled in Thorndyke's book, including Singleton, shared common principles such as the importance of capital allocation and cash flow.
• They valued per-share value increase, decentralized organizations, and independent thinking.
• These CEOs were skeptical of outside advisors and believed in the value of repurchasing their own stock.

"Independent thinking is essential to long term success."

This quote encapsulates the belief that long-term success in business requires thinking independently from prevailing market trends and opinions.

• Singleton was a remarkable mathematician and enjoyed playing chess blindfolded.
• He worked at Hughes Aircraft and Litton Industries before founding Teledyne.
• Teledyne's success was not due to unique businesses but Singleton's mastery of capital allocation.

"Under its reclusive founder and CEO, Henry Singleton, this dividend policy was, as we've just seen, just one in a series of highly unusual and contrarian practices of Teledyne."

This quote provides context for Singleton's unorthodox practices, including his dividend policy, which contributed to Teledyne's success.

• Singleton capitalized on an arbitrage opportunity between 1961 and 1969, acquiring 130 companies.
• He focused on profitable, growing companies with leading market positions in niche markets.
• Singleton avoided turnaround situations and used Teledyne's high-value stock for acquisitions.

"Singleton took full advantage of this extended arbitrage opportunity to develop a diversified portfolio of businesses." "He did not buy indiscriminately. He avoided turnaround situations and focused instead on profitable, growing companies with leading market positions, often in niche markets."

These quotes highlight Singleton's strategic approach to acquisitions, emphasizing growth and profitability rather than indiscriminate expansion.

• Singleton and Roberts implemented extreme decentralization, breaking the company into small parts.
• They drove accountability and managerial responsibility deep into the organization.
• Teledyne had a lean headquarters with fewer than 50 people for over 40,000 employees.

"Singleton and Roberts achieved the then trendy concepts of integration and synergy, and instead emphasize extreme decentralization."

This quote illustrates the counterintuitive strategy Singleton and Roberts used, focusing on decentralization rather than the popular approach of integration and synergy.

• Singleton shifted focus to strategic and capital allocation issues.
• They created a unique metric called the Teledyne return, emphasizing cash generation.
• Singleton's actions reflected his belief that capital allocation was the most important use of his time.

"Once the acquisition engine had slowed in 1969, Robertson Singleton turned their attention to the company's existing operations... They devised a unique metric that they termed the teledyne return, which was averaging cash flow and net income for each business unit, emphasized cash generation, and became the basis for bonus compensation for all business unit general managers."

This quote explains the shift in Singleton's strategy from acquisitions to optimizing existing operations through a focus on cash generation.

• Singleton stopped acquisitions when the stock's multiple fell and acquisition prices rose.
• He then embarked on an aggressive share repurchase program, buying back 90% of Teledyne's shares.
• Singleton's repurchases were contrary to Wall Street beliefs and highly effective.

"Singleton believed buying stock at attractive prices was self catalyzing, analogous to coiling a spring that at some future point would surge forward to realize full value, generating exceptional return."

The quote reveals Singleton's rationale behind the share repurchases, which were based on the belief that buying undervalued stock would lead to significant future returns.

• Singleton invested Teledyne's insurance portfolios heavily in equities during a bear market.
• He concentrated investments in a few companies he knew well, including a significant allocation to Litton Industries.
• Singleton's investment strategy reflected his comfort with concentration and deep understanding of his investments.

"His top holdings were invariably companies he knew well, whose PE ratios were at or near record lows at the time of his investment."

This quote emphasizes Singleton's focused investment approach, investing heavily in areas where he had an edge and understood the companies well.

• Singleton pioneered the use of spin-offs to simplify Teledyne's structure and unlock shareholder value.
• He believed in the flexibility of conglomerating or deconglomerating based on what made sense.
• Singleton's strategies were adaptable to changing market conditions and company needs.

"There is a time to conglomerate and a time to deconglomerate."

This quote encapsulates Singleton's philosophy of flexibility, adapting his strategies to the current context rather than adhering rigidly to one approach.

• Singleton allowed himself the freedom to work on the most important things for the company.
• He avoided rigid definitions of his role and prioritized flexibility and adaptability.
• Singleton's approach to time management was unconventional and focused on the company's best interests.

"I don't reserve any day to day responsibilities for myself, so I don't get into any particular rut. I do not define my job in any rigid terms, but in terms of having the freedom to do whatever seems to be in the best interests of the company at any time."

This quote reflects Singleton's philosophy on time management, emphasizing the importance of staying flexible and ready to address the most pressing issues for the company.

• Singleton's strategies and philosophies influenced other successful investors and business leaders.
• His focus on capital allocation, operational efficiency, and time management set a precedent in the business world.
• Singleton's approach to business was characterized by independence, contrarian thinking, and adaptability.

"If everyone's doing them, there must be something wrong with them."

Singleton's quote on share repurchases reflects his contrarian mindset and the importance of independent thinking in business decisions.