We have a very special guest with us today.

He is a graduate of Harvard College

and Stanford Graduate School of Business.

He has also founded Housatonic Partners,

which is a private equity firm with offices in Boston and San

Francisco.

Interestingly, he has written one

of those rare and special books, which

has won claim from none other than Warren Buffett and Charlie

Munger.

The book is called "The Outsiders."

And we are thrilled that the author, Mr. William Thorndike,

is here with us, in person, today

to talk about "The Outsiders."

Welcome.

WILLIAM THORNDIKE: Thank you, [INAUDIBLE].

[APPLAUSE]

INTERVIEWER: So I guess to kick it off,

why don't you give the audience here

and the thousands on YouTube an elevator pitch of the book

and what it's all about.

WILLIAM THORNDIKE: OK.

Great.

So I think the best analogy for the book is duplicate bridge.

So how many of you play bridge?

[LAUGHTER]

That's a rather low penetration.

That would be zero.

So duplicate bridge is an advanced form a bridge in which

a group of teams of two show up in a room,

they're divided into tables of four, each of which

is then dealt the exact same cards

in the exact same sequence, minimizing the role of luck.

Then at the end of the evening, the team with the most points

wins.

So I would contend, over long periods of time,

within an industry, it's duplicate bridge.

So if one company materially outperforms the peer group,

that's worthy of study.

So the eight companies and CEOs profiled in the book, they each

fit that pattern.

They had to meet two tests.

The first was an absolute test.

They had to have better performance relative to the S&P

than Jack Welch had during his tenure at GE.

And then the second test was a relative test.

They had to materially outperformed the peer group.

And so if you look across that group of eight, seven men

and one woman, by definition, they

had to do things differently than the peers.

But it turned out that the specific actions that they

took, the things that they did, were remarkably similar

across the eight.

So they competed in a wide variety of industries,

ranging from manufacturing, to defense, to consumer products,

to financial services, and across very different market

cycles, but the specific actions they took

were remarkably similar to each other.

And the primary area of overlap was in the area

of capital allocation.

And so I think the easiest framework for thinking

about capital allocation is that to be a successful CEO,

over long periods of time, you need

to do two things well-- you need to optimize

the profits of the business you're running

and you then need to invest or allocate those profits.

And again, I think the framework for that

is there only three ways that business can raise capital

to invest.

It can cap it's internal cash flow, it can raise debt,

or it can issue equity.

And then there are only five things

you can do with that capital.

So you can invest in your existing operations,

you can buy other companies, you can pay down debt,

you could pay a dividend, and you

could repurchase your shares.

That's it.

So over long periods of time, the decisions

CEOs make across those alternatives

have an enormous impact on per share values.

So if you took two companies with identical operating

results, same level of revenue and the same level

of profitability, and two different approaches to capital

allocation, over long periods of time,

they drive two very different per share outcomes

for their share holders.

Second piece is that if you looked at this group of eight,

they fit an interesting sort of personal profile.

So all eight were first time CEOs.

So very surprising finding.

Over half were under 40 when they got the job,

only two had MBAs, four had engineering degrees.

And as a group, if you were reaching for adjectives

to sort of try to describe them, you

would not use the traditional, CEO adjectives of charismatic,

strategic, and visionary.

Instead, you'd use other adjectives

like pragmatic, flexible, opportunistic, dispassionate,

rational, analytical.

Words like that.

So they fit a slightly different profile.

So I'll stop there, but that's a bit

of an overview of some of the themes in the book.

INTERVIEWER: William, picking up on how

you describe their personality.

You're saying you would not associate it

with charisma and so on.

You also mentioned, early on, Jack Welch,

who's arguably one of the most celebrated CEOs in business

history.

But I remember reading in your book, and correct me,

if I'm mistaken, you say that Jack Welch does not even

belong to the same zip code as Henry Singleton, who

is one of the CEOs profiled in your book.

Can you say more about that?

WILLIAM THORNDIKE: I mean, Jack Welch was a great CEO.

Period.

And it's the reason that he was the benchmark used

as one of the two tests for selecting

the eight for the book.

But if you look at his-- so his returns are extraordinary.

He ran GE for 20 years and he averaged

about a 20% compound annual return

across that period of time, which is extraordinary.

However, his tenure coincided with a record bull market run

and a broader stock markets.

So I think really the way to frame

that is, how did he perform relative to the broader market?

And he meaningfully outperformed the market.

3.3 times the S&P over the time he was there.

But if you look at that metric, relative performance compared

to the S&P across a CEOs tenure, I

think these eight materially outperformed Welch.

And Singleton is an interesting case

because he's got such an interesting background.

We could spend more time on him.

But he, by that same metric, outperformed the S&P

by 12-fold over a much longer, nearly 30 year tenure

at a company called Teledyne.

INTERVIEWER: I want to maybe pause on Singleton for a second

before we move on because you said that he was not just

a pioneer in stock buybacks, he was much more than that

because he sort of built a framework

in thinking about them.

And later on, in your book, you also

mention the straw buyback approach versus sucking hose

buyback approach.

Can you share more on that with us?

WILLIAM THORNDIKE: So I'll give you a little background

on Singleton first.

INTERVIEWER: Yes.

Sure.

WILLIAM THORNDIKE: So Singleton is a very interesting case

and I think it would resonate particularly with this audience

because he had advanced math background.

So he was an undergraduate, earned his Masters and PH.D.

in electrical engineering from MIT.

While at MIT for his PH.D. dissertation,

he programmed the first computer at MIT.

So when he was 23 years old, he won

an award called The Putnam Medal, which

is awarded to the top mathematician in the country.

So he's very capable, competent, mathematician, engineer.

He designed an inertial guidance system

that is still in use in commercial and military air

crafts.

So he had this extraordinary career before he became a CEO.

And during the 60s, and 70s, and end of the 80s,

he ran a conglomerate called Teledyne.

And what's interesting about Singleton--

and he had extraordinary returns in doing that,

but what's interesting is the range he

showed as a capital allocator.

So for the first 10 years, he ran Teledyne.

Conglomerates were sort of the social media

companies of their day.

They traded extremely high P/Es.

And so Singleton used the inexpensive currency

of his high PE stock to buy 130 companies.

So he was an active issuer of shares.

At the very end of the decade, 1969,

a couple of the larger conglomerates

missed earnings dramatically and the entire sector got pounded.

So PE multiples came down across the group

and Singleton never bought another company.

He fired his business development team,

the group that was going out and finding acquisitions for him.

Instead, he'd focused on optimizing his existing

businesses and then he began a pioneering program

of repurchasing his shares.

And over the next dozen years, he

repurchased 90% of his shares outstanding.

So he showed this amazing to sort

of pivot it as the opportunities presented themselves

and the result was this extraordinary return over a 28

year period at the helm.

So that didn't answer.

So buyback.

So in that second period, the last dozen

years when he bought in 90% of his shares,

he had an approach to that that is wildly

different than the way most public companies repurchase

shares today.

Corporate America, as a group, is a completely ineffective

repurchaser of its shares.

So last year, 2014, corporate America

set the record for most capital allocated to share buybacks

and they exceeded the record that was set before,

in October of 2007.

So the absolute trough for buyback volume

by corporate America was in the first quarter of 2009.

So corporate America, as a group,

has a perfect record of buying high and effectively

selling low.

And not surprisingly, the returns aren't great.

And if you look at the way buybacks are typically

implemented in public companies in the US, it's not surprising.

So the typical way that works is the board

will authorize an amount of capital

that can be deployed for repurchasing shares.

And that will then be implemented

in even, quarterly increments, usually designed

to offset option grants.

So there's very little net shrink of the share base.

And not surprisingly, that approach rarely

produces interesting returns.

If you look at what Singleton did

and what the other CEOs in the book

did when they repurchased shares,

it was a very, very different approach.

They went long periods of time without doing anything

and then they would repurchase large chunks of stock

when they felt it was inexpensive.

Singleton did that through tender offers,

which is unusual, but that was his method.

Most of the others in the book used open market purchases,

but, in any case, a very different approach.

INTERVIEWER: Similarly, everyone looks at Berkshire Hathaway

over the years.

A lot of acquisitions have happened

when the price to book ratio was two or above.

And the few buybacks that have happened,

have happened at lower valuations.

So the question is, these outsider CEOs,

they're all sort of following the similar framework of doing

buybacks or issuing stock managers,

increasing the intrinsic value for their shareholders.

But it doesn't sound like a very difficult thing to understand,

it sounds like a very simple thing.

And yet it's simple, but hard since you

said most of the corporate America is not doing that.

I want to get to know your thoughts on why that does not