William Thorndike (author of The Outsiders) said in an interview that Henry Singleton: “was a MIT trained mathematician and engineer, he got a Ph.D. In electrical engineering from MIT. While he was there he programed the first computer on the MIT campus, and he proceeded to have a very successful career in science. He developed an inertial guidance system for Litton Industries that’s still in use in commercial and military aircraft. He did a whole range of things. And then later in his career– in his mid-40s, he became the CEO of a ’60s era conglomerate called Teledyne.” Henry Singleton was also a limited partner in the pioneering venture capital firm Davis and Rock, and invested $100,000 in Apple in 1978.
Understanding Henry Singleton is worthwhile no matter your investing style, but that is especially true if you are a value investor or a venture investor. As an example of the esteem in which he is held by value investors, Warren Buffett once said: “Henry Singleton of Teledyne has the best operating and capital deployment record in American business.” In his book the Money Masters, John Train writes that Buffett once said this about Singleton: “According to Buffett, if one took the top 100 business school graduates and made a composite of their triumphs, their record would not be as good as that of Singleton, who incidentally was trained as a scientist, not an MBA. The failure of business schools to study men like Singleton is a crime. Instead, they insist on holding up as models executives cut from a McKinsey & Company cookie cutter.”
On the venture investing side, Arthur Rock once said: “Henry Singleton was this very brilliant, intellectual type who could foresee all these problems that no one else could see, and he saw opportunities. Henry was as intellectual as anyone I had come across.”
Coming up with 12 quotations in this case was not easy since Henry Singleton was a very private individual. If you go looking for quotations from Henry Singleton, you will not find much more than is set out below.
1. “I don’t believe all this nonsense about market timing.” Singleton was not someone who thought he could profit from timing the market in the short term. Because of his aversion to market timing, Singleton believed that making precise predictions about the short-term direction of markets was neither possible nor necessary, if you understand value and have the discipline to invest aggressively when the time is right. Following this approach, Henry Singleton was able to accumulate one of the best capital allocation records of any investor ever. He generated a 20.4% compound annual return for shareholders over 27 years. Charlie Munger has said Singleton’s financial returns as an investor were a “mile higher than anyone else …utterly ridiculous.”
2.“My only plan is to keep coming to work every day. I like to steer the boat each day rather than plan ahead way into the future.” “I know a lot of people have very strong and definite plans that they’ve worked out on all kinds of things, but we’re subject to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible.” Henry Singleton was also someone who understood the value of optionality. Singleton was able to put himself in a position to opportunistically capture profits when assets were mispriced. They key to optionality is simple: bet big when you have a big upside and a small downside. When you have a big downside and a small upside, don’t bet. If you have a big upside and a big downside, why bet if other bets have more valuable optionality?
3. “It’s good to buy a large company with fine businesses when the price is beaten down over worry..” Buying shares in a business with a moat at a price that is beaten down is the value investor’s mantra. Prices get beaten down when there is a lot of uncertainty caused by worry. Be greedy when others are fearful. John Train points out that Singleton bought over 130 business “when his stock was riding high, then when the market, and his stock fell, he reversed field.”
Singleton used big stock price drops to aggressively buy back Teledyne shares. Mike Milken describes one of Singleton’s business decisions here: “In the 1970s two businessmen I greatly admired were doing what Drexel and its clients and its imitators were doing ten years later: using debt–junk, if you will–to acquire equity. I’m talking about Dr. Henry Singleton of Teledyne and [the late] Charles Tandy of Tandy Corp. These were both great operational managers and great financial managers. They recognized that their common stock was selling at ridiculously low levels, so they offered to swap high-coupon bonds for common stock. Tandy used $35 million in 10% 20-year bonds to acquire 11% of its own common. In less than ten years that repurchased stock was worth more than $1 billion. Singleton bought in 26% of Teledyne’s equity for $100 million in 10% bonds–a very high coupon in those days. By the early 1980s that repurchased stock was worth more than $1.5 billion.”
4. “There are tremendous values in the stock market, but in buying stocks, not entire companies. Buying companies tends to raise the purchase price too high.” “Tendering at the premiums required today would hurt, not help, our return on equity, so we won’t do it.” Henry Singleton did not like paying a control premium. If you are paying a control premium, you are counting on the fact that you will be able to change the operations or strategy of that business AND realize that value, in addition to the right return on investment on that premium. With control you do have the ability to change strategy, benefit from supply or demand side economies of scale or scope, lower the cost structure of the business, sell unattractive assets or obtain tax benefits.
5. “After we acquired a number of businesses we reflected on aspects of business. Our conclusion was that the key was cash flow.” This approach is not dissimilar to Jeff Bezos, John Malone and others who focus on absolute dollar free cash flow rather than reported earnings. Growth of revenue and size of the company were never key financial goals. Singleton liked businesses which generated cash that could either be taken out of the business or reinvested when it makes sense. Reinvesting only make sense when you can generate substantially more than a dollar in value for every dollar reinvested. Some executives like Henry Singleton, John Malone and Warren Buffet know how to redeploy cash, but some don’t.
6. “Our attitude toward cash generation and asset management came out of our own thought process. It is not copied.” You don’t outperform a market if you are not occasionally contrarian and right about what you believe on enough occasions. Charlie Munger has said about Henry Singleton: “He was 100% rational, and there are very few CEOs that we can say that about.” Arthur Rock once said about Singleton: ”He really didn’t care what other people thought.” Independence of thought and emotional self-control are the keys to making successful contrarian bets. The other point made here by Singleton is about doing your own thinking and not outsourcing it to consultants and bankers.
7. “To sell something to lift the price of the stock is not thinking correctly.” In this quote he was referring to a potential spin off or sale, but he also had strong views on stock buy backs and new stock issuance. Henry Singleton believed that the time to sell a stock is if it is overvalued and the time to buy shares is when they are undervalued. What could be simpler? The purpose of a stock buyback should not be to lift the price of the stock. Thorndike puts it well here: ‘[CEOs] can tap their existing profitability– their existing profits– they can raise equity, or they can sell debt. And there are only five things they can do with it. They can invest in their existing operations, they can make acquisitions, they can pay a dividend, they can pay down debt, and they can repurchase stock. That’s it, those are all the choices. And over long periods of time, those decisions have a significant impact for shareholders.”
8. “We build for the long term.” Appeasing analysts who cry out for accounting earnings or other concocted metrics in the short term is folly. When his stock went down, Henry Singleton bought more back. That’s an example of long-term thinking. Being fearful simply because others are fearful is a big mistake. The greatest investing opportunity arises when people are fearful.
9. “All new projects should return at least 20% on total assets.” Free cash flow was not the only driving metric for Henry Singleton. He believed that businesses with sustained returns on assets (lasting for years, not months) produce superior investment returns. This sustained high return is what investors Warren Buffett and Charlie Munger mean by the “quality” of a stock. This rate of return must be maintained over a period of years to be considered a positive investment criteria, since otherwise you can’t tell whether there is a genuine moat versus merely high points in a business cycle.
10. “Our quarterly earnings will jiggle.” Henry Singleton was not someone who managed earnings. Singleton would much rather have had a long term average financial return of 14% that was lumpy than a 12% return that was smooth. Sergey Brin and Larry Page of Google (executives and co-founders) once wrote: “In Warren Buffett’s words, ‘We won’t ‘smooth’ quarterly or annual results.’ If earnings figures are lumpy when they reach headquarters, they will be lumpy when they reach you.”
11. “Teledyne is like a living plant with our companies as the different branches and each one is putting out new branches and growing, so no one is too significant.” If Singleton is criticized it is because he operated “a conglomerate.” Warren Buffett disagreed with this criticism: “Breaking up Teledyne was a poor result, certainly now and in the future.” Singleton was able to ignore the criticism since he has the discipline to think and act independently. It is one thing to talk about being a contrarian and quite another thing to actually do it. Singleton once said in an interview with Forbes: “being a conglomerate is neither a plus nor a minus.”
“There was no general theme,” Rock has said. “This was a conglomerate of scientific companies, and most of these were allowed to operate with very little direction from corporate.”
While Singleton diversified the businesses of his conglomerate, in terms of his outside investments, Singleton was a “focus” investor who did not believe indexing made any sense for an investor like him. Charlie Munger said Singleton “bought only a few things he understood well” – an approach he shared with famous investor Phil Fisher. Singleton said in his Forbes interview: “the idea of indexing isn’t something I believe in or follow.”
Of course, Singleton was not an ordinary investor. Singleton was one of the few investors who, as Warren Buffett says, fits into the “know something” category. Most people are better off with an index-based approach to investing since they do to have the temperament nor the inclination to work as hard as Singleton did to understand the businesses that he was investing in.
12. “A steel company might think it is competing with other steel companies. But we are competing with all other companies.” Henry Singleton knew that any moat is subject to attack and that that attack does not need to come from a competitor that is engaged in the same activities. The most successful attacks on a business tend to be asymmetric. Businesses tend to fail not from a frontal attack, but when they are eclipsed or enveloped.
p.s., This interview with Will Thorndike is an outstanding way to understand Singleton. Thorndike points out in the interview: “Throughout that decade, his stock traded at an average P/E north of 20, and he was buying businesses at a typical P/E of 12. So it was a highly accretive activity for his shareholders. That was Phase One. Then he abruptly stops acquiring when the P/E on his stock falls at the very end of the decade, 1969, and focuses on optimizing operations.
He pokes his head up in the early ‘70s and all of a sudden his stock is trading in the mid single digits on a P/E basis, and he begins a series of significant stock repurchases. Starting in ‘72, going to ’84, across eight significant tender offers, he buys in 90% of his shares. So he’s sort of the unparalleled repurchase champion.”
Notes:
If you read anything in the notes below, read the Forbes interview with Singleton.
Forbes – The Singular Henry Singleton
Amazon – The Outsiders (William Thorndike)Ideas for Intelligent Investing – ‘The Master of Capital
Allocation, Henry Singleton’
Investor’s Business Daily – How Singleton Built An Empire
Manual of Ideas – Teledyne’s Takeoff
NY Times – Henry Singleton Obituary
Berkshire Hathaway Chairman’s Letter – 1981
NY Times – Wall St. Eyes Are On Teledyne
Manual of Ideas – Strategy vs. tactics from a venture capitalist
Harvard Business Review – How Unusual CEOs Drive Value
Forbes – Mike Milken Interview