#431 How Henry Singleton Worked

24:05We went into the semiconductor business in 1960, even though we were in the midst of a business crisis at the time. We did it because of our conviction that it was necessary for our long term future growth and not because of any conviction that we would immediately make huge amounts of money. And then he continues in this next paragraph. And in my opinion, you really see how his brain works here. We decided that if we were going to manufacture, develop and sell electronic control systems, we ought to have a capability in the component area. That would enhance our ability to design systems because we know more about new components we could use.

24:38On the other hand, our expertise in systems would enable us to better judge what kind of components to develop. And then the book breaks down the fact that Henry had three great ideas. These are the three main ideas that he built his company on. What I would like to emphasize here is that Henry had three great ideas in creating and growing Teledyne. His first was to recognize the future importance of digital semiconductor electronics when this technology was in its infancy and by selective acquisitions create a strong base in this growing field on which to diversify his company. The second idea was to acquire and organize a selection of financial companies within his company to provide a strong financial base.

25:20The third was his innovative use of stock buybacks. These three things are equally important to remember, considering and continuing the story of Henry Singleton's accomplishments. Henry initiated his plan of growth through acquisition from the very first year of operation. And then I mentioned earlier how when you're reading both books, I'll just read these lines and these random lines in the books that you realize, OK, we're dealing with a very different kind of person. It says Henry had developed the talent of being able to play chess without seeing the board. One story relates that Henry was playing chess with tech, with his back turned to the board.

25:54and Tech was telling him what move he made. Suddenly during the match, Henry said, Tech, you told me the wrong move three moves back. And then in this one conversation, Singleton describes what his goal for creating Teledyne is. So as his first meeting with Henry, Jay Last recalls asking him, are you trying to create another Lytton? Hell no, Henry replied. I'm trying to create another GE, which explains why Henry's choices of companies to acquire gradually became more and more diverse. Later, he would look afield to companies that were less and less related to his original electronics, government, and military markets, but would diversify and contribute to the profitability of his company.

26:33Many years later, Henry said, Teledyne is like a living plan, with our companies as the different branches and each putting out new branches and growing so that no one business is too significant. And Singleton's strategy created this kind of flywheel, and they describe it here. It is quite interesting how Teledyne's technologies actually did expand like a branching tree. Great. With each new technology opening the way into other related technologies and these into still others. In many cases, when managers of the individual companies saw opportunities in related fields, they themselves recommended acquisitions to us of other suitable companies.

27:06So they give an example of how this can kind of, as the tree grows, you kind of branch yourself and grow into these other related industries. And this is the description. Our geophysical capabilities and seismic products led us into the field of oceanography and offshore petroleum exploration, where seismic techniques are used to profile the geological strata of the bottom of the sea to uncover likely places to which we can drill oil wells. This led to further expansion of Teledyne's activities in the petroleum industry. And this is what I mentioned earlier. Teledyne divides its business into 130 profit centers and only one of the 130 lost money last year.

27:50And if you can get your hands on the book, it's out of print. It's really hard to buy, but there's a bunch of information. It's almost like miniature biographies of each company that they're involved in. They don't cover all 130 of them, but they go into a lot more detail than obviously go into here. So in case you're interested, try to find a copy of this book. I highly recommend it. So then another thing that Henry talks about over and over again, talks about talent management started, you know, I think it's already mentioned a few times in the podcast where he said, you know, it was like the key to success.

28:15He's got some very interesting ideas here too. He was also very interested in the managerial talents of the owners and managers of the businesses that he acquired. Whenever possible, Henry wanted these people to stay on with Teledyne as managers of their own operations, since they were the most knowledgeable about their fields, their markets, and their production technologies. And this is what he says. We have what is called a management inventory. We work our heads off to increase our own capability at collecting and promoting the right people. To the extent that we succeed, the whole company will succeed.

28:44That's something he repeats over and over again. We increase our bets on the men who seem to be performers. And so that's another thing where as long as you're hitting your numbers, you're in your business, you didn't even have to talk to him. He would just leave you alone. I think he says that a couple of times, like, oh, they're doing the job. Why don't you just let them be? We try to get all of our people instead of competing among, this is still Singleton speaking here. We try to get all our people, instead of competing amongst each other within Teledyne, to look outside and see that the real competitors are all the other large corporations in the US.

29:13Our objective is to increase our rate of earnings faster than they do. It is a lot of fun, and as a result, we visualize it as a competitive game. So they go back. Again, all these highlights, these will appear on separate pages. They just repeat the same ideas over and over again, that we want to keep demonstrated talent and expertise. We always hoped that the owners or managers of these companies would stay on and continue to manage their operations, and most did. Many of them had started their companies 20 or 30 years earlier and had managed them into the successful and viable businesses that had attracted our attention in the first place.

29:47Some of them were ready to retire. In those cases, we asked if there was a relative who knew the business and who could take over and manage it. Sometimes another top executive or some of the best technical people accepted the job. Now, these men knew more about their specific businesses than we did, and we wanted to keep their expertise. We had no intention of managing the businesses at the corporate level. Now, they did. This is the way they got information from those businesses. We did establish our own unique financial and operations reporting system, which enabled us to monitor their performance closely on a monthly basis and see any trouble spots before they became serious.

30:25another principle of the way that Henry Singleton worked especially when his conviction he moves fast so just during three-year period from 1966 through 1969 they acquired 90 more companies another thing that Henry repeat over and over again did not like to waste time I think this great this like two sentences gives you an idea of this describing this describing what a meeting with Henry Singleton was like our first meeting was brief but it was the one in which each of us spoke with complete candor and that became the basis of our lasting relationship. All of our meetings were short, but they were very effective.

30:59So he didn't like to waste time. He also did not like to waste money. One humorous story of those early days. Henry would call me and invite me to have lunch with him. We always went to a poker parlor because the lunches were inexpensive. When it came time to pay for our lunches, Henry would always have me pick up the check. He was continually teaching me the value of frugality by not inviting me to an expensive restaurant. He said some crazy shit too one time where it's just like, uh, they need, they need a company cars. He's like, okay, well let's get everybody a Ford Pinto. And I think some of the guys on staff were like, Pinto is a tiny car, wind up having a bad, bad, uh, like reputation.

31:35Cause it would, I think if you run it, ran into it behind it, like blow up. But not only that, like, it's so small that most of the adult men couldn't fit in it. So if you were like six foot or six, two, it's like, you couldn't squeeze in there. He's like, well, what's wrong with that? And so that, that story was funny too. And so in addition to not liking to waste time, not liking to waste money, he expected you to know your business from A to Z. One of my favorite Maxis in the history of entrepreneurship comes from this guy named Sam Zamari. There's this fantastic biography of him called The Fish That Ate the Whale.

32:01This is a line that he said that if you know your business from A to Z, there's no problem you can't solve. And so he's telling the author of the book, he goes, hey, I want you to go meet this guy named Russ. He's a unique fellow. And so he goes, okay, well, what's unique about him? And, and, and singleton response. What's unique about him is that I'll ask him a question about one of these companies that I've asked him to supervise. And he always knows the exact numerical answer. If I ask him what they did in sales last month, he knows right away without calling someone to find out. That's the kind of fellow that you pick who runs a company and does it well.

32:30That is the kind of group leader we need. Then it goes back to another one of their principles that they repeat over and over again, that you should be breaking, they believed, in breaking your companies down to the smallest units possible. Our contention was that smaller units gave management better control and made the local manager fully responsible for the success of their own operations and motivated them to perform well. Our policy of keeping our operating units small, each responsible for its own success, is something we followed throughout the history of the corporation. Another thing that Singleton would do, he would cut his losses and move on.

33:08He says, we acquired Packard Bell for$16.5 million in common stock, and we assumed$5 million of their debt. It was a profitable addition to our company for many years, but eventually competition from Japanese television manufacturers became too severe. Henry was never shy about cutting his losses. And we simply got out of that business and closed the television operation. Then it goes into the fact that, you know, for the first decade, there's all these, like, it's almost like the history of Teledyne changed decade by decade. So for the first decade in the 1960s, they were just acquiring, they bought, you know, a hundred over 130 companies.

33:42And then in 1969, they stopped acquiring companies completely. And so they, they described why they made that decision. By 1969, Henry decided the prices for other companies we might be interested in were getting too high. This was partly due to increasing competition for these companies by other conglomerates who were growing the same way that we were. Many of the better companies had already been acquired, and there were fewer companies that were really attractive to us. Companies began asking more than we thought was reasonable. Contributing to our decision was the fact that a business recession was occurring at the time, and growth in earnings per share was declining, and the stock market was depressed.

34:16And since we had already acquired 150 companies, Henry decided it was time to organize and consolidate what we had. And then they talk about their shift in strategy where they went from buying entire companies to just buying pieces of them in the stock market. So by 1970, as we began our second decade, we had stopped our direct acquisition of companies. We decided there was no point in paying inflated prices for complete ownership of companies when we could buy a substantial interest in them through our insurance companies when the market prices were favorable. And you're going to see here when Henry talks about this, he sounds a lot like Buffett does in his shareholder letters.

34:48And so it says Henry was quoted about his philosophy in regards to this. 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. Don't be misled by the few shares trading at a low multiple of six or seven. If you try to acquire those companies, the multiple is more like 12 or 14. And their manager will say, if you don't pay it, someone else will. And they're right. Someone else does pay it. So it's no acquisitions for us while they're overpriced. I won't pay 15 times earnings. That would mean I'd only be making a return of six or 7%.

35:24I can do that in T-bills. We don't have to make any major acquisitions. As for the stocks we pick to invest in, the purpose is to make as good as a return as we can. we do not have any other intentions we do not view them as future acquisitions so let me interrupt this quote from singleton because at the time they thought oh this guy's a serial acquirer he bought you know 150 something companies whatever the number is he's just doing this as a way to find more acquisitions they just may be bigger and he's like well we're not actually viewing them as future acquisitions he says buying and selling companies is not our bag those who don't believe me are free to do so but they will be as wrong in the future as they have been about other things concerning teledyne in the past and so that is the end of the quote it's another great quote our story rather in the book about how again he just said hey go meet this guy he knows the business from a to z you ask him how the sales of any division is he knows it right off the bat singleton was obsessed with details and so there's this great quote from walt disney i love where it says if we lose the details we lose everything and here's a story that kind of illustrates that henry was very concerned about teledyne's image jay told me that one day he happened to walk past the open door of the PR department and looked in to see Henry Singleton sprawled on the floor with some large drawings, debating the exact design, shape, and proportions that make up the Teledyne logo type.

36:44He is telling you with his actions that he's paying attention to every single little detail. Goes back again, talks about his preference for autonomy. Says this over and over again. We really wanted our companies to operate with considerable autonomy and this placed a tremendous burden on our individual company presidents. Henry said, we depend on them. We have to trust them. We succeed or fail according to what they do. This was completely in accord with Henry's strong conviction that people were the most important factor in a business. How many times has repeated this? Again, this is going across, this book is what?

37:13300, 300 and something pages. And that, that idea is repeated over and over and over again. The fact is people are the most important factor in a business and they had to be given a chance to do their job. Direct quote from Singleton. Why bother them if they were doing their job. Goes back to this idea of he doesn't give a shit what you think of his strategy. The press gets everything wrong all the time. The fact that, oh, he went from acquiring all these companies. Now he's just buying stocks. But this is just a guy's he's going to actually, you know, he's going to do hostile takeovers and acquire them.

37:43Not only is he not going to acquire them or do a hostile takeover in by 1977, Teledyne was the largest shareholder in nine of the Fortune 500 companies, he didn't even want a board seat, much less control. He says, we actually held enough shares in six of these corporations to effectively have control over them, but Henry never exercised that capability. He never even attempted to seek a position on the boards of those companies. For a long time, there was considerable speculation that he was planning to take over these corporations, and this may have caused unease in some of the managers. In fact, Henry went out of his way to assure those managers that he had no such intentions, and so he was the largest shareholder of this company called Curtis Wright.

38:22And even when he was a larger shareholder, this is what a spokesman of Curtis Wright said about Singleton. He's been absolutely scrupulous in staying out of our affairs. That many didn't believe him was an indication of how little they knew of Henry's integrity and determination to follow his own course. One way he followed his own course, he comes up with this thing called the Teledyne return. We developed a measure that we called the Teledyne return, which is the average of your cash return and your profit. We would tell an individual business unit, for example, you reported a profit of a million dollars, but you only had half a million dollars of cash.

38:56So you only made$750 ,000. That's a Teledyne return. So you only made$750 ,000. So tell us about the rest of the profit when you get it. And I actually read a great description of this because I think this is confusing to some people. So let me just give you some additional notes on the Teledyne return. So it was a net income plus cash flow divided by two. The important insight was that Singleton didn't want managers optimizing purely for accounting earnings. A division could report a million dollars in profit, but if it only produced$500 ,000 of cash, Singleton considered the economic results substantially worse than the income statement suggested.

39:31So this is why Singleton invented the Teledyne return. Teledyne consisted of dozens of decentralized businesses. Singleton wanted to give the managers enormous operational autonomy while still having one number at headquarters that told him whether they were actually creating economic value. This metric became a key basis for evaluating and compensating Teledyne's business unit managers. It also discouraged a classic managerial trick, boosting reported earnings by consuming working capital. A manager could increase sales and earnings by piling up inventory or extending generous credit to customers, but cash flow would deteriorate.

40:07The Teledyne return would expose that. This fits Singleton's larger philosophy perfectly. The subsidiaries existed to generate cash. And Singleton's job was to allocate that cash. So another thing about Singleton, and I love, this is probably one of my favorite quotes in the book. So this happens in two paragraphs, which I think is interesting. One, say over and over again, like some of the best founders, best managers, they're just teachers. They have this unique philosophy, which you and I have been talking about for quite some time now. and then they just spend their time teaching their entire organization the way they want the business run why they're doing what they're doing how the actions that these individual business unit managers are affecting the outcome of the entire company and so on and so forth and so he would actually you know a lot of people don't have one-on-ones here but there's a lot of examples of just henry in the books where singleton is just pulling people aside one-on-one and just essentially having teaching sessions like whether it's over coffee whether it's at the lunch at the poker parlor whether it's in his office whether he's laying on the floor so it says quite often henry simply talked about his philosophy of running a corporation and the various financial strategies he came up with as he sat in his corner office each day, often working alone at his Apple computer.

41:13He was a brilliant business strategist and he came up with many creative ideas, ideas that were sometimes contrary to the currently accepted methods of managing a large corporation that prevailed in those days. And then you have a great line. This is my second favorite part of this, this paragraph where Claude Shannon is telling you, you know, bad boys move in silence. This is a direct quote from Shannon, Claude Shannon on Henry Singleton. He always tries to work out the best moves and maybe he doesn't like to talk too much because when you're playing a game, you don't tell anyone else what your strategy is.

41:44And then I just love this quote from Singleton. It's like playing golf. Anyone can swing a club, but some of us do swing it better than others. And then another thing that Singleton would repeat is that he found short term thinking repulsive he said we are not particularly persuaded by quick temporary gains we'd rather get something permanent and that takes time if there's anybody who wants us to do something real fast that's going to be astonishing in terms of increased earnings or something i don't know how to satisfy such desires when pressed about spin-offs being a good way to boost shareholder value he replied you're thinking in the short term i'm in the long term so i wouldn't do anything like that for a temporary rise in the price of the stock.

42:22You know, there are companies that will sell one division and buy another because this division generally sports a low multiple and the one they're buying has a high multiple. And they think this may rub off on the whole company. That absolutely turns me off. The whole concept is repulsive. We don't do things like that. We look at the economic long-term possibilities. And then something also interesting about Henry Singleton, it's like when he dies, I think he's the third largest landowner in the United States at the time. He had this also this another love of real estate. In fact, the book says that he never sold a single piece of real estate, whether it's a house or his ranch or just empty land in his entire life.

43:03He just kept acquiring them. And so after he retires from Teledyne, he spends the remaining the remaining, I think, like 10 years of his life, maybe something like that, just working on his ranch. and one of the interesting parts is his daughter writes a book later on in life where how her father ran the ranch and you see there's a lot of similarities between what he did with Teledyne and he would insist on writing every check that you know every single expense he wrote the check for the ranch and he called it a form of discipline and he talks about the importance of watching every dollar. He pays all the ranch bills and signs all the checks calling it a form of discipline Through doing the signing, it's amazing how much you learn about the business.

43:44There's a reminder of each event or action behind every check. And then what I did after finishing both books is I organized another section where it's actually Munger and Buffett on Singleton. And there's just some interesting ideas in here. So it says, sharing Buffett's admiration for Henry Singleton, Charlie wondered, I think this is at one of the Berkshire meetings, given the man's talent and record, have we learned enough from him? Buffett said that Singleton had, quote, the best operating and capital deployment record in American business. He went even further, saying that if you combine the achievements of the top 100 business school graduates, their collective record would not match Singleton's.

44:17Buffett also called it a crime that business schools did not study Singleton. Charlie Munger said Henry Singleton was very interesting. He was a lot smarter than Warren or I. Munger also said we respect Henry Singleton for a very simple reason. He was a genius. Munger called Singleton an awesome intellect and estimated his raw intelligence as being in the top one one thousandth of one percent. Munger said Henry Singleton was the smartest single human being I've ever known in my entire life but this is very fascinating this is why I wanted to include this section because there was a distinction that Munger drew between raw intelligence and accumulated experience and so he since he had an up-close view of both Buffett and Singleton he concluded Henry was a lot smarter but Warren had thought about investments a lot longer so think about it Singleton doesn't start his company so there's like 43 doesn't really start investing all the cash.

45:09Let's say he's in his 50s and he does that for another 20 years. So maybe from like the age of 50 to 70, where Buffett started at nine and it's still doing it in his 90s. I love the way that Munger drew that distinction between raw intelligence and time. And so then I want to end with this beautiful eulogy that is printed at the end of Distant Force that gives a deep insight to Henry Singleton, the man from somebody who knew him well. Rarely do you meet a total stranger and instantly know that you will come to admire that person. That happened to me when I first shook hands with Henry Singleton.

45:41It was half a century ago at MIT where I came to recruit doctorate degree graduates in engineering. The dean at MIT gave me the records of all the graduates and a photo of each. The graduates all looked the way the engineers usually do, except one. He was really good looking and something else. His grade chart was particularly crowded. All the other graduates' grades were like 80 or 90. They were two digits. Henry Singleton's grades everywhere were 100. Three digits squeezed into the space for only two. For every course he took, every final exam, 100. Perfect. While the other graduates wanted to deliver prepared recitals of their accomplishments, Henry asked me questions.

46:24What were we up to in Southern California? Why? And why are you doing it there? And how did your projects come about? Henry accepted our offer, came west, and began an engineering career. Had he chosen to remain in engineering, his career most certainly would have been a distinguished one. But an unexpected opportunity turned up that triggered and uncovered a surprising dimension of Henry's makeup. To create a new company that would find, acquire, merge, and manage other companies. Here he exhibited extraordinary talents even he could not have fully known he possessed. As CEO, he now applied his powerful analytical strengths in novel ways to research and assess the true values of companies, their stock prices, their competition, their profit and growth potential.

47:09With his stand-up desk and his computer, he became a tree full of wisdom of corporations and markets. Henry was not your ordinary CEO. He constantly frustrated the world of Wall Street and business media by ignoring them. By accompanying his phenomenal business success with a preference for anonymity, he mystified them. Not surprisingly, as his talents and analytical business decisions became known, many assumed he was a pure numbers guru, not interested in the people factor in investments. That's not true, and I can cite an example. Years ago, technology advanced suddenly made possible low-priced, high-powered computers that millions could buy.

47:49Numerous companies were starting to produce them. Most failed. not the one Henry helped to finance. He invested in Apple. I asked him how, with all these new computer startups looking alike, did you pick Apple? He replied, Well, I figured most of these millions of expected potential computer customers would at first be intimidated by computers. But how could anybody be intimidated by a computer named Apple? Besides, all the others, except Apple, if they failed, would just walk away. Apple's founders just had to make good. all of us who knew Henry well felt the warmth of friendship and sincere consideration underneath his main of reserve if in his passing we now feel a sadness this is perhaps a proper price that we must pay to compensate for the enrichment of our lives then knowing him has yielded us and that is where I'll leave it that is four hundred and thirty-one books down 1000 go and I'll talk to you again soon