Review & Reflections on The Outsiders
A seminal book on investing and operating
While researching capital vehicles to invest in and build enduring companies, I came across The Outsiders. Its one of Warren Buffet’s top book recommendations.
Its written by a researcher in search of extraordinary CEOs who consistently beat the market over multiple decades and market cycles. He looked throughout the history of the S&P 500 to identify CEOs who managed through at least 2 market downturns consistently beat market returns, but also more than 5x beat their competition, proving they didn’t just ride a rising tide, but were masters of their own tide; their success was determined using investor earnings. He identifies 8 living CEOs who fit this profile and through in depth research and interviews, he uncovers why they were successful and extracts lessons for other aspiring CEOs.
Below are some of my takeaways which I’d highly encourage for any investor or operator.
Why do we read about the greats? We pursue wisdom by studying the extremes in order to understand the conditions for greatness. However, knowing that we will not all become great necessarily, we have an important implicit decision to understand how their values fit with your values, if you are determined to pay the cost to be great, and what cost is satisfactory for you.
For example, Buffett’s first wife, when they separated, alluded to his inability to be present — always focused on work. On one hand, if that’s a cost of exceptional greatness, I’m comfortable being a great, not exceptional, investor-operator to be present for my family.
I use this extreme example and conclusion to demonstrate the core principle — there is a cost to greatness. What is it? Are you willing to pay it? What trade offs are you willing to make for it?
Who am I, truly? It’s striking that these CEOs are presented as having consistent values in both their personal and professional lives. For example they are shrewd, humble, frugal and often make concentrated bets (e.g. few investments and one spouse); although the author is biased in selecting his data since at least one CEO, Buffett, is known to have cheated on his first wife — not exactly the trait of a concentrated investor in his personal life.
Nonetheless I think there’s some underlying wisdom here at the meta level of value alignment across personal and professional life.
Ultimately, understanding who you are and what situations your profile (strengths, networks etc) is a good fit for, is a critical contributor to achieving great outcomes.
I believe its in part because you are more invested to learn about something that aligns with an intrinsic interest, than a circumstantial extrinsic motivation. Consequently you can develop better judgment in that area than the average person. You can have stronger, substantive and more independent convictions, irrespective of market noise.
Your consistency and authenticity of values also compounds your likelihood of success. Living out your values attracts the right people, relationships and hence resources around you (investors, entrepreneurs, teammates etc) who authentically share similar values.
Naval has this great related post about why being yourself is a competitive advantage and the importance of playing long term games. Investing in understanding yourself, you values and the conditions in which you thrive, is a long term investment that compounds in its return. The earlier you start the better.
Who do you want to serve? The author understandably works backwards from the ultimate objective of making the most consistent high returns for LPs. While great returns are table stakes to get access to capital, high LP returns are not the ultimate motivator for me; they are for someone like Buffet who lives for the game. My desired primary customers are great entrepreneurs doing their best work and getting them access to capital and supporting them on their journey is the most important optimization. Delivering great returns ensures we have capital when we need it, and at favorable terms.
Delivering extraordinary outcomes will be measured by various yardsticks — impact, returns etc. You have to be clear on who you want to serve and work backwards to design the target metrics that meet that goal, so you can put all other metrics in context of your north star.
Outlier CEOs have a unique blend of exceptional execution and capital allocation skills: The book highlights the trend of most CEOs training for their roles by rising through the ranks as a successful operator. In contrast, the outsiders in this book are both exceptional at operations as measured by their ability to generate great cashflow growth. However they also then make shrewd investment decisions to allocate that capital to achieve the highest returns. In many cases, they decentralize or delegate operations as they scale and yet centralize capital allocation decisions to themselves for reasons I describe in the next two post sections.
The questions I’d like to get additional insight into include — under what conditions, is a strategic investor profile + operational leader pairing enough of a complement to offset the single person advantage?
This in theory is what versions of a venture studio model inherently assume that you can find complements of both sides to create better outcomes. What makes this a good vrs great/exceptional trade off?
Generalists are valuable in a religious world — Whereas most CEOs have a constrained view of what they can invest free cash flow into to optimize investor returns, the CEOs in the book are able to make financial allocation decisions in a range of operational options (e.g. acquisition, share buybacks); in case of Buffett, a number can even invest across asset classes (public equities, private companies, bonds etc) because they are proactively curious beyond their typical boundaries. Its not just about the curiosity to read, but also to think and deduce in what contexts certain lessons apply (more here on this thread).
The world understandably rewards expertise because entrusting decisions to experts relies on assumed wise pattern recognition. So its understandable that many people are driven to become deep experts that know their asset class deeply (there’s so much to learn in each dynamic class), and to simultaneously have, at best, a high level understanding of other asset classes.
I’ve often heard leaders in one asset class disparaging other asset classes as not being enough “X” — not enough risk takers, too reckless, not creative enough and just pursuing temporary arbitrage without creating value etc. Even when they are neutral, I’ll hear a version of “The other guys do their thing, it’s just not for me.”
Where else do you see this behavior? Religious people. Many religious people similarly adopt or buy into a religion and spend the rest of their lives understanding the world only through that lens. We aren’t proactively curious to understand how others see the world and identify opportunities to borrow lessons and practices.
Valuable generalists are therefore not a lazy profile of people who seek exposure. They are those who, through thoughtful study, are able to grasp the fundamentals of how something works and can make high quality judgement calls across a range of relevant topics, and or know what questions actually matter to inform a decision. Valuable generalists pursue wisdom not knowledge.
The utility of being a generalist is ownership not employment: All of the Outlier CEOs were significant owners not professional CEOs.
You are best maximized as an owner because you have more control over resource allocation and execution to see through insights in a timely way.
This is because the fundamental advantage of generalist breath is the creative ability to make inferences across silos that lead to better judgment and to translate across silos in ways that align stakeholder interests for collaboration. The crux of this is better judgment and the execution of that judgment.
A valuable generalist is sub-optimally positioned as an employee because your ability to exercise of decisions is constrained by organizational priorities, comfort (or inertia) and the need to get cross-functional buy in to make a decision thats out of most collaborator’s realm of wisdom.
Its an easy line to walk between hubris of believing you are making a wise decision, and actually having a substantive contrarian analysis and resulting judgement. This insight is therefore implicitly positioned in the context of broader wisdom of character (eg humility, self awareness).
As always, these thoughts are works in progress so look forward to alternative takes on these takeaways, and reviews if you’ve also read this book.
