When most people think about the world’s greatest investor, the name Warren Buffett comes immediately to mind. But if you asked Buffett who he thought deserved the title, he’d likely name someone you’ve never heard of.
In his book The Money Masters, John Train quotes Buffett praising a man named Henry Singleton. According to Buffett, “Henry Singleton of Teledyne has the best operating and capital deployment record in American business.” He continues, “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, he says. Instead, they insist on holding up as models executives cut from a McKinsey & Company cookie cutter."
Over the course of two decades, Henry Singleton built one of America’s most legendary companies, Teledyne Inc, averaging a remarkable 23 percent annualized return. Among his many accomplishments, Singleton was one of Apple’s first investors, was among the first CEOs to understand the power of the share buybacks, and ultimately mastered the general model of conglomerate-building later adopted by Buffett’s Berkshire Hathaway. Beyond a small collection of Wall Street Journal articles and some magazine pieces, relatively little information has circulated about Singleton’s thinking and process. He led a very private life, often described by his peers as enigmatic. Collecting the available sources of Singleton’s own words, I consider these to be his most inspiring ideas:
“After we acquired a number of businesses we reflected on aspects of business. Our conclusion was that the key was cash flow.” Singleton paid very little attention to most measures of financial success. At the end of the day, cash is what keeps businesses alive, and so we focus our attention on businesses that generate lots of it. How much cash flow is enough? According to Singleton, “all new projects should return at least 20 percent on total assets.” So when Singleton invested a dollar, he expected to earn at least 20 cents per year. We use a similar hurdle rate when evaluating companies for the Growth Portfolio. Buffett also prefers at least 20% return on equity (similar to return on assets in this sense).
“A steel company might think it is competing with other steel companies. But we are competing with all other companies.” Many companies end up pigeon-holing themselves into a certain business or industry over time. Truly a lateral thinker, Singleton recognized that divisions between industries are false boundaries, while investment capital is fluid. Capital should always attract to its best possible return regardless of where that return is found.
“Our quarterly earnings will jiggle.” Singleton controlled what he could, and had the wisdom not get wrapped up in what he could not. Neither earnings nor investment returns come evenly over time, so patience is important. Buffett’s thinking follows along similar lines, often quoted as preferring a “lumpy 15 percent over time than a smooth 12 percent.” It’s the long term that counts.
“I don’t believe all this nonsense about market timing.” Predicting the ideal time to get in and out of stocks/bonds/cash etc is impossible. If you do think it’s possible, it’s likely you haven’t been investing long enough, or you aren’t paying attention to your returns. Like Buffett, Singleton believes value is what matters, not timing.
“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.” Planning for the future, to a certain degree, is important. It helps us focus on specific goals and aligns our actions and our thoughts towards achievement. However I do question the value of planning to the penny. As Buffett agrees, I’d rather be approximately right than precisely wrong.
Studying the methods of Buffett, Singleton, and others make one fact very clear. While every generation names its own greatest investors, the blueprints behind their successes are strikingly similar.
Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc. in Toronto. He offers financial planning and investment management for high net worth Canadian investors. Ben focuses on high quality investments, the Growth and Income Portfolios, low risk investing, and reducing tax.