Reading Notes: The Outsiders

Author:  William N Thorndike Jr

Format: Audible / Kindle

Subject:  Capital Allocation

Rating: 8/10


The outsiders is an investigation into what makes a truly great CEO.  The Outsiders is written about eight exceptional CEOs.  These CEOs delivered returns that trounced the S&P500 over the long-term.  These CEOs are in many ways the polar opposite of the household name CEOs we think of today.   The book spends a significant time covering the importance of sound Capital Allocation strategies.

Useful Quotes:

  • CEOs need to do two things well to be successful:  run their operations efficiently and deploy the cash generated by those operations.
  • There are two basic types of resources that any CEO needs to allocate:  financial and human.
  • Stiritz “disdained the false precision of detailed financial models” and instead focused on a handful of key variables:  market growth, competition, potential operating improvements, and cash generation.
  • These CEOs “used leverage selectively, bought back a lot of stock, minimized taxes, ran decentralized organizations, and focused on cash flow over reported net income.”
  • Warren Buffett has proposed a simple test of capital allocation ability:  has a CEO created at least a dollar of value for every dollar of retained earnings over the course of his tenure?
  • Buffett believe the key to long term success is “temperament,” a willingness to be “fearful when others are greedy and greedy when they are fearful.”
  • Buffett upon finally closing Berkshire’s textile business: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
  • “It is impossible to produce superior performance unless you do something different.” – John Templeton
  • You are not wedded to a particular business or industry

 Capital Allocation Tool Kit

  • Raising Capital:
    1. Tap internal cash flow
    2. Issue debt
    3. Raise Equity
  • Deploying:
    1. Invest in existing operations
    2. Acquire other businesses
    3. Pay down debt
    4. Issue dividends
    5. Repurchase stock


Reading Notes: Secret Powers of Negotiating

Negotiation: discussion aimed at reaching an agreement.

Author:  Roger Dawson

Format: Kindle

Subject:  Negotiations

Rating: 8/10


Negotiating is a big part business and everyday life, so I was eager to dive into the details of this book.  Dawson didn’t disappoint me in the least; this is a well written book.   The author intermixes a variety of negotiating tactics with real-life examples.  The chapters and tactics build upon one another in an easily understood manner.  Furthermore, the book does an excellent job of mapping out the negotiation process from beginning to ending.  Dawson also covers strategies for dealing with impasses, stalemates, mediation, and arbitration.

After reading this book, I truly believe that I am an above average negotiator.  As a matter of fact, I have also already used several of these tactics during negotiations in both my personal and professional life.  Lastly, I am completely confident that this book has already paid for itself many times over since I read it last fall.

What I liked Most About the Book:  I gained a ton of insight about the topic of negotiating, and it was an easy read.

Knowledge Nuggets:

  • Be Prepared to Walk Away
  • Never Offer to Split the Difference
  • Always ask for more than you expect to get.
  • Be a Reluctant Buyer or Seller
  • Flinch at Proposals
  • Refer to a Higher Authority
  • Use Bracketing

401K Plan Sponsors Don’t Understand Fiduciary Responsibilities

David McCann’s recent article Passive Aggression cites an ongoing trend of 401K Plan Sponsors moving toward low-fee index funds.   According to a recent survey by Cerulli Associates, many plans are making theses changes to help prevent law suits as opposed to reducing costs.  And, McCann warns that these plan sponsors might be exposing themselves to additional liability by doing so.  He is correct.  And, he is missing the larger point: too many plan sponsors don’t understand their fiduciary responsibilities.

The Employee Retirement Income Security Act (ERISA) requires plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries, prohibits self-dealing, and provides judicial remedies when violations of these standards cause harm to plans.

McCann doesn’t see any problem with adding index funds to plans.  After all, they should always have significantly lower fees than an actively managed funds.  They can also be a reasonable method of managing risk.    He warns that plan sponsors get into trouble when they act for the wrong reason:  to prevent litigation.  To be fair, I agree with McCann’s point.  Plan Sponsors who use such logic are certainly not helping their case.

And this points to the bigger problem:  many Plan Sponsors don’t understand how to properly act in a fiduciary manner.  Outlining all of the nuances and best practices of being a great fiduciary is beyond the scope of the article.  But, a great start is for plan sponsors to ensure they actually act in the best interest of plan participants.  Another great step is maintain records of the decision making process and criteria for the plan.  Of course taking these actions won’t prevent a lawsuit.  They will, however, go a long way in building a strong defense.

Full Disclosure:  I am very much a Boglehead, and I encourage my friends and family to be as well.

Side Note:  About a month ago, John Oliver did a nifty piece on how much 401K fees cost plan participants.

Reading Notes: Rich Dad, Poor Dad

Author: Robert T Kiyosaki

Format: Audible

Narrated By: Tim Wheeler

Subject: Personal Finance

Rating: 4/10


Rich Dad, Poor Dad is written in the form of a narrative containing life lessons of the author from both his Rich Dad and Poor Dad. I went through an entire spectrum of emotions while listening to this audio book.  The character known as the “Rich Dad” made several excellent and inspiring points during the many lessons he taught to the author.  However, an equal amount of those lessons were full of of bad advice and Ad Hominem attacks against anyone that didn’t agree with his logic.

The book makes a lot of subtle and not so subtle attacks on traditional education, and implies that most educated people are idiots and have grand senses of entitlement; It often uses the Poor Dad, who is a college educated teacher, to make this point.  To be fair, the author makes an excellent point about the lack of strong financial education in our public schools and homes. He also does an excellent job of motivating people to take responsibility and accountability in their own financial futures.

In conclusion, I found Rich Dad, Poor Dad to be way more inspirational than educational.

What I liked Most About the Book:

The average person could read this book as the only personal finance education they ever received and would have a better chance at success.

What I liked Least About the Book:

The average person can follow this book verbatim and make a lot of really terrible personal finance decisions.

Favorite Quotes:

Rule #1: You must know the difference between an asset and a liability, and buy assets. If you want to be rich, this is all you need to know.

An asset is something that puts money in my pocket. A liability is something that takes money out of my pocket.

That is why I say that someone’s Net Worth is worth less than they think.

I can’t afford it shuts down the brain…  How can I afford it? opens up the brain.

People who avoid failure also avoid success.

An intelligent person hires people who are more intelligent than he is.

Winners are not afraid of losing. But losers are. Failure is part of the process of success. People who avoid failure also avoid success.

There is a difference between being poor and being broke. Broke is temporary. Poor is eternal.”

Accounting is possibly the most confusing, boring subject in the world….” 

The $555,000 Student-Loan Burden

The Wall Street Journal has a story about a Medical Student who now owes over $555,000 in student loan debt.  Michelle Bisutti originally borrowed $250,000 to cover medical school, but her balance quickly ballooned as she deffered loan payments and defaulted during her residency.

While student loan debt of $500K is rare, balances of $100K+ are becoming more and more common.

Should More People Voluntarily Default on Their Home Mortgage?

This NY Times article makes a case that people who owe significantly more on their mortgage than their home is worth might be better off to walk away, even if they can afford the payments.  The Wall Street Journal ran a similar article a few weeks ago.

The idea is that many people who bought homes with little or no down payment during the market’s peak could walk away and rent a similar home for a fraction of the price.  The additional savings could significantly increase their financial well-being by sacrificing their credit.

John Courson, the president of the Mortgage Bankers Association disagrees and questions what kind of “message” homeowners who voluntarily walk away will send to family, kids, and friends.   He  correctly cites that foreclosures futher depress surrounding home prices.

The Myth of the American Dream

I have often told my friends and colleagues that the I disagree with the idea of home ownership being the American Dream or a path to personal wealth. I have cited that even in the best markets, the actual rate of the return in too low. Home ownership also makes the workforce less mobile which causes other problems for our economy. Brett Arends of the Wall Street Journal agrees.

Story courtesy of Yahoo.