Library

Dear Chairman addresses the story of one of capitalism’s longest running tensions – the conflicts of interest among public companies’ directors, managers, and shareholders.

In 1926, Benjamin Graham found what he considered “a treasure”: Northern Pipeline, which at the time was trading at $65/share, was sitting on a fat pile of holdings in other companies which, according to his calculations, could be monetized and would allow Northern to make a one-off payment of $90/share to all its stockholders, without having any impact on its ongoing earnings. Graham believed this asset sale, along with its distribution as dividends, would generate significant value to shareholders. After a frustrated attempt to convince the company to take this course of action, Graham decided to write a letter to other shareholders explaining the situation. According to the author, this letter marked an important turning point in the history of modern capitalism: it was the moment in which shareholders began to impose their rights as actual owners of the companies.

Through the study of eight “Dear Chairman” letters (original letters are included as an appendix to the book), the author conducts the reader through the evolution of shareholders activism, with examples ranging from the first “proxyteer” wars, to the logic of the “corporate raiders” – and having as main actors characters such as Graham, Carl Icahn and Daniel Loeb.

According to the author, “It is incredible how much useful information from the business world is becoming lost to history”. This book is an attempt, very successful in our view, to bring light to some of this knowledge.

The Checklist Manifesto is an extremely engaging book, and we believe it should be a part of any library collection.

Why do we keep on failing regardless of excuting the same processes thousands of times? Whether it’s in a simple medical procedure, in the government sphere, in a large company’s routine or in the financial industry, we find ourselves surrounded by failures that could have been avoided. The reason is simple: the current volume and complexity of knowledge in most professional areas is greater than the ability of an individual to store and use this knowledge consistently, correctly and safely.

Can we do better? Would the solution be more training, more study or better teaching techniques? According to the author the answer is simple. He uses solid arguments to advocate that we can avoid many failures and do better, by using an extremely simple and low-tech method: the use of checklists. With cases in different areas, from the aviation industry to the construction and asset management, the author discusses how the use of more standardized checklists could bring improvements in processes in different areas with a very low incremental cost. It is a trivial concept, but apparently a very powerful one.

Although the cases focus more on surgical procedures to illustrate the value of checklists (not a surprise given the author’s background), the concepts discussed cover many other areas of knowledge and professions. These are valuable lessons, with stories and teachings that will stay with the reader for a long time after putting the book down.

Business Adventures was written in 1969 and drew our attention because of an interesting story: in 1991, Bill Gates asked Warren Buffett what was his favorite book – a great question to ask Buffett. In response, Buffett sent Gates a copy of Business Adventures.

Bill Gates currently refers to this book as “the best business book I have ever read.” He says that this book serves as a reminder that the principles of a successful business remains constant in time. We agree. Perhaps the most important of these principles, that becomes clear as the stories are being digested, is the need that any enterprise has to rely on good people. People. You can have the perfect product and the perfect marketing strategy, but you will always need quality people to lead any firm.

A word of caution to the reader: despite being a fantastic book that revives interesting stories of postwar capitalism, we do not believe that this is a book to be read at once, or even read in the order in which the chapters are presented. There are twelve independent stories which you can read in any order without loss of context. It is hard to choose, but our favorite stories were the last story – In Defense of Sterling – which narrates the backstage of the first speculative attack on the pound sterling and the firm and coordinated action of central bankers from developed countries in defense of that currency; and The Last Great Corner – which explains in detail the attempt to corner the short market executed by a publicly traded company. Also worth mentioning The Fate of the Edsel – a story of perhaps the greatest disaster in the automotive industry history in launching new vehicles and; A Reasonable Amount of Time – which deals with insider trading carried out by executives from listed companies and narrates the case that serves as a reference until this day to guide the standards of the conduct expected by regulators regarding insiders.

The Outsiders brings an interesting debate on the role and importance of a company’s CEO, and tackles valuable concepts about business management and shareholders value generation.

“It’s almost impossible to overpay the truly extraordinary CEO … but the species is rare.”

– Warren Buffett

The book begins with this sentence that sums up what lies ahead. The author redefines what it means to be a successful CEO. Most people would describe a good CEO as a leading reference, a visionary and a person with exceptional knowledge of his industry. Besides, in our world of personalities cult, CEOs often reach the status of celebrities, appearing on magazine covers and their comments in the media have almost prophetic value. Names like Jack Welch and Steve Ballmer come to mind. Should great CEOs be measured by their fame or is there a more efficient way to measure the value they bring to their companies? More importantly, are the most recognized CEOs actually the ones that achieved the best performance at their work? The book answers these and other questions masterfully.

Without spoiling the surprise (there is a lot to come…!), the author argues that CEOs have two simultaneous objectives: to keep their company’s operations running smoothly and to efficiently allocate the cash generated by these operations. This second objective, an efficient capital allocation, ends up being an ability usually poorly evaluated in CEOs, but that can mean the difference between spectacular returns for shareholders or returns in line with the rest of the industry. The author illustrates these concepts, and some other, by evaluating eight CEOs from different industries that during their periods heading their companies generated returns to its shareholders more than 20 times higher than the S&P 500 returns, and much higher than the average returns of their respective industries in the same periods.

Fooling Some of the People All of the Time brings as its central theme the uphill battle of a value investor, David Einhorn, in an attempt to unmask fraudulent accounting practices in a publicly traded company – needless to say, one of his short positions.

The beginning of the book provides an interesting discussion of value investing, with practical examples of asymmetries that the fund manager found in the American market, a good reflection on short positions, and especially a hands-on account of value investing during the Internet bubble.

After this introduction, the author dives into the central theme of the book. In 2002, after a thorough analysis of Allied Capital activities –creditor/investor company in midsize business, Einhorn became skeptical of the company accounting practices – particularly in relation to the valuation of their illiquid positions (according to him, “You-Have-Got-to-Be-Kidding-Me method of Accounting”) – and set up a short position in Allied stock. Over the next six years, Einhorn waged his battle with Allied Capital, insistently taking his analysis and conclusions to the attention of regulators and other shareholders. Theses other parties, on the other hand, for lack of will, inability or conflict of interest, did little.

The book describes in detail this fascinating and frustrating story of the author’s persistence. Although the book emphasizes, at times, the failure of regulators, it is mainly a success story of hard work and diligent research done by an investment manager and his team. Some concepts were strengthened throughout the book that we consider crucial to success in equity investments: research and systematic and diligent analysis; a good deal of skepticism about any company’s management speech; the importance of “field work” through conversations with different people from the analyzed company and its industry – customers, suppliers and competitors; and finally, that time and persistence are usually rewarding for stocks investors.

Double your Profits focuses on business management and the development of a culture focused on results. Despite its title, which would condemn it to the self-help section of any bookstore, it offers a direct and compelling approach on how to maximize a firm’s profit.

The book begins with some important guidelines for the creation of a result-oriented culture permeated by meritocracy, and ends by suggesting objective measures that executives can take to maximize the results of their business. It is interesting that, in practical terms, we see this philosophy and some of these measures in the culture of certain Brazilian companies that have shown exceptional results over time.

Out of curiosity, Marcel Telles, one of Inbev controllers, said in an interview that he annually sends his partners a book, and Double your Profits is the only book he sent his partners not once, but twice.

In short, we believe it is a book that will be of interest to anyone: to executives or business owners this is a reading that, with the necessary adaptations to each specific situation, can have a very positive influence (and pactical!); for equities investors, the book presents a business management format focused on results, against which you can contrast and evaluate the management practices in any company.

“What distinguishes a mediocre company from a great company?” With that question in mind, Jim Collins wrote the book Built to Last, one of the most influential management books of the 90s. The book talks about the DNA features of great companies, capable of generating returns much higher than the average for their shareholders.

“Can a mediocre company become great?” With this second proposal, through a study with strict parameters, the author identified companies that generated poor returns for its shareholders and that took a great leap to excellence – generating, over 15 years, returns 7 times higher on average than the stock market average returns. This is the theme of Good to Great.

The author covers in detail the relatively simple factors – lessons of good governance and good management – that caused this striking change in the standard of efficiency of these companies. These concepts are commonly addressed in Oceana when discussing our funds investment cases – these are particular variables of each company that can influence tremendously the value generation that can be expected over time.

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Entendi | I Understand