A reader of the blog was kind enough to send me a 1979 article from Forbes about Henry Singleton. Singleton co-founded Teledyne in 1960 and built it into a highly profitable U.S. corporation. The company serves as a template for capital allocation. Singleton simply refused to invest money into projects or divisions that did not promise a high rate of return and shunned Wall Street orthodoxy by following this tenet wherever it lead him including making massive buybacks of Teledyne stock and making large purchases of deeply undervalued public companies.
“Singleton has an almost uncanny ability to resist being caught up in the fads and fancies of the moment. Like most great investors, Henry Singleton is supremely indifferent to criticism.” I think this trait is essential and that it can be cultivated by 1) defining with razor-sharp clarity your investment framework and then following it with great discipline, and 2) always doing your own work (thinking) when making investment decisions. The second trait does not mean that you won’t generate ideas from others, most notably other proven value investors, but that you then make them your own.
Singleton is an example of how an extraordinary manager can get extraordinary results – 30% plus returns on equity and EPS growth of over 1,200% in only ten years – in very ordinary businesses: “offshore drilling units, auto parts, specialty metals, machines tools, electronic components, engines, high fidelity speakers, unmanned aircraft and Water Pik home appliances.” I have made the point before that we, as investors, need to seek out these .400 hitters and hitch a ride.
The combination of Singleton’s capital allocation principles and his laser focus on them was Teledyne’s durable competitive advantage.
“Now everyone understands that all new projects should return at least 20% on total assets,” said Singleton of his managers. This was a core requirement that drove much of Teledyne’s success. You can emulate this by insisting that your investments have a similar – or higher – return on capital.
“After we acquired a number of businesses we reflected on aspects of business. Our conclusion was that the key was cash flow.” Investors should not focus on accounting profits but free cash flow that can either be redeployed in the business at a high rate of return or returned to shareholders. Singleton, like Buffett, refused to pay a dividend because Teledyne could reinvest earnings at over 30%, a level he felt his stockholders could not match if investing their own funds.
Singleton had disdain for managers who, while their own stock sold for five times earnings, would not think twice of paying ten or fifteen times earnings for a big acquisition. In stark contrast, Singleton only used his stock as currency when it sold at multiples of “40, 50 or 60 times earnings.” This is Mr. Market 101, yet it (he) requires great patience and discipline to fully exploit.
When Singleton decided to allocate his capital by investing in the stock market, “He rejected Wall Street dogma.” His investment checklist was simple. He bought companies that were 1) well run and 2) undervalued. This is the secret sauce that is hiding in plain sight: buy good businesses at cheap prices. Singleton was confident that the multiple of these investments would rise over time.
Singleton was willing to concentrate his investments. At one point he had over 25% of his portfolio in Litton. He liked undervalued stocks where the business was facing an isolated problem, not a general one. He also stayed well within his circle of competence, buying stocks in companies that paralleled the divisions of Teledyne: industrial conglomerates, oil stocks that did geological exploration and made drilling rigs, and insurance.
Singleton liked to buy pieces of companies at six times earnings. That’s an earnings yield of almost 17%. This level of undervaluation provides a large margin of safety and could serve as a sound hurdle rate for investors looking for common stocks. These opportunities show up, but most investors are not in a position to exploit them because they have either already committed their capital to sub-optimal investments or lack the courage to step up to the plate when the sky is falling – or both.
Singleton hated projections and clearly knew the difference between what is important – capital allocation at high rates of return – and what is not – he called splitting his stock a nonevent, “paper shuffling.” He should be studied.
One final thought shows the influence of Singleton. When I attended the Fairfax Financial annual meeting last April in Toronto, Prem Watsa made it clear the he has made a careful study of Singleton, leaving me with the impression that Prem will continue to draw deeply from those lessons in running Fairfax. That’s good news for shareholders.