#246 Mark Leonard's Shareholder Letters

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May 13, 2022

Discover the remarkable journey of a visionary leader who transformed a modest investment into a multibillion-dollar empire. Explore the art of strategic acquisitions, especially during tough economic times, and how a decentralized approach fosters efficiency. Dive into the significance of high-performance teams and the entrepreneurial spirit, emphasizing personal growth alongside clear communication. Topics also touch on navigating the dynamics of small versus large businesses, offering unique insights into management and adaptability.

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ADVICE

Decentralization and Autonomy

Build systems you want to work in, attracting like-minded individuals.
Highly talented people often prefer decentralized, autonomous environments.

INSIGHT

Software Business Growth

Software businesses benefit from economies of scale, growing through increased sales to existing customers.
Profitability can also be improved by streamlining acquired businesses and reducing them to their profitable core.

ANECDOTE

Teledyne's Growth Strategy

Teledyne, led by Henry Singleton, thrived by dividing businesses into smaller units, fostering creativity and reducing waste.
This approach mirrors Mark Leonard's preference for smaller, more manageable business units.

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Thinking, Fast and Slow

Daniel Kahneman

In this book, Daniel Kahneman takes readers on a tour of the mind, explaining how the two systems of thought shape our judgments and decisions. System 1 is fast, automatic, and emotional, while System 2 is slower, effortful, and logical. Kahneman discusses the impact of cognitive biases, the difficulties of predicting future happiness, and the effects of overconfidence on corporate strategies. He offers practical insights into how to guard against mental glitches and how to benefit from slow thinking in both personal and business life. The book also explores the distinction between the 'experiencing self' and the 'remembering self' and their roles in our perception of happiness.

The evolution of cooperation

Robert Axelrod

The Evolution of Cooperation, written by Robert Axelrod, delves into the theory of how cooperation can emerge and persist in a world of egoists without central authority. The book uses game theory, particularly the Prisoner's Dilemma, and evolutionary biology to explain how cooperation can arise through strategies such as TIT-FOR-TAT. Axelrod's work highlights that cooperation can be self-policing through reciprocity and does not require trust, rationality, or central authority. The book also discusses the importance of the durability of relationships and the clustering of individuals with cooperative strategies in facilitating cooperation[1][3][5].

The outsider

Colin Wilson

In 'The Outsider,' Colin Wilson examines the psyche of the Outsider through the lives and works of various literary and cultural figures such as Albert Camus, Jean-Paul Sartre, Ernest Hemingway, Hermann Hesse, and Fyodor Dostoyevsky. The book delves into the Outsider's experience of dislocation and his struggle to find meaning and purpose in a world that seems devoid of it. Wilson argues that the Outsider is a metaphysical man who seeks a transcending meaning and purpose for human existence, often feeling isolated and disconnected from society. The book is both a study of the Outsider's predicament and an impassioned call for a new form of existentialism that could provide a satisfying and objective religious understanding of life.

Copy this!

Lessons from a Hyperactive Dyslexic who Turned a Bright Idea into One of America's Best Companies

Ann Marsh

Paul Orfalea

This book is a memoir of Paul Orfalea's journey from a struggling kid with learning disabilities to the founder of Kinko's, a company that grew into a $1.5 billion empire. It highlights his unique approach to business, emphasizing the importance of taking care of employees and creating a compassionate company culture. The book is filled with personal anecdotes, business lessons, and Orfalea's inspired aphorisms, making it a refreshing and honest look at what makes Orfalea tick.

The fish that ate the whale

The Life and Times of America's Banana King

Rich Cohen

This book tells the fascinating story of Samuel Zemurray, who started as a roadside banana peddler and eventually built a sprawling empire involving banana cowboys, mercenary soldiers, Honduran peasants, CIA agents, and American statesmen. Rich Cohen's narrative explores Zemurray's rise to power, his involvement in overthrowing Central American governments, and his complex role in American history. The book delves into Zemurray's personal life, his business exploits, and the moral implications of his actions, painting a nuanced portrait of a man driven by an indomitable will to succeed.

The essays of Warren Buffett

Lessons for Corporate America

Warren Buffett

This book is a comprehensive collection of Warren Buffett's annual letters to Berkshire Hathaway shareholders, edited by Lawrence A. Cunningham. It provides valuable insights into Buffett's investment philosophy, corporate management, and business strategies. The letters are organized into thematic chapters, making it easier for readers to understand Buffett's views on various topics such as value investing, executive compensation, and market fluctuations. The book is praised for its clarity, wisdom, and practical advice, making it a definitive source for understanding Buffett's approach to business and investing.

You Don't Know Jack... or Jerry

null

Robert O. Babcock

One Man's Medicine

An Autobiography of Professor Archie Cochrane

Professor Archie Cochrane

Effectiveness and Efficiency

Random Reflections on Health Services

Archibald Leman Cochrane

In 'Effectiveness and Efficiency: Random Reflections on Health Services', Archie Cochrane critiques healthcare systems, advocating for the use of randomized controlled trials to evaluate treatment effectiveness. His work has been influential in shaping evidence-based medicine and led to the establishment of the Cochrane Collaboration.

What I learned from reading Constellation Software Inc. President's Letters by Mark Leonard.

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[1:10] Business lessons from Mark Leonard by Tren Griffin

[2:11] Newsletter: Liberty’s Highlights The Serendipity Engine: Investing & business, science & technology, and the arts.

[2:59] I don’t like anyone telling me what to do. I don’t like anyone saying I am an authority figure and you will do it this way. I can’t think of anything that annoys me more. I was stuck by the principal. I challenged teachers. I left home early. I had a bootleg radio license. I built a flamethrower. I did things that weren’t accepted by lots of people. That ability to choose what I think is right is something I prize highly.

[4:49] Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It (Founders #110) and The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success (Founders #94)

[4:53] Teledyne grows bigger by dividing businesses into smaller parts wherever possible. Singleton claims that this keeps his managers creative and not wasteful.

[5:12] Our preference is to acquire businesses in their entirety and to own them forever.

[8:57] The Fish That Ate the Whale: The Life and Times of America's Banana King (Founders #37)

[9:18] There are times when certain cards sit unclaimed in the common pile, when certain properties become available that will never be available again. A good businessman feels these moments like a fall in the barometric pressure. A great businessman is dumb enough to act on them even when he cannot afford to.

[12:20] Customer relationships that endure for more than two decades are valuable.

[13:08] The longer we have owned a small software business, the larger and better it has become.

[15:32] Jeff Bezos’s Shareholder Letters. All of them! (Founders #71)

[23:22] We didn't get to that point with central edicts or grand plans. We just had a hunch that our internal ventures could be better managed, and started measuring them. The people involved in the Initiatives generated the data, and with measurement came adjustment and adaptation. It took 6 years, but we have fundamentally changed the mental models of a generation of our managers and employees.

[23:56] A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market (Founders #93 and #222)

[28:06] Our business units rarely get large.

[28:26] This suggests that the size and performance of our business units are almost totally unrelated. I believe that these business units are small for a reason...that the advantages of being agile and tight far outweigh economies of scale. I’m not a proponent of handling our “complexity problem” by creating a bunch of 400 employee business units to replace our 40 employee units. I’m looking for ways of “achieving scale” elsewhere.

[29:06] Debt is cheap right now, so it is pretty tempting to use it. Unfortunately, it has a nasty habit of going away when you need it most.

[30:42] The Essays of Warren Buffett (Founders #227)

[32:51] Book recommendation from Mark: Thinking Fast and Slow

[34:53] I love what I'm doing and don't want to stop unless my health deteriorates or the board figures it's time for me to go.

[36:42] My personal preference is to instead focus on keeping our business units small, and the majority of the decision making down at the business level. Partly this is a function of my experience with small high performance teams when I was a venture capitalist, and partly it is a function of seeing that most vertical markets have several viable competitors who exhibit little correlation between their profitability and relative scale. (TRUST IN SMALL GROUPS OF SMART PEOPLE)

[37:35] There are a number of implications if you share my view: We should

a) regularly divide our largest business units into smaller, more focused business units unless there is an overwhelmingly obvious reason to keep them whole,

b) operate the majority of the businesses that we acquire as separate units rather than merge them with existing CSI businesses, and

c) drive down cost at the head office and Operating Group level.

[38:11] I want you to bear with me because I really do think this is a very clear description of what he's building, the advantages the strategy provides, and why he's going to be hard to compete with over the longterm.

[40:13] We have 199 business units. We can run a test in 5, 10, 6, 24, whatever it is —we find what works and we can spread it throughout the entire company and spreading best business practices makes those businesses better. The longer it goes, the more businesses we have, the stronger they get over the time. And it's nice you have a checkbook and a phone but I'm way too far ahead— you'll never catch me is essentially what he's saying.

[42:00] Copy This!: How I turned Dyslexia, ADHD, and 100 square feet into a company called Kinkos (Founders #181)

[43:19] Book recommendation from Mark: The Evolution of Cooperation

[44:52] You Don't Know Jack... or Jerry by Robert O. Babcock.

Jack Henry and Jerry Hall launched a software company in theh back of a small engine repair shop. Thirty years later, Jack Henry and Associates, Inc., is a thriving operation with over 3,700 employees in close to 50 locations around the United States.

[47:22] Book Recommendations from Mark: One Man's Medicine: An Autobiography of Professor Archie Cochrane and Effectiveness and Efficiency, Random Reflections on Health Services by Archie Cochrane

The first book is a moving, idiosyncratic and dryly amusing autobiography of a brilliant and erudite outsider that makes you wish you’d known the man firsthand.

The second is a stinging critique of a well-meaning but entrenched medical establishment, for their ineffective and dangerous medical practices.

[48:23] We spend time on non-randomized observational studies trying to spot business practices that actually add value rather than just adding overhead.

[48:34] My favorite part of Mark’s letters

[51:09] A huge body of academic research confirms that complexity and coordination effort increases at a much faster rate than head count in a growing organization.

[51:50] The business manager needs to be asked why employees and customers wouldn't be better served by splitting that business into smaller units. Our favorite outcome in this sort of situation is that the original business manager runs a large piece of the original business and spins off a new business unit run by one of his or her proteges.

[53:39] Something wonderful happens when you spin off a new business unit.

[54:16] When you get big you lose entrepreneurship.

[54:43] If I were advising my 35 or 40-year-old self on where to go, I would tell him to stay put. Become a master Craftsman in the art of managing your VMS business. It is the most satisfying job in Constellation and will generate more than enough wealth for you to live very comfortably and provide for your family.

[55:30] You can't be normal and expect abnormal results.

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