In one sentence: The counterpart to the bad-CEO episodes: Phil holds up Warren Buffett and John Mackey as role models, shows how a good letter helps you value the business, lists four traits and explains why long-run growth numbers beat one-year returns when judging a CEO.
Key ideas
- Why basics repeat. Phil compares it to a UCLA basketball coach making stars practise the same shot; fundamentals are what hold when you wobble. A note from Guy Spier: Munger's four principles are a distillation made for reporters, so each is deeper than it sounds. [00:00–07:00]
- A fair price (Munger's word) is roughly what the whole business would sell for privately, which Phil says is about half of what the public market often charges. [06:00]
- Buffett as a CEO model. Read the Berkshire letters (berkshirehathaway.com, back to 1977; partnership letters earlier). The job of the letter is to give you what you need to value the business every year. [08:00–12:00]
- Using the 2015 letter. Per-share book value grew about 19.2% a year over 51 years. Berkshire's accounting writes losers down but doesn't write winners up, so intrinsic value exceeds book value. Buffett said Berkshire would buy back stock at up to about 120% of book. Phil calls this a CEO signalling a price he thinks is cheap. Danielle asks whether the letters ever admit mistakes; Phil says other years do. [12:00–20:00]
- Candour about price is rare. A CEO who says "don't buy now, it's too expensive" is almost unheard of but good for long-run trust. [20:00–21:00]
- Four traits of a Rule #1 CEO. (1) Focus on the customer, (2) no cutting corners, (3) intellectual honesty even at the expense of sales and profit, (4) a culture of integrity, with the CEO's real jobs being capital allocation and culture. Nordstrom's no-receipt returns (the story of a tyre) is the culture example. [21:00–23:00]
- Check what they said against what happened. Read old 10-Ks and see whether prior plans were delivered. Phil recalls a Caterpillar CEO's five-year plan that just stopped being mentioned. [23:00–25:00]
- Admitting a miss. Phil credits IBM's Ginni Rometty for saying a predecessor's goal couldn't be met, and the stock fell. Integrity ahead of the price. [25:00–26:00]
- John Mackey and Conscious Capitalism. Serve all stakeholders, which Mackey argues is good for the bottom line. Phil recommends reading everything by Mackey and Buffett to build a profile of a good CEO. [26:00–28:00]
- Public CEOs can win while you lose. Unlike a private owner, a public CEO can wipe out shareholders and leave better off. [28:00]
- Judge on a three-year view. Corporate culture is easier to read than corner-cutting. Cutting corners can flatter ROE and ROIC for a while, so Phil leans on the four growth rates (earnings, sales, equity, cash), which are hard to manipulate. A dip in ROE or ROIC or a bit more debt can be a right long-term decision, but a one-year thumbs down is the trap that pressures CEOs. [28:00–31:00]
How it maps to RuleOne
- The Big Four growth rates and ROIC on /stock/TICKER/ are the numbers to read over three years, not one.
- Management quality is a manual job: read two or three years of 10-K "plans" and shareholder letters, then record what was promised against what happened.
- Open-market buybacks only help when the price is low; compare the buyback price with your own value estimate.
Buffett, Munger and Graham links
- The Berkshire letters, including the 2015 letter used here (book value from $19 to $155,501 per share over 51 years, 19.2% a year). Buffett's explanations of intrinsic value versus book value and of the buyback threshold are in that letter.
- Mackey's book Conscious Capitalism (with Raj Sisodia).
- Munger's four principles: see 001.
Words to know
- Book value: assets minus liabilities as accounted, which can understate or overstate real worth.
- Intrinsic value: what the business is really worth, based on the cash it produces.
- Capital allocation: how a CEO spends the cash, on projects, acquisitions, buybacks, dividends or debt.
Try this
Pick a company you own. Find its 10-K from three years ago and write down two things management said it would do. Then check in the latest report whether it happened and whether they said so.
Check yourself
- What are the four qualities of a Rule #1 CEO?
Answer
Customer focus, no cutting corners, intellectual honesty, and a culture of integrity. - Why use the four growth rates to judge management?
Answer
They're hard to manipulate and, over three years, show whether the business is really growing while ROE or debt may move for good reasons. - Why does a buyback not automatically help?
Answer
It helps only if the price paid is well below intrinsic value.
Short quotes
"The point is to give you the information you need every year to put a value on the business." (Phil, ~11:30, auto-transcribed, paraphrased)