Wall Street’s Greatest Magician
“Every great magic trick consists of three parts or acts. The first part is called “The Pledge”. The magician shows you something ordinary: a deck of cards, a bird or a man. He shows you this object. Perhaps he asks you to inspect it to see if it is indeed real, unaltered, normal. But of course… it probably isn’t. The second act is called “The Turn”. The magician takes the ordinary something and makes it do something extraordinary. Now you’re looking for the secret… but you won’t find it, because of course you’re not really looking. You don’t really want to know. You want to be fooled. But you wouldn’t clap yet. Because making something disappear isn’t enough; you have to bring it back. That’s why every magic trick has a third act, the hardest part, the part we call “The Prestige”.”
A Wall Street Magician
As a student at MIT, Henry Singleton was the recipient of the Putnam Prize in mathematics and went on to graduate with a doctorate in electrical engineering. In his early career, he made significant contributions to aircraft inertial guidance systems that are still being used today and invented a way for naval ships to reduce their natural magnetic fields, making them harder to detect by enemy submarines. Despite his brilliance, for years Wall Street was unconvinced by his methods. But then…
right under their noses…
Singleton pulled off the greatest magic trick of all time.
“Just buy really good value and when the market is ready, value will be recognized.”
In 1960 Singleton founded the conglomerate Teledyne. Conglomerates are corporations made up of many different unrelated businesses that typically conduct business operations separately. In 1966, Singleton ceded day-to-day control of the company to his friend, George Roberts. With Roberts taking on the title of President, Singleton spent his time focused on perhaps the single most important activity of a CEO, capital allocation. Good capital allocators discover the best ways to effectively deploy a company’s money. Singleton wasn’t good at this. He was outstanding. A master of his craft.
There are five basic ways a company can spend its money:
- Invest in existing operations
- Buy another company
- Pay a dividend
- Repurchase shares
- Pay down debt
Singleton first honed his skills by buying other companies. In the early years, as Teledyne’s stock price increased, Singelton viewed his own company as overvalued. He took advantage of the high price and used Teledyne’s stock to continuously purchase other companies. Between 1960 and 1970, Teledyne acquired over 140 businesses. And then, Singelton stopped…
In the early 1970s, because of their size and anti-trust concerns, conglomerates came under heavy scrutiny from Washington. The scrutiny coupled with the fact that investors looked unfavorably on Singleton’s unwillingness to distribute dividends in a low growth environment, caused Teledyne’s stock price to sink. Whereas Singleton has previously viewed the company’s shares as overvalued, he now saw them as undervalued. It was time to put his plan in reverse. In his eyes, the best investment for Teledyne to now make with its capital was purchasing its own shares.
Between 1972 and 1984 Singleton unleashed what was the largest stock repurchasing program in history. During this time, Teledyne ended up repurchasing 90% of its outstanding stock.
At first, Wall street didn’t care.
Teledyne was a conglomerate. It had four years of slow growth, was not paying a dividend and was repurchasing a lot of its shares for seemingly no reason at all. Despite the massive repurchases, Teledyne’s stock remained depressed and hovered below $20 per share for much of the early 1970s.
In the face of much criticism, Singleton remained resolute.
In 1975, Wall Street finally caught on.
In late 1974, Teledyne’s stock was trading at $7 per share. In 1976 it had increased 10x to $69 a share and by 1978 the stock was trading over $100 a share. Singleton’s plan had paid off. He was a capital allocating magician and Teledyne’s equity holders were rewarded handsomely.
In the 25 years from 1963-1990, Teledyne’s stock compounded at a rate of over 20% annually. $1,000 invested with Henry Singleton in 1963 would have been worth $180,000 by 1990. This performance trounced that of comparable companies and the S&P 500.
Source: The Outsiders
Outside of the finance world, Singleton’s story is largely unknown. For the most part, he avoided the limelight as best as he could. He was not a household name like Bill Gates, Steve Jobs or Jack Welch but his record speaks for itself. In fact, if you ask Warren Buffett who the greatest CEO in American history is, there’ s a good chance Henry Singleton would be his answer.
“Henry Singleton has the best operating and capital deployment record in American business … if one took the 100 top business school graduates and made a composite of their triumphs, their record would not be as good as Singleton’s.” -Warren Buffett
Not a bad endorsement!
Henry E. Singleton, Founder of Teledyne – New York Times
The Singular Henry Singleton – Forbes