#328 Tom Murphy (Buffett's favorite manager)

Transcript from https://podmenti.com/t/ccca6e0ea87a7015

You might be able to hear this in my voice in the episode that you're about to listen to.
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Warren Buffett said Tom Murphy and Dan Burke
We're probably the greatest two person combination in management.
That the world has ever seen.
Or maybe ever will see.
When he speaks to business school classes.
Warren Buffett.
often compares the rivalry between Tom Murphy's company
Capital City's broadcasting.
And CBS
To a transatlantic race.
Between a robo
And the Q E
Two.
Q E two is the Queen Elizabeth two.
It is this giant transatlantic liner, much, much larger than the Titanic.
So he compares it to a transatlantic race between a rowboat
And the QE too.
to illustrate the tremendous effect management can have on long term returns.
when Murphy became the CEO of Capital City's in nineteen sixty six
CBS was the dominant media business in the country.
With T V and radio stations in the country's largest markets.
The top rated broadcast network.
And valuable publishing and music properties.
In contrast, at that time.
Capital cities had five T V stations and four radio stations.
All in small markets.
CBS's market capitalization was sixteen times
The size of capital cities.
But by the time Murphy sold his company to Disney thirty years later.
Capital cities was three times as valuable as CBS.
In other words, the rowbo had won.
Decisively.
That is an excerpt from the book that I'm gonna talk to you about today, which is The Outsiders, eight unconventional CEOs and they're radically
Rational Blueprint for Success. It was written by William Thorndike.
And specifically, I'm going to focus on chapter one, which is about Tom Murphy and Capital Cities Broadcasting. And the name of the chapter is a perpetual perpetual motion machine for returns.
And before I do that, I'm gonna actually put this book down for one second. I'm gonna pick up last week's book, which was Ted Turner's autobiography.
And read this section.
Because he pu he appears Tom Murphy.
And his uh partner
uh Dan Burke appear in Ted Turner's autobiography as well, because they also built
They essentially build capital cities from a small broadcasting company into a multi billion dollar media conglomerate. And so this is what Ted Turner said about them.
I like the capital cities people a lot, Dan Burke and Tom Murphy.
really understood the business. They had built their company up by buying
T V and radio stations as well as new p newspapers and magazines.
and operating them efficiently.
That is not the first time I read Tom Murphy's name in one of the books that I've covered for the podcast, all the way back on episode two eight two eighty six.
I did an episode on Warren Buffett and Charlie Munger. Warren Buffett and Charlie Munger talk about Tom Murphy over and over again.
They mention the sharehold letters, they mention when they're answering the Q and A's at their annual meeting.
But this is what they said.
in the book, All I Wanna Know is Where I'm Going to Die, so I'll never go there, that I covered back on episode two eighty six. This is Warren Buffett.
I says forty years ago, Tom Murphy gave me
One of the best pieces of advice I've ever received.
He said Warren, you can always tell someone to go to hell tomorrow.
You haven't missed that opportunity.
Just forget about it for a day.
If you feel the same way tomorrow, then tell them that then.
But don't spout off.
In a moment of anger.
And just one more excerpt before we jump into the book. And this actually comes from the book called A Few Lessons from Warren Buffett. I covered it all the way back on episode two oh two.
This is advice that Tom Murphy gave Warren Buffett.
on cost control. Cost control is something you and I are going to talk about a lot today. It's central to understanding Tom Murphy's
Uh incredible performance.
This is what Warren Buffett says.
Thirty years ago, Tom Murphy drove this point home to me with a hypothetical tale about an employee
who asked his boss for permission to hire an assistant.
The employee assumed
That adding twenty thousand dollars to the annual payroll would be inconsequential.
But his boss told him that the proposal should be evaluated
as a three million dollar decision.
given that an additional person would probably cost at least that
Amount over their lifetime.
factoring in raises benefits.
And other expenses.
Down to the amount.
The fact that the company would have to buy more toilet paper. This is how the insane this guy paid attention to cost and efficiency.
And unless the company fell on very hard times.
The employee added would be unlikely to be dismissed, however marginal his contribution to the business.
So as we go through this overview of Tom Murphy's life and his business philosophy, just remember that he watched headcount like a hawk.
So let's go back to the book, the chapter on Tom Murphy in The Outsiders. And it's gonna pick up where we just left off, where
Capital cities winds up
vastly outperforming over the uh three decades CBS and like okay, well how does this happen?
How did this
seemingly insurmountable gap between these two companies get closed.
So it says the answer lies in fundamentally different management approaches. CBS spent much of the nineteen sixties
In nineteen seventies.
Taking the enormous cash flows generated by its network and broadcast operations
And funding an aggressive acquisition program.
That led it into entirely new fields.
So instead of focusing on other media properties, media business that they knew well.
They bought things like a toy business and they even bought the New York Yankees.
Uh, they also would issue stock to fund
some of these acquisitions. They're gonna compare and contrast, obviously.
the way CBS is being led, uh under this guy named Bill Paley.
Who's actually the founder of CBS. I was reading about Bill Paley last week in the Ted Turner biography.
our autobiography and he mentioned
uh Bill so actually went out and bought
And it's actually sitting on my desk right now. It's uh
Bill's autobiography, which was published all the way back in nineteen seventy nine. So eventually I'm gonna read it, and if it's good, I'll make a podcast on it. But let's go back to this. So
Uh, they're they're getting into new fields they don't know.
Uh enough about
They're issuing shares.
They're building a fancy headquarters in Midtown Manhattan.
At an enormous expense.
And then they develop now, this is this is gonna be uh the maybe the largest contrast.
uh between C V S and Capital Cities.
They develop a corporate structure. Listen to this.
With forty two presidents and vice presidents.
And generally displayed what Charlie Margar calls a prosperity blinded indifference.
to unnecessary costs when I got to this section of the book.
It made me think of
One of my favorite things that uh that Munger says.
uh they go and uh I think he was touring the Buffalo Evening News after they bought it.
And he was really against Munger was really against spending money in luxurious offices and so he has this great quip. He's like
Why does a newspaper need a palace to publish in?
And so that's what I think of when when they're describing what's going on here.
The strategy at CBS was consistent with the conventional wisdom of the conglomerate era, which espoused the elusive benefits of quote diversification.
To justify the acquisition of unrelated businesses.
At its core.
CBS's strategy and implemented by Bill Paley was focused on making CBS larger. So now they start contrasting that with Murphy's strategy for capital cities.
In contrast, Murphy's goal was to make his company more valuable, not just larger, but more valuable, as he said to me.
And so
Thorndike is talking to him for this book, right?
As he said to me, the goal is to not have the longest train
But to arrive at the station first.
Using the least fuel. I love Murphy's got a bunch of good lines.
Uh when he's being when he's talking to Thorndike?
That's one of my favorite. The ghost
To not have the longest train.
But to arrive at the station first.
Using the least fuel.
And so as he continues to describe
The difference in Murphy and Burke's strategy compared to CBS. I just jotted down a few notes on what was happening to the uh on this page for my own self.
I just bet find your edge, don't diversify, and then repeat what works.
Murphy and Burke rejected diversification and instead created an unusually streamlined conglomerate that focused laser like
on the media business that it knew well.
Murphy acquired more radio and TV stations as opposed to buying the Yankees or toy company, right?
So he acquires more radio and T V stations, operated them superbly well.
and regularly repurchased his shares.
The formula that allowed Murphy to overtake Paley was deceptively simple.
Number one.
Focus on industries with attractive economic characteristics.
Number two.
Selectively use leverage to buy occasional large properties.
Number three, improve operations.
Number four.
Pay down debt.
And number five, repeat this loop.
More contrasting by Thorndike.
What's interesting is that his peers at other media companies did not follow this path. They followed fashion.
and diversified into unrelated businesses. I'm gonna pause in the middle of that sentence, actually.
Because when I got to that section it made me think of something I read in Burke in um
Warren's Berkshire shareholder letters, where he says the behavior of peer companies will be mindlessly imitated.
It's exactly what's happening in the book, right? They're just following fashion.
uh what's really popular to do at the time, whatever other people what uh other company, other conglomerates doing, they're gonna diversify into unlimited businesses.
They're gonna build large corporate staffs.
And they're gonna overpay for marquee media properties, obviously.
He's setting it up.
For you and I to tell us that Murphy did the opposite. He did none of those things.
Capital Cities under Murphy was an extremely successful example.
Of what we would now call a roll up.
In a typical roll up
A company acquires a series of businesses.
Attempts to improve operations and then keeps acquiring.
Benefiting over time from scale advantages and best management practices.
Now, just because it sounds simple does not mean it's easy. There's a lot of people, especially in the 90s and eight and the nineties and the two thousands, that try to do this.
And a lot of these companies that try to do a bunch of roll ups.
wind up going out of business and he talks a little bit about why this happened.
uh why this happened to them and why it did not happen to Tom Murphy.
A lot of these companies collapsed.
Under the burden of too much debt. These companies typically failed.
Because they acquired too rapidly.
And underestimated the difficulty of integrating acquisitions and improving operations. Murphy's approach to the roll up was different.
He moved slowly.
He developed real operational expertise.
Which I think is one of the benefits of not diversifying, right?
By the time he does his biggest acquisition, it's gonna come three decades into his career, he's gonna buy ABC with Warren Buffett's help.
he can have real conviction. Do do I actually have operational expertise in operating all these media?
properties. Well, let me look at the past thirty years. Did I do this correctly or not?
Uh, and then he focused on a small number of large acquisitions that he knew to be high probability bets.
Capital Cities combined excellence in both operations and capital allocation to an unusual degree.
And that's that goes back to
uh the start of the chapter where
Buffett's saying, like, you know
Uh, Murphy and Burke are probably the greatest two person combination ever.
And it's this division of labor, the fact that Burke was the
incredible operator, the one that rooted out all the the inefficiencies.
And then Murphy was the one that d was capital allocated.
focus on strategy and acquisitions, which we'll get to. And I'll and again, here's another great
uh Murphyism, if you will.
Uh so he says capital cities combined excellence in both operations and capital allocation to an unusual degree. As Murphy told me, this is great. This is excellent.
The business of business
is a lot of little decisions every day
mixed up with a very few big decisions.
Okay, so let's go back in the timeline and figure out how did Tom Murphy even get associated with capital cities to begin with.
And really the reason I'm highlighting this is because it speaks to the fact that one of the things you have to admire about Tom Murphy is that
It once he had conviction, he had no
Hesitancy about being bold. And you see that with the decision to take this job in the first place. So he graduates from Harvard Business School.
And he gets a job, just a normal job.
He's working for Lever Brothers, which is this massive consumer package goods company at the time.
He goes to
This event at his parents house.
And he meets this guy named Frank Smith.
And Smith begins to tell him
about Smith's latest venture, which is he bought a struggling
T V station. This is before cable. Just like if you listen to last week, this is the the early days of cable. This is
very similar to the early days of Ted Turner's career. That's why I think it's so
Interesting to do this podcast.
Right after the last one.
So Smith buys this.
He buys a struggling TV station and he purchases it out of bankruptcy.
And before the evening was over
Murphy had agreed to leave his job in New York City and relocate to Albany to run
The T V station. Now here's the crazy thing.
He had no broadcast experience.
Nor did he have any kind of management experience of any kind.
At this point
Tom Murphy is twenty nine years old.
Tom is going to turn around this station. It's going to take him three years.
So the station has a bunch of operating losses, obviously,'cause it was bought out of bankruptcy, right?
So he went to turning it into a consistent cash generator generator by improving programming
And then aggressively managing costs. That's gonna come up over and over and over again. Aggressively managing costs.
as you can imagine when he's giving advice to Warren Buffett. My by the way, Warren Buffett says that Tom Murphy was one of his heroes.
that Tom Murphy made him a better person and that
Uh actually that that is the ultimate give.
gift you can give to somebody by helping them become a better person. So
You can imagine if he's
Giving Warren Buffett advice.
Saying that don't
don't think about hiring another person just as like a twenty thousand dollar thing. Like thinking about it all like
How much you're gonna pay more over a decade, all the other stuff that comes with employee down to the amount of toilet paper that person's gonna use in the office.
I think that the that's an understatement, aggressively managing costs, right?
So says this was a formula that the company would apply repeatedly in the years ahead.
In nineteen fifty seven, so this is now three years later.
Smith and Murphy buy a second TV station.
Then shortly thereafter they buy a third
T V station.
And then they change the name of the company to Capital Cities.
Now the third
T V station is important.
Because
This is when Murphy hires a young thirty year old with also
No broadcast experience as his replacement
to run the Albany station. That is Dan Burke. Dan Burke
and Tom Murphy are going to be this dynamic deo, these partners
For the next thirty years.
So Murphy spends time training Burke and he says
He quickly indoctrinated Burke into the company's lean, decentralized operating philosophy.
Then Murphy moves back to New York to work with Smith
to build the company through acquisition. So that is how capital cities is gonna grow.
It grows by selectively acquiring additional
radio and television stations.
Now here's what happens. Smith unexpectedly dies in nineteen sixty six.
By this time, Smith and Murphy had been working together for eleven years. So that means at forty years old.
After Smith's death
Murphy becomes CEO.
And that's the position he's gonna hold until he sells it.
Uh to Disney.
So at the time he takes over the company
They have revenue of just twenty eight.
million dollars.
Murphy's first move as CEO, he's like, Okay, I'm gonna elevate Burke.
To the role of president and chief operating of.
And this was an excellent selection of a partner because they have
Such the opposite skill sets and they have a very clear division of labor. And so this is a description of their excellent partnership and who did what.
Burke was responsible for daily management of operations and Murphy for acquisitions and capital allocation.
As Burke told me.
Our relationship was built on a foundation of mutual respect.
I had an appetite for and a willingness to do things.
That Murphy was not interested in doing.
Burke believed his job.
was to create the free cash flow.
And Murphy's job was to spend it.
So by this time Capital City owns five different T V stations.
That was the maximum allowed by the FCC. So there's there's a regulation on the books of time, you cannot own more than five. So
It's like, okay, well, we're not gonna stop growing, what are we gonna do?
says they next turn their their attention to newspaper publishing.
Which
As an advertising driven business with attractive margins and strong competitive barriers,
Had close similarities.
To the broadcasting business.
So that's another example of him deviating from what other people building.
conglomerates are doing this time. He's like, Well, I just want to stick to these businesses.
That are very similar to each other that I know very well.
And so after buying a bunch of newspapers, he's like, Well, what other businesses are very similar to the ones I already own?
Eventually this this regulation is going to be lifted.
Uh, but before that happens, he's like, Well
There's this new invention, which we talked about last week.
Which is cable television. Okay.
Well, that looks very similar to the broadcast TV stations I own.
And then some of these
Newspapers that I own.
There's a
Advertising driven businesses with attractive margins. Let me go ahead and buy a cable television business. And this was
One of the most fascinating things about the Ted Turner autobiography is the fact that
Ted Turner was one of the first people in the broadcast
uh T V industry to actually embrace cable
There's a maxim here that this is not a threat. It's an opportunity.
Everybody every other broadcaster besides Ted Turner.
And
Uh now we see
Uh Tom Murphy as well.
Thought about
cable as oh my god, this is a threat to my broadcast business. They both are the b both Turner and Murphy taught it's like no, it's not a threat, it's an actual opportunity.
And they also understood it as a better product offering. Like cut the the the genie's out of the bottom. Like there's nothing you're gonna do. Like you might as well go with the technology that enables you to just reach a a much larger market than somebody in uh watching like a uh a local or regional T V station.
And then it goes into another strategy that he used that was quite different.
Uh, during the extended bear market of the mid nineteen seventies to early nineteen eighties.
Murphy became an aggressive purchaser of his own shares. He eventually bought close bought back close to 50% of his outstanding shares.
Most of it at single digit.
Price to earnings multiples.
In nineteen eighty four, the FCC relaxed its station ownership rules.
And Murphy in his master stroke
But
The ABC network. So
The note I left myself here is this is something that comes up over and over again in in these books. Stay in the game long enough to get lucky. This is
the most important thing that he does in his entire business career and it happens
Thirty years into his career.
So he buys ABC Network for nearly three point five billion dollars with financing from his friend.
Warren Buffett.
The ABC deal was the largest non oil and gas transaction in business history to that point.
And an enormous bet This is what I meant about him.
being able to be bold when he has real conviction and an enormous bet the company transaction for Murphy, representing over a hundred percent of capital equities enterprise value at the time.
So then
The Wall Street Journal.
Uh reported.
on this transaction with the headline
The minnow swallows the whale.
And then Murphy's partner Burke said at the time
That this is the acquisition that I've been training for my entire life.
So why would Murphy bet the entire company on one transaction?
says Murphy's conviction was that he can improve the margins of ABC's TV stations from the low thirties.
up to capital cities industry leading levels
of margins of fifty plus percent
Oh my God, check this out.
Under Burke's oversight, the staff that oversaw ABC's TV station group
dropped from sixty to eight.
People.
the margin gap was closed in just two years. So in two years they tr they
They brought ABC's margins from thirty percent to over fifty.
A story from this time demonstrates the culture clash between the network executives and the leaner, more entrepreneurial acquirers.
A B C was a limousine culture.
Executives had the habit of taking a limo
For even a few blocks to go to lunch. Murphy, however, was a cab man.
Before long
This practice
of h Murphy's practice of taking cabs everywhere instead of a limo.
Or god for God's sakes, you should walk a few blocks. Come on, stop being lazy.
Uh, before long this practice
Of taking cabs rippled through
The ABC executive ranks. When asked whether this was a case of leading by example, Murphy responded, Is there any other way?
Capital Cities never made another large scale acquisition after the ABC deal, focusing instead
On integration, smaller acquisitions, and continued stock repurchasing in nineteen ninety five, so ten years.
After he bought ABC.
Buffett suggested to Murphy that he sit down with Michael Eisner, who was the CO of Disney at the time.
they wind up meeting at the An uh the Allen and company gathering in Sun Valley, Idaho.
And Izer
express an interest in buying the company.
They wind up having a negotiation and Murphy negotiated a buyout price of nineteen billion dollars.
He left Murphy then uh retired from active management.
He left behind an aesthetic group of shareholders. Why are they a static? Well, if you had invested a dollar with Tom Murphy.
As he became CO in nineteen sixty six, that dollar would have been worth two hundred and four dollars.
By the time you sold the company to Disney.
Okay, and so then the book goes into a little bit more about how
They ran the business before the acquisition.
by Disney says one of the major themes in this book is resource allocation.
The outsider CEO, so not just
Tom Murphy, but the eight other COs or the eight total COs
uh covered in this book, including Henry Singleton.
Uh, John Malone, Warren Buffett.
says the outsider CEOs shared an unconventional approach, one that emphasized flat organizations
and dehydrated corporate staffs. There's a lot of very memorable language in the book.
That is one of them.
Dehydrated
Corporate staffs.
They also talked about headquarters staff's being anorexic.
Both of those descriptions being important because that's how they want to build the company's culture. So the company's culture at Capital Cities.
W meant extraordinary autonomy
For operating managers.
And this principle was stated in a single paragraph on the inside cover of every capital city's
Annual report and it says
Decentralization is the cornerstone of our philosophy. Our goal is to hire the best people we can.
And give them
The responsibility and authority
They need to perform their jobs. We expect our managers to be forever cost conscious. That
phrase is uh repeated a few times. Forever cost conscious
And to recognize and exploit sales potential.
Headquarters staff.
was anorexic.
No vice presidents in functional areas like marketing, strategic planning, or human resources. No corporate council and no public relations department either.
In the capital city's culture, the publishers and station managers had the power
And the prestige internally.
And they almost never heard from New York.
If they were hitting their numbers.
The company's guiding human resource philosophy was repeated over and over again.
By Murphy.
And it was
Hire the best people you can and leave them alone.
Extreme decentralized approach.
keeps both cost and rancor down.
And I love how they make the point that capital cities ate their own cooking. The guinea pig in the development of this philosophy was Dan Burke himself.
In nineteen sixty one, after he took over as general manager.
At W T E N, which was the station in Albany.
That
uh first Murphy.
was managing, right? So after he takes over for Murphy
Burke, this is hilarious. I love this part.
Burke began sending weekly memos to Murphy as he had been trained to do when he worked at General Foods.
After several months of receiving no response, he stopped sending them, realizing his time was better spent on local operations than on reporting to headquarters.
As Burke said.
Murphy delegates to the point of anarchy again.
Great memorable language in here.
Murphy delegates to the point of anarchy.
Frugality was also central to the ethos.
This is gonna sound a lot. I mean
I again the the two main
I think ideas you see over and over again in the history of entrepreneurship is one, the importance of focus.
And two.
Gentlemen watch your costs. That is a quote from Andrew Carnegie.
They're all all of the people we study on the podcast, with very few exceptions, were maniacal.
About watching their costs.
And Murphy and Burke.
describe why they were also fanatical about this and it is exactly
Like
The the frame of mind that Andrew Carnegie and his partner Henry Clay Frick had 150 years before this. This is exactly what they said.
So it says Murphy and Burke realized early on that while you couldn't control your revenues.
You can control your costs.
They believe that the best defense against the revenue lumpiness inherent in advertising supported businesses.
was a constant village on costs.
Which became deeply embedded in the company.
culture. That is Andrew Carnegie and Henry K. Frick.
That is Rockefeller, that is Ford.
That is Sam Walton.
In fact, it w was hilarious.
Oh the I got

I'll bring a Walton in a minute because the next story
That illustrates how obsessed they were about cost control, reminding me of something that I read in Sam Walton's autobiography. One of the earliest and most often told corporate legends.
Murphy even scrutinized the company's expenditures on paint.
They wanted to repaint.
one of their T V stations.
And Murphy says, Paint the two sides that face the road and leave the other sides untouched.
He is forever.
cost conscious, there's a great story anecdote told.
In Sam Walton's autobiography. He's flying the plane, that little Cessna that he would go around picking out like the new Walmart stores.
And they're they're trying to come up with a name for what what the concept behind Walmart
And there's a series of names.
uh Walmart is one of the ones suggested and s one of the reasons first Sam was inspired by Sol Price, who I've covered over and over again.
About Fed Mark.
And so he liked the idea of Walmart, but one of the reasons he picked it is because it had less letters.
than the other options.
And therefore less lighting, but you knew you had to light up your stores, right? And so the less letters, less lighting, less costs.
on a grand scale, as he expands, might be only, you know, seven letters instead of eleven or whatever the other options were, but that extra that additional four letters, you don't have to make them, you don't have to light them, you don't have to clean them, all the additional expenses that would compound over time. So again, that again, they all think this this way. They are forever cost conscious.
They're just insane about getting this competitive advantage that comes when you just watch your costs like a hawk.
This is where he goes into headcount over and over again.
So Phil Meek is one of the guys, he runs their publishing division. He works for both Burke and Murphy, right?
Filmeek took this message to heart and ran the entire publishing operation.
So at this time they had six daily newspapers
Several magazines.
And a bunch of weekly like shoppers, these things you see in um
In like grocery stores.
And he ran his headquarters with only three people.
They would have very few meetings. One of the meetings is the people would come to New York and they'd go over
All of their own.
Again, they're they're obsessed with economic
efficiency and how it relates to every single other idea that they have in their philosophy.
And so what they do is they sit down and they go through
Line by line, everything that you're spending.
And so it says particular attention was paid to capital expenditures and expenses.
Managers were expected to outperform their peers and great attention was paid to margins.
the profit margin that your company operated at
was viewed as a form of report card to HQ.
Outside of these meetings, managers were left alone.
The company did not simply cut its way to high margins.
Murphy and Burke realized that the key drivers of profitability in most of their businesses.
were revenue growth and advertising market share, and they were prepared to invest in their properties.
to ensure leadership in local markets.
Why? Why did they invest in expanding their market share? Because they realized this through trial and error.
They realized early on that the T V station was an the the T V station that was the number one in local news
Ended up with a disproportionate share.
of that market's advertising revenue.
And a great way to think about this is another description by an early employee at Cap Cities. The company was careful
Not cheap.
The company was careful, not cheap.
The company's hiring practices were equally unconventional.
Murphy and Burke shared a clear preference for intelligence, ability, and drive.
over direct industry experience because neither one of them
Murphy when he was hired and Burke when he was hired, they had intelligence, ability, and drive. They did not have direct industry experience.
Ah, and so they specifically targeted what they called talented younger foxes.
With fresh perspectives.
Murphy and Burke were also comfortable giving responsibility to promising young managers, as Murphy described it to me.
We'd been fortunate enough to have it ourselves and we knew it could work.
And so one of the people they hired young
was Bob Iger. They hired Bob Iger thirty s at thirty seven.
And before that he had spent his entire career in broadcast sports and they hired him to assume responsibility for A B C entertainment.
Another important trait that fueled their success is they had exceptionally low turnover.
Part of this culture, right?
And they talked about there's a rival broadcaster once remarked. This is another great line. We have we see lots of resumes, but we never see any from capital cities. Why?
'Cause the system in place corrupts you.
With so much autonomy and authority that you can't imagine leaving. Again, really great memorable language.
The system, these are people that are inside the company. The system in place corrupts you with so much autonomy and authority that you can't imagine leaving.
So that was a description of more of operations which fell under Burke. Let's go to Murphy
And his capital allocation. In the area of capital allocation, Murphy's
Approach was highly differentiated from his peers.
He issued diversification, paid minor dividends, rarely issued stock,
And made active use of leverage.
He would regularly repurchares in between
Long periods of inactivity made the occasional
very large acquisition.
The two primary sources of capital for capital cities
Where internal operating cash flow and debt
The company produced consistently high
Industry leading levels of operating cash flow.
This high
uh amount of cash flow provided Murphy with a reliable source of capital to allocate. Murphy also frequently used debt to fund acquisitions.
Once he summarized his approach as this
We take the assets.
And once we've paid them off, we leverage them again to buy other assets.
Acquisitions was where Murphy spent the majority of his time. He did not delegate acquisition to decisions and never used investment bankers to Murphy.
As a capital allocat, the company's extreme decentralization
had important benefits and it allowed the company to operate more profitably
Then its peers, which in turn
gave the company an advantage in acquisitions by allowing Murphy to buy properties.
And no
that under Burke, remember Burke's this extreme efficient operator, they would quickly be made more profitable, lowering
The effective price paid.
When he had conviction, Murphy was prepared.
to act aggressively.
And Murphy was not impatient. Murphy was willing to wait a long time for attractive acquisitions. He once said
I get paid not just to make deals, but to make good deals.
When he saw something he liked, Murphy was prepared to make a very large bet, much of the value created during
His nearly thirty year tenure as CO was the result of a handful
of large acquisition decisions, just a handful.
These acquisitions each represented twenty five percent or more of the company's market cap at the time they were made.
Murphy was a master at prospecting for deals. He knew what he wanted to buy and he would spend years.
Developing relationships with the owners of these desirable
properties. He had a very unusual
negotiating style.
He would often ask the seller what they thought their property was worth, and if he thought their offer was fair, he would take it.
And if he thought their proposal was high
He would counter with his best price.
And if the seller rejected his offer, Murphy would walk away. So it says like he would never do well at auctions. He usually bid
you know, sixty or seventy percent lower than the winning bid.
But that was very interesting. It's like you told me what the price is.
I think it's worth that. I won't even negotiate with it. I'll just say, Okay, I'll take it for that amount.
And if that doesn't work out, here's the best price I can do. There's no back and forth. Can we just agree on this? If not, let's just keep it moving.
Outside of
acquisitions, the second largest amount he spent was actually share repurchasing.
He bought back over one point eight billion he spent over one point eight billion.
on share buybacks.
That investment alone.
generated a excellent return.
For shareholders.
twenty two point four percent over nineteen years.
As Murphy says today, I only wish I'd bought more.
And then the chapter closes with this interesting anecdote.
About this very unique culture.
Uh, he told me a story about a bartender at one of the management retreats who made a handsome return by buying Capital City stock
in the ear nineteen seventies.
When the bartender was later asked why he made the investment.
He replied, I've worked a lot of corporate events over the years, but capital cities have
Was the only company where you couldn't tell who the bosses were.
And then there's a post script on the chapter that if you're interested in studying
They call trans this company TransDime.
A contemporary doppelganger to capital cities.
Uh, says a contemporary analogue for capital cities can be found in TransDime, a little known publicly traded aerospace components manufacturer.
Like capital cities, the company focuses on very specific types of business.
With exceptional economic characteristics.
And TransDime evolved a highly decentralized corporate structure and operating system for optimizing.
The profitability.
of these specialized businesses.
And there's actually an excellent podcast series I listen to.
That's actually produced. It's uh called fifty X if you search in your podcast player.
William Thorndike, so the author of this book.
Actually did a four part
series.
on trans dime. So if you're interested in in companies that are like Capital Cities.
And you wanna listen to that podcast or you wanna learn more, I'd highly recommend listening to that four part series. I thought it was really good.
I I wish there was more books.
on I can't find any biographies on Thomas Murphy. I can't find
A company history on capital cities, which seems like I'm making some there, I have to be making some kind of massive mistake. So if you find either a biography on Thomas Murphy,
or uh company history, please let me know. I'd gladly read it.
And then make a a a longer, like more in depth podcast episode on this.
I'm always fascinated about learning more.
about and from the people that are admired by people I admire. The fact that Warren Buffett calls
Thomas Murphy, his hero, that Ted Turner says that these guys know what they're doing, that they were building an excellent multimedia.
or uh multi billion dollar media conglomerate.
uh really piqued my interest. So I will leave a link down below. I assume you already have this book.
It was number one on Warren Buffett's recommended reading list for a long time. It's referenced over and over again.
I think they sell it at the Berkshire
um annual meeting every year as well.
I actually did a podcast on a chapter in the book. Previously was episode ninety four.
On Henry Singleton, uh if you want to go back and listen to that, but
Just in case you haven't uh bought the book already, I will leave a link down below. And if you buy the book using that link, you'll be supporting the podcast at the same time.
That is three hundred and twenty eight books down, one thousand ago, and I will talk to you again soon.
One more thing before you go, if you have not already subscribed to Founders Notes.
You can go to founders notes dot com.
and sign up for what I think is the world's most valuable notebook for founders.
I'm just gonna give you a brief history. This is
I I've never been more enthusiastic or can give a more enthusiastic endorsement of any
product ever because I literally created this product. So
Let me tell you w what I mean by that. Um all the way back in two thousand nineteen
I get a message.
from one of the co founders of ReadWise.
I didn't know Read Wise.
uh existed at the time. His name is Tristan, and he
Yeah, obvious he listened to the podcast.
It's obvious on the podcast that I read a lot. And he built an app.
Where it's possible for you to save all the notes and highlights for every single thing
that you've ever read. I might be
I'd have to ask Tristan. I I know I'm one of the super users.
Uh, because since that happened, that was uh over four years ago, this happened back in two thousand eighteen.
Over the years I've added over twenty thousand.
Of my
highlights and notes on
all the books that I've read for the podcast.
This takes an unbelievable amount of time. Typically for if I if I make a one hour long podcast on a book
That means I've spent about forty hours for every one hour of audio that I produce.
Forty hours reading, researching, taking notes.
At the end of all that process is I manually add in all my notes and highlights.
So like I would say
I don't know, eighty or ninety percent of all my notes and highlights never even make it into the podcast, right? You know, usually that takes l let's call at least five hours, depending on the book.
There's at least three hundred and I think ten books of mine in ReadWise.
If it's e each an average of five hours.
That's essentially the equivalent of
Two, four months.
sixty four days of me putting in
All these notes and highlights.
Oh
over the last four years. And why would I do that? Because it makes I could not make
The podcast without
Read wise.
Because now I have access
I have a way I have essentially a database, right?
To search.
All of my notes, all of my highlights.
You just heard in this podcast me pull up all of these past descriptions that Warren Buff and Charlie Munger
have said about Tom Murphy.
That didn't come from my memory. That came because I'm constantly searching
My read wise. I leave it in my browser.
Every day. I don't X out of it.
I'm searching it constantly. I'm going through the highlights feed constantly. I'm going through the favorites feed.
I'm going to individual books.
I'm searching for keywords, I'm searching for ideas.
That is why I think
In the right hands, and I'll tell you whose hands it belongs in.
Uh, I do feel that it's the world's most valuable notebook.
For founders.
And I've been saying this for years because I tweet about it.
I post on LinkedIn about it. I go
get interviewed and I talk about the fact that ReadWise was the best app
that I've ever paid for. And so a few months ago
Over the summer.
I approached the the founders of ReadWise and I was like, Hey
Uh, every day I keep getting these messages of people saying they want access to my notes and highlights.
And I was always reluctant because I thought it was like, Oh, it's like kind of a superpower, like maybe I should just keep it for myself.
But
It like you had I started thinking is like why are people asking this? It's like oh'cause they wanted to use it exactly how I want to use it.
Like you can listen to you're gonna hear a lot of great ideas just from listening to the podcast.
But some of these you're gonna forget, or maybe you wanna search
And always have'em.
Like the the ideas or the the
Principles
At hand.
Any time that you want.
And so I was like, is there a way for us to build a product together?
Where it's very simple. You go to founders notes.com, you sign up, and then what do you get? You get access to exactly what I see.
You're seeing every single thing.
that I see. You see all the bo all my books, you see all the notes, you see all the highlights, and then therefore you
Can actually search.
find ideas and principles and then contextually apply them to your business.
So there's a line in Poor Charlie's Almanac that says there's no better teacher than history in determining the future, and that their answer is worth billions.
Of dollars in a thirty dollar history book.
This founders notes is like that on steroids.
'Cause it's not a single history book. It's
hundreds of them and then all my notes and the way I think about
And my interpretations of what's happening and why that's so important that I wanted to save that.
uh idea and actually put it into a database that I can search. So
I said in the right hands.
I think it's the world's most valuable notebook. So the reason what I made this for is
I made this for founders that are already running successful companies, right?
The reason that is because those already running successful companies, what Founders Notes does for those kind of people, and hopefully you're one of them.
is it gives you the best way to reference the thoughts and ideas of history's greatest founders.
And then it's up to you.
how to know how to apply what you're learning to your own company.
The best founders want useful information. They don't want to be told what to do. And in many cases, the only person that can actually make the right decision for your company is you because you have all of the context and the history and an understanding of what it is that you actually want to build and what you're doing.
The second thing, the second way I just think about who
uh founders' notes is perfect for. It's it's for the already committed.
Uh, there is no monthly option. There's only annual subscriptions.
If you have to think twice about the price, it's not for you. Again, this goes back to the there's three hundred and something episodes of founders that anybody can listen to for free.
It's for people running already successful companies, like I spend uh I I spend money all the time. If I think that something is going to make my company better, then I don't hesitate. I view that as an investment, not an expense. And founders notes is priced in a way where if you're already running a successful company, it's a no brainer.
to subscribe and to at least try it out. So
If this is you, I encourage you to test it out for a year.
you'll have access to the world's most valuable notebook for founders, and I do really do mean that and I do believe that.
And I do think the value that you'll get out of it.
will be incredible.
One after you subscribe, keep it in your browser. The tab is always open on my computer. I never exit out. If I do it's by some kind of drastic mistake, I reference it constantly, every day.
There's so much knowledge and wisdom contained in it.
Over twenty thousand highlights and that doesn't mean tell you
that what I have coming. I already have three upcoming features. It's gonna make it even more valuable. That'll be included and no additional cost to you, so
I'm I'm not gonna even sneak on those yet.
I'm gonna release them I think one at a time.
Uh, with the help of Readwise,'cause Readwise, the team of ReadWise are the ones helping me build this.
uh together. So they've been absolutely fantastic. But to get access to what I believe, sincerely believe, is the world's most valuable notebook for founders, all you have to do is go to foundersnotes.com.
That is founders' notes.
Dot
Come.