The late Henry Singleton was a bona fide polymathic genius. He had a PhD in electrical engineering and could play chess just below the grandmaster level. In the realm of business, Warren Buffett once said that 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.”
Singleton co-founded Teledyne in 1960 and stepped down as chairman in 1990. Teledyne started life as an electronics company and through numerous acquisitions engineered by Singleton, morphed into an industrials and insurance conglomerate. According to The Outsiders, a book on eight idiosyncratic CEOs who generated tremendous long-term returns for their shareholders, Teledyne produced a 20.4% annual return from 1963 to 1990, far ahead of the S&P 500’s 8.0% return. Distant Force, a hard-to-obtain memoir on Singleton, mentioned that a Teledyne shareholder who invested in 1966 “was rewarded with an annual return of 17.9 percent over 25 years, or a return of 53 times his invested capital.” In contrast, the S&P 500’s return was just 6.7 times in the same time frame.
Beyond the excellent long-term results, I also found another noteworthy aspect about Singleton’s record: It is likely that shareholders who invested in Teledyne in 1963 or 1966 would subsequently have thought, for many years, that Singleton’s genius had failed them. I’m unable to find precise historical stock price data for Teledyne during Singleton’s tenure. But based on what I could gather from Distant Force, Teledyne’s stock price sunk by more than 80% from 1967 to 1974. That’s a huge and demoralising decline for shareholders after holding on for seven years, and was significantly worse than the 11% fall in the S&P 500 in that period. But even an investor who bought Teledyne shares in 1967 would still have earned an annualised return of 12% by 1990, outstripping the S&P 500’s comparable annualised gain of 10%. And of course, an investor who bought Teledyne in 1963 or 1966 would have earned an even better return, as mentioned earlier.
Just like how Buffett’s Berkshire Hathaway had seen a stomach-churning short-term decline in its stock price enroute to superb long-term gains driven by outstanding business growth, shareholders of Teledyne also had to contend with the same. I don’t have historical financial data on Teledyne from primary sources. But for the 1963-1989 time frame, based on data from Distant Force, it appears that the compound annual growth rates (CAGRs) for the conglomerate’s revenue, net income, and earnings per share were 19.8%, 25.3%, and 20.5%, respectively; the self-same CAGRs for the 1966-1989 time frame were 12.1%, 14.3%, and 16.0%. These numbers roughly match Teledyne’s returns cited by The Outsiders and Distant Force, once again demonstrating a crucial trait about the stock market I’ve mentioned in many earlier articles in in this blog (see here and here for example): What ultimately drives a stock’s price over the long run is its business performance.
Not every long-term winner in the stock market will bring its shareholders through an agonising fall mid-way. A notable example is the Canada-based Constellation Software, which is well-known in the investment community for being a serial acquirer of vertical market software businesses. The company’s stock price has risen by nearly 15,000% from its May 2006 IPO to the end of June 2023, but it has never seen a peak-to-trough decline of more than 30%. This said, it’s common to see companies suffer significant drawdowns in their stock prices while on their way to producing superb long-term returns. An unfortunate reality confronting investors who are focused on the long-term business destinations of the companies they’re invested in is that while the end point has the potential to be incredibly well-rewarding, the journey can also be blisteringly painful.
*The title of this section is a pun on one of my favourite books on finance, titled When Genius Failed. In the book, author Roger Lowenstein detailed how the hedge fund, Long-Term Capital Management (LTCM), produced breath-taking returns in a few short years only to then give it all back in the blink of an eye. $1 invested in LTCM at its inception in February 1994 would have turned into $4 by April 1998, before collapsing to just $0.30 by September in the same year; the fund had to be rescued via a bail-out orchestrated by the Federal Reserve Bank of New York. Within LTCM’s ranks were some of the sharpest minds in finance, including Nobel laureate economists, Robert Merton and Myron Scholes. Warren Buffett once said that LTCM “probably have as high an average IQ as any 16 people working together in one business in the country…[there was] an incredible amount of intellect in that room.” LTCM’s main trading strategy was arbitrage – taking advantage of price differentials between similar financial securities that are trading at different prices. The LTCM team believed that the price differentials between similar instruments would eventually converge and they set up complex trades involving derivatives to take advantage of that convergence. Because of the minute nature of the price differentials, LTCM had to take on enormous leverage in order to make substantial profits from its arbitrage trading activities. According to Roger Lowenstein’s account, leverage ratios of 20-to-1 to 30-to-1 were common. At its peak, LTCM was levered 100-to-1 – in other words, the hedge fund was borrowing $100 for every dollar of asset it had. Compounding the problem, LTCM’s partners, after enjoying startling success in the fund’s early days, started making directional bets in the financial markets, a different – and arguably riskier – activity from their initial focus on arbitrage. The story of LTCM’s downfall is a reminder of how hubris and leverage can combine into a toxic cocktail of financial destruction.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently do not have a vested interest in any companies mentioned. Holdings are subject to change at any time.