Intelligent Fanatics, The Outsiders, Good to Great


I have been asked to review the above, Intelligent Fanatics.  Please read the above link.   The question I have for readers: “What EXACTLY can YOU learn from these books that you can apply to your investing?  Or are you just reading narratives of past success?  Think about it for awhile, then reply in the comments section.   Then read on……….



good-to-great (Link:Contrary Research)

From Good to Great … to Below Average

Last week, however, I picked up Good to Great by Jim Collins. This book is an absolute phenomenon in the publishing world. Since it came out in 2001, it has sold millions of copies. It still sells over 300,000 copies a year.

The book focuses on eleven companies that were just okay, and then transformed themselves into greatness — where greatness is defined as a sustained period over which the stock dramatically outperformed the market and its competitors. Not only did these companies make the transition from good to great, but they also had the sorts of characteristics which made them “built to last” (which is the title of Collins’s earlier book).


Ironically, I began reading the book on the very same day that one of the eleven “good to great” companies, Fannie Mae, made the headlines of the business pages. It looks like Fannie Mae is going to need to be bailed out by the federal government. If you had bought Fannie Mae stock around the time Good to Great was published, you would have lost over 80 percent of your initial investment.

Another one of the “good to great” companies is Circuit City. You would have lost your shirt investing in Circuit City as well, which is also down 80 percent or more. Best Buy has cleaned Circuit City’s clock for the last seven or eight years.

Nine of the eleven companies remain more or less intact. Of these, Nucor is the only one that has dramatically outperformed the stock market since the book came out. Abbott Labs and Wells Fargo have done okay. Overall, a portfolio of the “good to great” companies looks like it would have underperformed the S&P 500.

I seem to remember that someone did an analysis of the companies highlighted in Peters and Waterman‘s 1980’s classic book In Search of Excellence and found the same thing.

What does this all mean? In one sense, not much.

These business books are mostly backward-looking: what have companies done that has made them successful? The future is always hard to predict, and understanding the past is valuable; on the other hand, the implicit message of these business books is that the principles that these companies use not only have made them good in the past, but position them for continued success.

To the extent that this doesn’t actually turn out to be true, it calls into question the basic premise of these books, doesn’t it?

I suggest that BEFORE you read any of the above books that you

1.) listen to this:

and read this:halo-effect

A review from a reader:

I read “Good to Great” and “Built to Last” some years ago because they were bestsellers and had good reviews. Although I did enjoy reading them, a voice in my head kept asking questions regarding the reliability of the research and findings. After reading “The Halo Effect”, I was relieved and happy to learn that I am not the only person asking these questions.

The world of business is complicated, uncertain and unpredictable. A company’s performance depends upon a variety of factors beyond the actions of its managers. These include currency shifts, competitors’ actions, shifts in consumer preferences, technological advances, etc. The first delusion is the Halo Effect, the tendency to look at a company’s overall performance and make attributions about its culture, leadership, values, and more. Our thinking is prejudiced by financial performance. In good times, companies are praised and their success is attributed to a variety of internal factors. In bad times, companies are criticized and these factors, which may not have changed, are attributed for the failures. The reality is more complicated and dependent upon uncertain and unpredictable factors.

An interesting section of this book is the one on the delusion of absolute performance. Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time. For instance, GM today produces cars with better quality and more features than in the past. But its loss in market share is owed to a myriad of factors, including Asian competitors.

This is an excellent book because it will make you THINK. Is an oil company great if its profits soared when oil prices went up? Can the formulas used by successful companies in the 80s or 90s be applied to guarantee success today? A professor once told me that to predict future performance by analyzing past data is like driving a car forward while looking at the rear view mirror. In the appendix of this book there are tables showing the performance of the companies studied in “In Search of Excellence” and “Built to Last”. It is interesting to note the difference in performance in the years before and after these studies.

The author, Phil Rosenzweig, is a professor at IMD in Switzerland and former Harvard Business School professor. He wrote this book to stimulate discussion and help managers become wiser – “more discerning, more appropriately skeptical, and less vulnerable to simplistic formulas and quick fix remedies.” In my case, this book has given me a new perspective on business books.

The following is a brief summary of the nine delusions:

1. Halo Effect: Tendency to look at a company’s overall performance and make attributions about its culture, leadership, values, and more.

2. Correlation and Causality: Two things may be correlated, but we may not know which one causes which.

3. Single Explanations: Many studies show that a particular factor leads to improved performance. But since many of these factors are highly correlated, the effect of each one is usually less than suggested.

4. Connecting the Winning Dots: If we pick a number of successful companies and search for what they have in common, we’ll never isolate the reasons for their success, because we have no way of comparing them with less successful companies.

5. Rigorous Research: If the data aren’t of good quality, the data size and research methodology don’t matter.

6. Lasting Success: Almost all high-performing companies regress over time. The promise of a blueprint for lasting success is attractive but unrealistic.

7. Absolute Performance: Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time.

8. The Wrong End of the Stick: It may be true that successful companies often pursued highly focused strategies, but highly focused strategies do not necessarily lead to success.

9. Organizational Physics: Company performance doesn’t obey immutable laws of nature and can’t be predicted with the accuracy of science – despite our desire for certainty and order.

Another lesson to glean is how to read the business press.   Beware of backward-viewing narratives of company success. See cisco-narrative.
You need to truly dig deep into the specific causes of a company success.   Was Wal-Mart a huge success in its growth phase because of the focus and leadership of Sam Walton?  Sure, perhaps, but that doesn’t tell you much.   How will you find the next Sam Walton?   How did Wal-Mart have such success against bigger competitors such as K-Mart in its early history?  You need to dig deeper!
We will discuss further in the next post.

8 responses to “Intelligent Fanatics, The Outsiders, Good to Great

  1. I read intelligent fanatics and while i agree with the concept, i don’t think it is really possible to separate the visionary from the disillusioned at an early stage. Much better to wait 10 years and look at a proven track record. Not all disruptions can truly disrupt an industry. Your competitors will quickly catch on, can you succeed against a motivated, deep pocketed company that is facing an existential crisis? Might be better to think about what you don’t want in a leader. Process of elimination can be just as fruitful as digging for diamonds in the rough.

  2. I read the Good to Great, In Search for Excellence, and After the Halo Effect came to the realisation that what we not in these books is probably more important. What I want to read now is how to fail, how to mess up a business, how to wreck your life and look out for these (invert as Charlie says). There are to many variable that we cannot control and measure, so these books are a narrative without indicating the risk of the path taken. With hindsight the risk is under estimated and the reversion to mean is left out, as if trees grow to the heaven.

    • Yes, studying failure is another way to really learn. Note Nokia and how they were destroyed by the SmartPhonw/Apple, etc. Sometimes the best adapted to a PARTICULAR environment are the most vulnerable when change inevitable comes. Sometimes much easier to spot failure like the canal companies when the railroads came or now the general circulation newspapers.

  3. Maybe this is more relevant to the 100-bagger topic a few posts back, but since we’re talking about books and connecting the dots, I am currently reading Finding the Next Starbucks (Michael Moe, 2006), which led me to go back and look at Starbuck’s financials for several years following the IPO in 1992 and see if I would have bought it.

    YoY sales, operating income, and earnings growth was huge but so was valuation (40-50x P/Es). Maybe that’s fine if you can identify the barrier to entry, but what is it?! What about all the imitators cropping up (Caribou Coffee, Peet’s, locally-owned). And even if I had decided to pull the trigger, would I have held on during what looks on the chart like an 80% drawdown in 2009?

    The only rule I could maybe glean by looking back was, if there’s a company everyone’s excited about, and you understand it, and it’s seeing huge growth, put 0.5% of your money into it and give 10 years to see if it metastasizes. Maybe don’t exceed 10% of your total portfolio with these 0.5% moon shots.

  4. Great comment Lumilog. If you want me to post your work on Starby’s let me know. I did the same with Wal-Mart in the early 1970s. Great financials, growth, high returns but trading st 30 times? The market isn’t totally naive. You have to truly understand the competitive advantage and the motivations of management. Hey, you don’t make big money without HUGE insights, discipline and fortitude.

    Studying Starbucks was not a waste because 2009 was a great entry point if you understood that their franchise was still intact. But hindsight is easy. You would need to keep a log of your thoughts at the time to really learn/improve your decision-making.

  5. Another interesting read is Peter Lynch’s books. Although he advocated long-term investing, I think he was really a short-term one. His investments are, of course, now a matter of record, so we can see just how well they panned out. From what I saw, “not so much”. There were companies that, if they had played their card right, could have become the next Wal-Mart, InterContinental Hotels or whatever. But they didn’t.

    It’s also interesting that you mentioned Fannie Mae. This is perhaps a classic “black swan” company, where you make 20% return on equity. Until you don’t. Peter Lynch liked the company (before its collapse, obviously). Even Warren Buffett invested in it, proving that even he didn’t fully understand the nature of its risk.

    What did impress me about Buffett was that he bailed out before it went south. His reason was that when the company announced it was “targetting” a return, his experience told him that it would end in disaster.

    I was impressed by Buffett’s insight. On reflection, I think he was right, even if not entirely for the right reason.

    Apropros of what Roger said: I think it’s a great idea to read the accounts of scam companies. It’s easy to find them: just look for Chinese stocks for starters. After a few of them, you begin to see the tell-tale signs: impossible ROEs, operating margins, but increasing debtor days.

    I heard an expert on Chinese securities say that, in general, Chinese companies do not keep a lot of cash. So if you see a Chinese company with what appears to be a mountain of cash, then there’s probably something decidely wrong with that picture. Other than being Chinese, of course.

  6. Urgh, I forgot to mention. Are you familiar with the writings of Malcolm Gladwell? He has been accused of being a popularist, an accusation that he doesn’t refute, but I found him to be an intelligent writer with some counterintuitive insights.

    He writes a lot about talent and luck, which I am sure will be of interest to you.

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