Intelligent Fanatics

One Sentence Summary:

  • Case studies of 9 historic compounding companies with a focus on the leader of the business and their emphasis on the people operations that make up the business

Below are notes I've taken while reading the book. This is not a comprehensive summary but thoughts and ideas I've found valuable. I recommend reading these notes after you've read the book first to compare our thoughts. I can't stop you if you don't want to so I guess you can use the below as an idea of what you may get out of the book yourself if you read it... though if it ain't clear it's cause you didn't listen to me. 

Raw Notes:


"We each live with a 'windshield' of people in front of us; one of the keys to igniting your motivation is to fill your windshield with vivid images of your future self, and to stare at them every day.." pg viii -> Plays on the five closest people strategy by Jim Rohn. It's the same for your heroes. You need not need to meet them directly and talk to them. Just constantly study them. 

Chapter 1: Henry Wellcome - Burroughs Wellcome & Co.

Burroughs started first in a market with no competition. Being first in a new category seems essential. Henry Wellcome was 26 when he joined. But at this point Wellcome was already the top salesman for McKesson and he could negotiate to sell their products in Britain's untapped market as part of Burroughs' company. The leverage you can pull when you focused on being so good at your craft that they cannot ignore you. Given such leverage Wellcome also bargained for an equal control in the company. Control is essential - pg 7

"I regard our business as in its infancy" - Henry Wellcome on losing money to the widow of Burroughs upon his death and sale of his equity stake. It was $15MM in today's money. But what you need in the leader of the company is the vision and mindset to think big. No need for detailed plans but a north star to guide your journey is key. Silas Burroughs did not have the same time horizons nor the integrity required to be a great partner. Imperative to only partner with those you like, rust, respect and have similar time horizons! - pg 11

Exceptional care in each hire is important for a company. People are investments just like with stocks. Looking at stocks as just tickers is the same as looking at people you hie as just "numbers in the system". Each person you hire is an allocation of capital with hopes he/she will provide high ROI. Fundamental analysis on people are key too! Wellcome learned this through practice but he had a belief in finding and appointing the best people - pg 15

Wellcome's ability to attract and "motivate" the best talent has been a key asset in combination with the leader's vision. A thought I have here is for software companies, if they can attract then retain the best talent wouldn't their SG&A cost be lower than one that is just going on hiring sprees for it's inability to retain?

Chapter 2: Clessie Cummins - Cummins Engine Company

"Many successful investments take longer than we originally expect." -> Hence why you need the facts to give you the conviction to hold longer when you are tested. pg 26

"Great ideas are born out of frustration, not greed." -> important to keep in mind for those who want to start a company for some "get rick quick" scheme. It's the idea of scratching your own itch. An itch is frustrating and annoying and you want to fix it. Companies like Basecamp and Hootsuite were results of those who were born from scratching an itch. By scratching an itch you are guaranteed a customer of 1. pg 28

Cummins created the diesel engine every truck driver wanted (the end customer). Incumbent truck manufacturers fought them and disallowed dealers to retrofit their trucks with the engine. But given the superior product, the truck drivers just bought the original trucks and had them retrofitted themselves. Eventually the dealers would become part of the distribution network. A comp advantage is created when you do something BETTER or CHEAPER. This case it was BETTER. But it was also CHEAPER for the customers. Win-Win. pg 30

"We should consider production to the point where we feel that we can make a profit every year, both good and bad - in other words we must establish a governor that will keep us from swinging, in the boom years, and still produce enough business to keep us going through the dark years" -> Controlled growth is key. Always think about sustainable cashflow to keep the lights on with the option of swinging for the fences. If you focus on your niche and specialize you should be able to control your growth. Don't just diversify. It's called DIWORSEIFICATION! pg 31

Setting up a culture with a "win-win" principle for all relationships is important. Employee/employer, customer/company etc... For a strong culture can be a form of competitive advantage inherently built into the business model for that is the result of the actions created by people living and breathing that culture. pg 35

Chapter 3: Peter Kiewit - Peter Kiewit Sons' Inc.

"You could canvass the world, recruiting the top picks from Stanford, Harvard - you name it - and you would never replicate the magic and success that is the culture of the Kiewit company" - Warren Buffett -> Buffett has analyzed thousands of companies. I believe him when he says you can't just replicate culture. It must organically form within. It must be deliberate. pg 39

"Younger Peter would later cite this one experience, and the lesson, to remind his workers at PKS to never be satisfied with the status quo" -> Referring to competitors who got fat and lazy and soon stopped existing. Many also just get too big to even move (i.e. banks). But the mindset to instill the desire to be ANYTHING BUT average is key. pg 45

The early executive team had all put in the hours starting out at the construction site and worked their way up to become VPs. This method of developing talent internally has been key for PKS. I think this is commonly missing in many organizations where they forego the long-term investment in growth of talent for short term fill-up of needs. That's a fast way to erode culture. pg 48

A culture of high performance is not socialist. It doesn't mean you don't fire anyone for feel good reasons. If someone is a poor performer who is not adding value to the company, eliminating the fat is important. pg 49

"One of the traits of intelligent fanatics is to create and lead a decentralized, flat organization" -> leaders must first delegate and learn to give trust first if they hope to ever get any back from their employees. pg 51

"PKS offices never had an employee's name or title on the door" -> creating an environment where the leadership exists through respect. pg 52

"The stock of several of our major competitors . . . we make more than they do, and we think one of the reasons is that all of our stock is owned by employees - people who are actively engaged in furthering the interests of our company - Peter Kiewit" -> It's harder to find any better form of incentive alignment than direct ownership in the company. Without equity in the company it's hard to ask your employees to even think like owners. And most likely the ones who are owners will do whatever they can for he well-being of the company. pg 55

"Only active employees could own stock in PKS. Once those employees became inactive, the company would repurchase their shares at the going rate" -> Similar to Mawer and also... mind blanking but there is a successful VC firm that competes with KKR that does the same thing. There is no reason for people who are no longer part of the company's operations to feed off the success achieved by the ones who still help it run. Peter Kiewit eventually sold his ownership to 40-45% of his employees and reduced his control down to 40%. That is what a people leader does. He also imposed limits to executives where they could only collectively own 20% so that lower level employees could buy more. But he was smart to make sure he maintained control as no employee other than he was allowed to have more than 10% ownership. pg 57

"If you are looking ahead one year, you should plant rice. If you are looking ahead 20 years, you should plant trees. But if you are looking ahead to a longer, indefinite period, you should spend your time growing people." Like stocks, pick great people who have the ability to generate wealth for the business over time. Then you get the right people in the right spots. Like portfolio construction. pg 58

"Peter would say that managers of every level of the company needed to be training and developing those at the next level down and he would tell us that we would not be expected to be promoted unless we trained our replacement" -> crucial to build this culture of organic mentorship to transfer the culture from top-down. Even mentoring the young gives the seniors a greater sense of ownership + the mentees will develop senses of loyalty. pg 60

Chapter 4: Roger Milliken - Milliken & Company

"Culture is everything - Chris DeSoiza, head of research" pg 65.

Seth Milliken, founder, was multi-faceted in that he was an investor who owned multiple assets like railroads and properties and he used his investing background as a great capital allocator to operate a business and use skills of capital allocation to people. pg 66

Strong desires for lifelong learning seem to be a key requirement to be an intelligent fanatic. pg 68

Milliken moved his textile business to focus on high-value niche products. Seems to be a common theme for small profitable businesses to focus on high-end niches. Playing on the human desires for luxury items and desire for quality. People also inherently like spending more money on a type of good because it makes them happier with the purchase. It's a form of self-confirming bias that they made the right choice in spending lot's of money on this expensive good because it must be worth it given the price. g 69

A decentralized operation here too with autonomy given to employees. This empowers them. But it doesn't leave them leaderless. A leader cannot abdicate his position for he must still help guide the team. They build on an internal intrinsic motivating system by recognizing scientists for patents they individually created. They also filled 95% of openings internally, how else will you promote loyalty? This may also force the company to rethink their growth. Forcibly growing slowly instead of just for growths sake. Most companies don't even know who they need and what they are even looking for when hiring externally anyway. pg 72

Let your employees figure out the How to the problem. Give them the autonomy. Build a culture where you at 88 can plan for its next 100 years. This can only work if you've built a system where you have effectively put yourself out of a job. pg 80

Chapter 5: Hank Rowan - Inductotherm Corporation

"What Foley was proposing was that I leave a steady, rewarding job with prestige and promise and gamble my future and my family's on starting up a new company, with no outside capitalization, to compete against the world's leader in the business, a company that had a 40-year head start - Hank Rowan when starting Inductotherm" -> Now Hank started slowly via moonlighting. He had already planted the seed and continued watering it slowly. Hank ass eventually pushed to start his own when his company hired an outsider with more experience for a position Hank wanted to be promoted to. Turns out that external candidate with more experience was not good enough for Inductotherm dominated them soon after. pg 84 - 91

"Success breeds complacency in any human endeavor" -> same for companies too. But this may be the value of maintaining a stoic mindset to life. To always have a PHD mindset = Poor, Hungry, Driven. A lack of resources in a company is also great because this constraint FORCED Inductotherm to innovate. pg 93

"Fill the other guy's basket to the brim - Andrew Carnegie, win-win situations are the only relationships that last" -> Another common trend in sustainable great businesses. You think win-win in every relationship (internal + external). That must also be why the "shared economies of scale" model adopted by Amazon, Ocado, Zooplus make the company so valuable. pg 96

Chapter 6: Jack Henry & Jerry Hall - Jack Henry & Associates

The companies origin was as a side project. A common theme I find. Rarely do entrepreneurs go all-in at the start. They all start as side projects until they get too big and require full attention to become meaningful. Jack Henry was also an accountant when he started. Comrade. pg 106

JHA offered the best software + service (i.e. something they did better than the competition) to the financial services industry (i.e. a niche market). JHA's motto is to " Do the right thing, Do whatever it takes, Have Fun". Too many people forget to HAVE FUN! Without Fun what is the POINT!? pg 109

JHA focused on creating an environment at their campus. They have a full experience set for the customer who will experience top service and cleanliness once getting on the corporate plane, ride to the campus, and walking around the office. It's part of the story. It's part of the experience. It's like going into an Apple store. Whenever you are selling something the story is key. Joe G, co-founder of Airbnb, also discussed about when he started his first venture the story was 50% of what he was selling. pg 110

When JHA was in a crisis all executives took a material pay cut of 25% and suspended incentive pay. Nucor did the same and Ken Iverson cut his own salary by 75%. The focus was not on penalizing your family, your employees, by firing them but more going through the crisis together as a company. This is crucial. Leaders have to lead by action. The executives should always be the ones to take the big pay cuts because their pay cut will make the material difference to the company and that will be of value to the company in the long run. Management MUST cut salaries first. pg 112

"Intelligent fanatics often choose the far less popular, boring industries and niches, where there is less competition. JHA created its own market and stuck to the sleepy banking industry" pg 114. 

JHA made sure that when they acquired companies the acquired employees would feel that they were gaining. They would give them cash bonuses as an example. For companies that are focused on acquiring businesses their strategy on integrating such companies it would be important. pg 116

JHA went further with making their employees act like owners. On top of letting them own equity in the company, they were all provided the company's financials. This isn't common and even for non-stock holders this is an important cultural strategy of transparency that is required to show trust. You have to earn trust from your employees and this is an amazing way. They also paid out bonuses quarterly. I've heard of some small investment banks doing this and I think it's an effective way to help your employees. Cashflow is king after all. Annual bonuses are just a way for companies who are scared of their weak cultures lack of ability to maintain employees. pg 119

When Jack and Jerry stepped down, JHA was led by Mike Henry and Mike Wallace. They were both with JHA for the majority of their careers and were raised in the same culture and thus were able to preserve it. I would view the entrance of an outsider CEO to signify the potential erosion of the existing culture of a company or it may indicate a lack of any durable culture to begin with. Jack and Jerry would sell their 54% ownership stake, cutting it by half so the new leaders would think like owners. Like Peter Kiewit, a sell down of the equity for those no longer involved in the operations of the business will be essential to keep the operators of the company motivated with the right incentives. pg 122

32 year compound annual growth rate of 19.3%, up to 2017. Amazing. The ROIC trend looks beautiful

Chapter 7: Harold & Dan Leever - MacDermid Inc. 

"We will be a highly principled, disciplined, per share focused, cash flow organism - Dan Leever" pg 132

Dan Leever build out a decentralized model where the international units operated with their own strategic business units. This allowed them to be small, loosely organized, minimally controlled and fast reacting units throughout the various regions. This is the model that CSU adopted to their great success. When Dan became CEO he formed 13 units and each unit leader got to be an entrepreneur who had a small base to grow his or her own business. This is an amazing model for motivation. This let's each business model attack a small niche. pg 132

Harold focused on keeping the organization lean. They were judicious with hiring people and did not grow for growth's sale. This limited them from firing people, which would damage morale and culture. pg 133

"One of the most important jobs of a leader is to put people into the jobs most suited to their abilities" -> The true leader of a company is the one that sets the culture and performs capital allocation of personnel. pg 134

"Responsibility = Accountability = Ownership - Pat Summitt. And a sense of ownership is the most powerful weapon a team or organization can have" -> As Stephen Covey said "Accountability breeds response-ability". Give them ownership, make them accountable and then they will learn to be responsible! pg 135

Even at 2500 employees they could maintain the culture because when split into the units each unit was small enough to probably maintain the culture. Also, Dan would actually be able to tell a personal story of each employee that made it past 5 years in the company and that was celebrated. This kind of acknowledgment is so important. pg 136

Dan was influenced by an investor called Tom Smith, who introduced him to Warren Buffett and Henry Singleton. It's this circle of intelligent fanatics helping each other. This is such an amazing fact of how great leaders who strive for the same things will end up uniting and making each other stronger in the process. Dan learned the value of stock repurchases and ignored all the idiots who complained about an illiquid stock. Beauty.  pg 138

Dan met Emerson Kampen, CEO of Great Lakes Chemical, and commented on how despite having $100MM in cash flow they had conference rooms running on 15 minute timers to turn the light off. The offices were very spartan with minimal wasted furniture. It seems the stoic and spartan aspect of intelligent fanatics is prevalent everywhere. pg 139

"Our progress and your progress, our company's long-term advantage and your long-term advantage, lie in human resources. Other advantages that come about from technological improvement , the opening of new markets, lower costs, all prove to be relatively short run. So, it is the initiative, the will and the motivation people bring to their work that we have to rely upon for survival and growth. - Harold Leever" -> it seems that any advantage in a business model of dominating a niche or doing an activity so much better or cheaper can only be sustained by the people. Why don't people consider this in business school?? pg 141.

"By doing the LBO, I lost control of the future. I could have done all kinds of thins - recaps, other things like that - that could have accomplished the same thing without losing control" -> Never give up control. A common and crucial theme in running a sustainable business. Let's be honest here, most private equity funds don't care to keep he business alive for decades when their funds need a pay out in 5 years. pg 142

Chapter 8: Bob Johnson - Black Entertainment Television

Bob Johnson was an operator partnered by John Malone. John Malone had the 30% of compounded returns over 25 years by partnering with intelligent fanatics and letting them run their business. Decentralized operations at its finest. 

Johnson focused on dominating a niche by producing low-cost programming aimed at the African-American demographic. Eventually he would go onto showing music videos on TV, something that was foreign at the time. Something else of note is that he built BET while moonlighting as a lobbyist. Focusing on niche, Creating your own category, Turning the moonlighting side project to a major enterprise = All common patterns. 

"Working at BET provided these young employees with far greater responsibility than they could get at other companies" -> little experience can actually be asset to innovation. I mean, when do you actually see big consulting firms innovate. Assigning responsibility gave the employees for intrinsic incentives and that fostered huge growth for BET. "Johnson would give his young employees both stock and intrinsic ownership of their projects" pg 155

"Quality leaders with sustainable cultures are often found eating among their frontline employees, learning as much as they can" -> amen. pg 160

Chapter 9: Dr. Devi Shetty - Narayana Health

Narayana charged less than half of what most surgeries in India cost. This allowed them to serve the large volume of poorer individuals who now could get the surgeries they needed. This is effectively the "Shared economies of scale" model Amazon uses. You gain scale efficiency and you lower prices from that efficiency to benefit your customers. Since you reward them, they will reward you with higher captivity. 

"Your rank in the school and academic performance has nothing to do with how good or bad of a doctor you are going to be" -> It seems to be applicable in every single profession and just in life. pg 169

"Not surprisingly, the Mayo brothers also initially acquired heir skill through volume. They learned that the best surgeon of their time, without exception, developed their abilities in charity service, not in private practice. The key that charity work provided was volume of patients. The brothers would not find such opportunities in Rochester, Minnesota, so they went to a nearby state hospital for the insane, which housed more than a thousand patients." -> 1) They first looked at those you were at the path they wanted to get to and identified how they got there. 2) Then they utilized deliberate practice to arrive at their long term goal. 3) They ignored the external noise of prestige and short-term high pay for going into private practice. pg 172

"When you tell yourself there is no money, your brain starts working. An amazing opportunity comes to you" -> Dr. Shetty on the power of constraints. Puts perspective to all those excuses focused on limited capital. pg 173

"The longevity of the Mayo Clinic can be attributed to their training programs. Investing in training results in easy succession planning and a steady way to ensure the culture of an institution isn't eroded over time. These training programs cost money and most private hospitals don't invest in them, but they make a lot of sense for us in the long term. For everyone else, it's much easier to poach our nurses or doctors" -> By focusing on training your employees for continuous succession you are in effect telling them you want them to stay. If you don't, then you are expecting turnover. A focus on succession planning breeds loyalty. pg 179

"In contrast to other hospitals in India, where doctors get a wage plus a cut of the surgery fees NH pays a slightly higher fixed salary and that is it" -> Measured incentives can actually narrow people's focus. Having a financial incentive @ the end actually leads to poor performance per Daniel Pink's citations in Drive. You pay them for their work but rather give them ownership to incentivize them to think for the longevity of the company. pg 181


"You must be a lazy man if it takes you 10 hours to do a day's work. What I do is get good men, and I never give them orders. My directions seldom go beyond suggestions. Here in the morning I get reports from them. Within an hour I have disposed of everything, sent out all my suggestions, the day's work is done, and I am ready to go out and enjoy myself." -> Andrew Carnegie on running his business. This is pure gold. The focus is on human capital. Hire the right people and give them responsibility, accountability, autonomy and control. That is all you need to give them. Be the leader that tells them the what needs to be done but not the "how" it needs to be done. That is what it means to be a manager. It's something Clayton Christensen said is one of the most valuable professions if done right. pg 186

"In investing or business, what has worked in the past will not work again in the exact same fashion" -> Steal from your heroes but you'll have to put in your own style to be someone. pg 190